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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 SEPTEMBER 30, 2001
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)
---------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
As of October 31, 2001, the registrant had 92,653,513 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
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at September 30, 2001 and April 1, 2001.............. 3
Condensed Consolidated Statements of Income for the three months and six months ended
September 30, 2001 and October 1, 2000..................................................... 4
Condensed Consolidated Statements of Cash Flows for the six months ended
September 30, 2001 and October 1, 2000..................................................... 5
Notes to Condensed Consolidated Financial Statements....................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations...................................................................... 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk................................. 21
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders........................................ 22
Item 6. Exhibits and Reports on Form 8-K........................................................... 23
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
QLOGIC CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
A S S E T S
SEPTEMBER 30, APRIL 1,
2001 2001
------------- --------
Cash and cash equivalents .............................................................. $ 148,021 $ 128,273
Short term investments ................................................................. 272,441 227,210
Accounts and notes receivable, less allowance for doubtful accounts
of $2,873 and $2,372 of September 30, 2001 and April 1, 2001, respectively ........ 41,349 53,588
Inventories ............................................................................ 36,933 46,510
Deferred income taxes .................................................................. 28,443 32,558
Prepaid expenses and other current assets .............................................. 3,371 2,358
--------- ---------
Total current assets ............................................................ 530,558 490,497
Property and equipment, net ............................................................ 58,058 56,843
Other assets ........................................................................... 24,955 24,157
--------- ---------
$ 613,571 $ 571,497
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable ....................................................................... $ 8,885 $ 18,017
Accrued compensation ................................................................... 9,591 15,413
Income taxes payable ................................................................... 16,942 6,295
Accrued warranty ....................................................................... 2,980 2,887
Other accrued liabilities .............................................................. 5,574 5,183
--------- ---------
Total current liabilities ..................................................... 43,972 47,795
--------- ---------
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; 92,567,738 and
92,324,042 shares issued and outstanding at September 30, 2001 and April 1,
2001, respectively .............................................................. 92 92
Additional paid-in capital ........................................................ 401,559 393,383
Deferred stock-based compensation ................................................. (4,741) (5,751)
Accumulated other comprehensive income ............................................ 3,393 1,724
Retained earnings ................................................................. 169,296 134,254
--------- ---------
Total stockholders' equity ...................................................... 569,599 523,702
--------- ---------
$ 613,571 $ 571,497
========= =========
See accompanying notes to condensed consolidated financial statements.
3
QLOGIC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------------- -----------------------------
SEPTEMBER 30, OCTOBER 1, SEPTEMBER 30, OCTOBER 1,
2001 2000 2001 2000
------------- ---------- ------------- ----------
Gross revenues ....................................... $81,746 $ 87,620 $173,808 $165,022
Sales discounts ...................................... 867 1,649 3,028 2,278
------- -------- -------- --------
Net revenues ......................................... 80,879 85,971 170,780 162,744
Cost of revenues ..................................... 32,607 30,464 66,918 57,052
------- -------- -------- --------
Gross profit .................................... 48,272 55,507 103,862 105,692
------- -------- -------- --------
Operating expenses:
Engineering and development ...................... 16,294 13,765 33,691 26,323
Selling and marketing ............................ 9,063 8,699 19,220 17,044
General and administrative ....................... 3,876 3,208 8,308 6,641
Merger related expenses .......................... -- 22,947 -- 22,947
------- -------- -------- --------
Total operating expenses ....................... 29,233 48,619 61,219 72,955
------- -------- -------- --------
Operating income ..................................... 19,039 6,888 42,643 32,737
Interest income, net ................................. 4,662 4,508 9,768 8,330
------- -------- -------- --------
Income before income taxes ........................... 23,701 11,396 52,411 41,067
Income tax provision ................................. 7,839 12,702 17,369 22,749
------- -------- -------- --------
Net income (loss) .................................... 15,862 (1,306) 35,042 18,318
======= ======== ======== ========
Net income (loss) per share:
Basic ............................................. $ 0.17 $ (0.01) $ 0.38 $ 0.20
------- -------- -------- --------
Diluted ........................................... $ 0.17 $ (0.01) $ 0.37 $ 0.19
------- -------- -------- --------
Number of shares used in per share calculations:
Basic ............................................. 92,535 90,493 92,467 90,219
------- -------- -------- --------
Diluted ........................................... 94,761 90,493 94,908 94,788
------- -------- -------- --------
See accompanying notes to condensed consolidated financial statements.
4
QLOGIC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
------------------------------
SEPTEMBER 30, OCTOBER 1,
2001 2000
------------- ----------
Cash flows from operating activities:
Net income ......................................................... $ 35,042 $ 18,318
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization .................................... 6,243 5,433
Provision for non-cash sales discounts ........................... 3,028 2,278
Increase in allowance for doubtful accounts ...................... 501 58
Amortization of deferred stock-based compensation ................ 1,010 --
Loss on disposal of property and equipment ....................... 30 104
Provision for deferred income taxes .............................. 5,920 2,078
Tax benefit from issuance of stock under employee stock plans .... 1,722 14,724
Changes in assets and liabilities:
Accounts and notes receivable ................................. 11,738 (10,864)
Inventories ................................................... 9,577 2,271
Prepaid expenses and other current assets ..................... (1,013) 259
Other assets .................................................. (638) (1,958)
Accounts payable .............................................. (9,132) 6,294
Accrued compensation .......................................... (5,822) 992
Incomes taxes payable ......................................... 10,647 5,556
Accrued warranty .............................................. 93 446
Other accrued liabilities ..................................... 1,615 338
--------- ---------
Net cash provided by operating activities .................. 70,561 46,327
--------- ---------
Cash flows from investing activities:
Additions to property and equipment .............................. (6,453) (9,083)
Purchases of investments ......................................... (172,602) (111,011)
Maturities of investments ........................................ 129,042 73,468
Acquisition of businesses, net of cash acquired .................. (1,224) (841)
Purchase of equity investment .................................... (3,000) --
--------- ---------
Net cash used in investing activities ...................... (54,237) (47,467)
--------- ---------
Cash flows from financing activities:
Principal payments under short-term debt ......................... -- (12)
Proceeds from issuance of stock under employee stock plans ....... 3,424 13,787
Principal payments on long-term debt ............................. -- (6)
--------- ---------
Net cash provided by financing activities .................. 3,424 13,769
--------- ---------
Net increase in cash and cash equivalents ............................. 19,748 12,629
Cash and cash equivalents at beginning of period ...................... 128,273 86,889
--------- ---------
Cash and cash equivalents at end of period ............................ $ 148,021 $ 99,518
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest............................................................ $ 17 $ 12
========= =========
Income taxes........................................................ $ 127 $ 290
========= =========
Supplemental disclosure of non-cash investing and financing activities:
Accrual for acquisition performance payment ........................ $ 802 $ 530
========= =========
See accompanying notes to condensed consolidated financial statements.
5
QLOGIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 September 30,
2001, the statements of income for the three months and the six months ended
September 30, 2001 and October 1, 2000 and the statements of cash flows for the
six months ended September 30, 2001 and October 1, 2000. 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 1, 2001. The results of operations for the three
months and six months ended September 30, 2001 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:
SEPTEMBER 30, APRIL 1,
2001 2001
------------- ---------
(IN THOUSANDS)
Raw materials ....... $31,955 $37,110
Work in process ..... 375 8,021
Finished goods ...... 4,603 1,379
------- -------
$36,933 $46,510
======= =======
NOTE (3) NET INCOME (LOSS) PER SHARE
The Company computed basic net income (loss) per share based on the weighted
average number of common shares outstanding during the period presented. Diluted
net income (loss) 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.
6
QLOGIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE (3) NET INCOME (LOSS) PER SHARE (CONT.)
The following table sets forth the computations of basic and diluted net
income (loss) per share:
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------ -------------------------------
SEPTEMBER 30, OCTOBER 1, SEPTEMBER 30, OCTOBER 1,
2001 2000 2001 2000
------------- ---------- ------------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Numerator:
Net income (loss) ................................. $15,862 $ (1,306) $35,042 $18,318
======= ======== ======= =======
Denominator:
Denominator for basic net income (loss) per
share -- weighted average shares .............. 92,535 90,493 92,467 90,219
Dilutive potential common shares, using
treasury stock method ........................ 2,226 -- 2,441 4,569
------- -------- ------- -------
Denominator for diluted net income (loss)
per share ........................................ 94,761 90,493 94,908 94,788
======= ======== ======= =======
Basic net income (loss) per share attributable
to common stockholders ........................... $ 0.17 $ (0.01) $ 0.38 $ 0.20
------- -------- ------- -------
Diluted net income (loss) per share attributable
to common stockholders ........................... $ 0.17 $ (0.01) $ 0.37 $ 0.19
------- -------- ------- -------
Options to purchase 4,591,633 shares of common stock with exercise prices
that exceed the average market price of $36.87 during the three months ended
September 30, 2001 were excluded from the calculation of diluted net income per
share as their inclusion would have been anti-dilutive. All 4,750,724
outstanding options to purchase shares of common stock during the three months
ended October 1, 2000, were excluded from the calculation of diluted net loss
per share as their inclusion would have been anti-dilutive.
Options to purchase 3,819,557 and 579,192 shares of common stock with
exercise prices that exceed the average market price of $41.50 and $79.78 during
the six months ended September 30, 2001 and October 1, 2000, respectively, were
excluded from the calculation of diluted net income per share as their inclusion
would have been anti-dilutive.
7
QLOGIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE (4) OTHER COMPREHENSIVE INCOME (LOSS)
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 Statements of Financial
Accounting Standards No. 115 (SFAS) 115. According to SFAS 130, unrealized gains
and losses from available for sale securities require disclosure as a component
of other comprehensive income (loss). SFAS 130 separates comprehensive income
into two components: net income (loss) and other comprehensive income (loss).
Other comprehensive income (loss) refers to revenue, expenses, gains and losses
that are recorded as an element of stockholders' equity, but are excluded from
net income (loss). While SFAS 130 establishes new rules for the reporting and
display of comprehensive income (loss), SFAS 130 has no impact on the Company's
net income (loss) or total stockholders' equity. The Company's other
comprehensive income (loss) is comprised solely of unrealized gains and losses
on marketable securities categorized as "available for sale" under SFAS 115. The
components of total comprehensive income (loss) for the three and six-month
periods ended September 30, 2001 were as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------------- ------------------------------
SEPTEMBER 30, OCTOBER 1, SEPTEMBER 30, OCTOBER 1,
2001 2000 2001 2000
------------- ---------- ------------- ----------
(IN THOUSANDS)
Net income (loss) .................... $15,862 $(1,306) $35,042 $18,318
Other comprehensive income:
Unrealized gain on available
for sale investments, net ........ 1,849 496 1,669 525
------- ------- ------- -------
Total comprehensive income
(loss) .......................... $17,711 $ (810) $36,711 $18,843
======= ======= ======= =======
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Discussion and Analysis of Financial Condition and Results of
Operations contains descriptions of our expectations regarding future trends
affecting our business. These forward-looking statements and other
forward-looking statements made elsewhere in this report are made in reliance
upon safe harbor provisions of the Private Securities Litigation Reform Act of
1995. Our actual results could differ materially from those anticipated in these
forward-looking statements as a result of several factors, including, but not
limited to those factors set forth and discussed under "Factors That May Affect
Future Results" and elsewhere in this report, which include without limitation
the fact that that our operating results fluctuate significantly, that our
business is dependent on the storage area network market that is new and
unpredictable, and that our financial condition will be materially harmed if we
do not maintain and gain market or industry acceptance of our products. Readers
of this Quarterly Report on Form 10-Q are urged to read those sections in their
entirety. In light of the significant uncertainties inherent in the
forward-looking information included in this document, the inclusion of
information should not be regarded as a representation by us or any other person
that our objectives or plans will be achieved. QLogic undertakes no obligation
to update or revise these forward-looking statements, whether as a result of new
information, future events or otherwise.
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. (All figures in thousands except as otherwise noted).
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------------------------- ------------------------------------------
SEPTEMBER 30, 2001 OCTOBER 1, 2000 SEPTEMBER 30, 2001 OCTOBER 1, 2000
----------------- ----------------- ------------------ ------------------
Net revenues .......................... $80,879 100.0% $85,971 100.0% $170,780 100.0% $162,744 100.0%
Cost of revenues ...................... 32,607 40.3 30,464 35.4 66,918 39.2 57,052 35.1
------- ----- ------- ----- -------- ----- -------- -----
Gross profit ..................... 48,272 59.7 55,507 64.6 103,862 60.8 105,692 64.9
------- ----- ------- ----- -------- ----- -------- -----
Operating expenses:
Engineering and development ...... 16,294 20.2 13,765 16.0 33,691 19.7 26,323 16.2
Selling and marketing ............ 9,063 11.2 8,699 10.1 19,220 11.2 17,044 10.4
General and administrative ....... 3,876 4.8 3,208 3.8 8,308 4.9 6,641 4.1
Merger related expenses .......... -- -- 22,947 26.7 -- -- 22,947 14.1
------- ----- ------- ----- -------- ----- -------- -----
Total operating expenses ..... 29,233 36.2 48,619 56.6 61,219 35.8 72,955 44.8
------- ----- ------- ----- -------- ----- -------- -----
Operating income ........... $19,039 23.5% $ 6,888 8.0% $ 42,643 25.0% $ 32,737 20.1%
======= ===== ======= ===== ======== ===== ======== =====
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 September 30, 2001 decreased $5.1 million or 5.9% from the three months
ended October 1, 2000 to $80.9 million. The decrease was the result of a $10.6
million increase in sales of Fibre Channel product offset by a $14.7 million
decrease in sales of SCSI products, and a $1.0 million decrease in IDE-based
royalties. The decrease in sales of SCSI-based products was due to a decline in
our peripheral chip business.
Net revenues for the six months ended September 30, 2001 increased $8.0
million or 4.9% from the six months ended October 1, 2000, to $170.8 million.
The increase was the result of a $27.1 million increase in sales of Fibre
Channel product offset by a $15.4 million decrease in sales of SCSI products,
and a $3.7 million decrease in IDE-based royalties. The decrease in sales of
SCSI-based products was due to a decline in our peripheral chip business.
Export revenues (primarily to the Pacific Rim countries) in the three months
ended September 30, 2001 decreased $5.7 million or 12.8 % from the three months
ended October 1, 2000, to approximately $38.7
9
million, primarily due to decreased sales to our peripheral chip customers in
Japan. As a percentage of net revenues, export revenues accounted for 48% in the
three months ended September 30, 2001, and 52% in the three months ended October
1, 2000.
Export revenues in the six months ended September 30, 2001 remained unchanged
from the six months ended October 1, 2000, at approximately $85.1 million. As a
percentage of net revenues, export revenues accounted for 50% in the six months
ended September 30, 2001, and 52% in the six months ended October 1, 2000.
Export revenues are denominated in U.S. dollars.
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, our
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 September 30, 2001 was 59.7%, a decrease from 64.6% in the three months
ended October 1, 2000. The decrease in gross profit percentage was due primarily
to sales of lower margin SCSI-based products, as well as economies-of-scale
impacts associated with decreased revenues.
The gross profit percentage in the six months ended September 30, 2001 was
60.8%, a decrease from 64.9% in the six months ended October 1, 2000. The
percentage decrease resulted primarily from a reduction in IDE-based royalties,
as well as sales of our lower margin SCSI-based 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 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 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 2002.
During the three months ended September 30, 2001, engineering and
development expenses increased $2.5 million to $16.3 million from $13.8 million
in the three months ended October 1, 2000. 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 increased to 20.2% in the three months
ended September 30, 2001 from 16% in the similar prior year period. The increase
as a percentage of net revenues was due to our continued investments in new
product development, and a decrease in net revenues during the three months
ended September 30, 2001.
During the six months ended September 30, 2001, engineering and development
expenses increased $7.4 million to $33.7 million from $26.3 million in the six
months ended October 1, 2000. As a percentage
10
of net revenues this amounted to 19.7% in the six months ended September 30,
2001, and 16.2% in the six months ended October 1, 2000. The increase in dollars
and as a percentage of net revenues was due to our continued investments in new
product development, and development expenses growing at a rate faster than 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 September 30, 2001, selling and marketing
expenses increased $0.4 million to $9.1 million from $8.7 million in the three
months ended October 1, 2000. As a percentage of net revenues, sales and
marketing expenses increased to 11.2% in the three months ended September 30,
2001 from 10.1% in the similar prior year period. The increase in spending and
as a percentage of net revenues was largely due to our decision to expand our
sales efforts in the distribution channel sales area.
During the six months ended September 30, 2001, sales and marketing
expenses increased $2.2 million from the similar period in the prior fiscal
year. As a percentage of net revenues this amounted to 11.2% in the six months
ended September 30, 2001 compared to 10.4% in the similar prior year period. The
increase in spending for sales and marketing expenses and as a percentage of net
revenue is a result of our decision to expand our sales efforts in the
distribution channel sales area.
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 incur additional costs relating to the growth of the business.
During the three months ended September 30, 2001, general and
administrative expenses increased $0.7 million to $3.9 million from $3.2 million
in the three months ended October 1, 2000. 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
increased to 4.8% in the three months ended September 30, 2001 from 3.8% in the
similar prior year period.
During the six months ended September 30, 2001, general and administrative
expenses increased $1.7 million to $8.3 million from $6.6 million in the six
months ended October 1, 2000. As a percentage of net revenues this amounted to
4.9% in the six months ended September 30, 2001, and 4.1% in the six months
ended October 1, 2000. In the six months ended September 30, 2001, general and
administrative expenses increased in dollars due to an increase in general and
administrative personnel and related expenses.
Merger Related Expenses. Merger related expenses consist primarily of
investment banking, legal and accounting fees and other direct and incremental
related charges. In the three months and six months ended October 1, 2000,
merger related expenses were $22.9 million relating to the merger with Ancor
Communications, Inc.
Non-Operating Income
Interest and other income, net of interest expense, was $4.7 million for
the three months ended September 30, 2001, and $4.5 million for the three months
ended October 1, 2000. The increase was largely due to increases in interest
income related to increases in cash equivalents and investment balances. This
increase was partially offset by a decrease in investment returns.
In the six months ended September 30, 2001, interest and other income, net
of interest expense, was $9.8 million and $8.3 million in the six months ended
October 1, 2000. The increase in interest and other
11
income in the six months ended September 30, 2001 is largely due to increases in
cash equivalents and investment balances. The increase was partially offset by a
decrease in investment returns.
Income Tax Provision
Our effective tax rate was 33% in the three months ended September 30,
2001, and 111% in the three months ended October 1, 2000. The elevated effective
tax rate in October 1, 2000 was a result of certain non-deductible merger
expenses associated with the Ancor Communications, Inc. merger consummated on
August 1, 2000.
Our effective tax rate was 33% in the six months ended September 30, 2001,
and 55% in the six months ended October 1, 2000. The elevated effective tax rate
in October 1, 2000 was a result of certain non-deductible merger expenses
associated with the Ancor Communications, Inc. merger consummated on August 1,
2000.
New Accounting Standards
Effective July 1, 2001, we adopted Statement of Financial Accounting
Standards No. (SFAS) 141 "Business Combinations". SFAS 141 addresses financial
accounting and reporting for business combinations and requires that all
business combinations initiated after June 30, 2001 be accounted for by a single
method -- the purchase method. The adoption of SFAS 141 did not have a material
impact on our financial position or results of operations.
SFAS 142 "Goodwill and Other Intangible Assets" requires that goodwill and
intangible assets that have indefinite useful lives not to be amortized but
rather be tested at least annually for impairment. We are required to adopt SFAS
142 on April 1, 2002. However, goodwill and intangible assets acquired after
June 30, 2001 are subject to the amortization provisions of SFAS 142. The
adoption of SFAS 142 is expected to reduce general and administrative expenses
by $1.4 million annually through December 2005.
In October 2001, the Financial Accounting Standards Board (FASB) issued SFAS
144 "Accounting for the Impairment and Disposal of Long Lived Assets." SFAS 144
is effective for fiscal years beginning after December 15, 2001. We do not
expect the adoption of SFAS 144 to have a material impact on our financial
position or results of operations.
Liquidity and Capital Resources
Our combined balances of cash and cash equivalents and short-term
investments have increased to $420.5 million at September 30, 2001 compared to
$355.5 million at April 1, 2001. The increase was primarily attributable to
positive cash flow from operations and proceeds from issuance of stock under
employee stock plans during the six months ended September 30, 2001.
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 $43.9 million to $486.6 million from April 1,
2001 to September 30, 2001. The increase in working capital in the six months
ended September 30, 2001 was largely attributable to cash flow from operations.
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 5, 2002,
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 September 30,
2001.
Our cash flow provided by operations was $70.6 million in the six months
ended September 30, 2001, and $46.3 million in the six months ended October 1,
2000. The growth in cash provided by operations was primarily due to increases
in profitability. Additionally, in the six months ended September 30, 2001, cash
flow from operations was improved by increases in income taxes payable and a
reduction in accounts and notes receivable and inventories and partially offset
by a reduction in accounts payable and accrued compensation.
12
Our cash flow used in investing activities was $54.2 million in the six
months ended September 30, 2001 compared to $47.5 million in the six months
ended October 1, 2000. The increase in cash used in investing activities for the
six months ended September 30, 2001 was primarily due to increased purchases of
short-term investments, net of investment maturities. Additionally, capital
expenditures were $6.5 million in the six months ended September 30, 2001 and
$9.1 million in the six months ended October 1, 2000. The decrease in capital
expenditures was due to reductions in capital investment as a result of the
decreased growth rate in net revenues.
Our cash flow provided by financing activities was $3.4 million in the six
months ended September 30, 2001 compared to $13.8 million in the six months
ended October 1, 2000. The decrease in cash provided by financing activities in
the six months ended September 30, 2001 was primarily due to decreases 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 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.
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, 2001
through November 1, 2001, the market price has ranged from a low of $17.21 per
share to a high of $99.13 per share. Several factors could impact our stock
price including, but not limited to:
- announcements concerning QLogic, our competitors or customers;
- quarterly fluctuations in our operating results;
- 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 industry analysts; and
- market conditions for high technology equities in general.
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.
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.
Orders placed by major customers are typically based on their forecasted sales
and inventory levels for our products. Fluctuations in our quarterly operating
results may be the result of:
- changes in purchasing patterns by one or more of our major customers,
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;
- changes in our ability to anticipate in advance the mix of customer
orders;
- level of inventory our customers require us to maintain in our field
warehouses;
- the time, availability and sale of new products;
- 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;
- adoption of new accounting pronouncements and/or changes in our
policies; or
- 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 magnify 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 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.
14
OUR BUSINESS IS DEPENDENT ON THE STORAGE AREA NETWORK MARKET THAT IS NEW AND
UNPREDICTABLE, AND IF THIS MARKET DOES NOT DEVELOP AND EXPAND AS WE ANTICIPATE,
OUR BUSINESS WILL SUFFER.
Fibre Channel-based storage area networks, or SANs, were first deployed in
1997. As a result, the market for SANs and related storage router products has
only recently begun to develop and is rapidly evolving. Because this market is
new, it is difficult to predict its potential size or future growth rate. A
significant number of our products are used exclusively in SANs and, therefore,
our business is dependent on the SAN market. Accordingly, the widespread
adoption of SANs for use in organizations' computing systems is critical to our
future success. Most of the organizations that potentially may purchase our
products from our customers have invested substantial resources in their
existing computing and data storage systems and, as a result, may be reluctant
or slow to adopt a new approach like SANs. SANs are often implemented in
connection with the deployment of new storage systems and servers. Therefore,
our future success is also substantially dependent on the market for new storage
systems and servers. Furthermore, the ability of the different components used
in a SAN to function effectively, or interoperate, with each other when placed
in a computing system has not yet been achieved on a widespread basis. Until
greater interoperability is achieved, customers may be reluctant to deploy SANs.
Our success in generating revenue in the emerging SAN market will depend on,
among other things, our ability to:
- educate potential OEM customers, distributors, resellers, system
integrators, storage service providers and end-user organizations
about the benefits of SANs;
- maintain and enhance our relationships with OEM customers,
distributors, resellers, system integrators, and storage system
providers;
- predict and base our products on standards which ultimately become
industry standards; and
- achieve interoperability between our products and other SAN components
from diverse vendors.
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 we compete involve rapidly changing technology,
evolving industry standards and continuing improvements in products and
services. Our future success depends, in part, on our ability to:
- 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. A significant portion of our revenues is generated from
Fibre Channel technology. We, and some of our competitors, are developing
alternative technologies that may compete with the market acceptance of our
Fibre Channel products, such as iSCSI and Infiniband. If alternative standards
are adopted by the industry, we may not be able to develop products for new
standards in a timely manner. Further, even if alternative technologies do
augment Fibre Channel revenues, our products may not be fully developed in time
to be accepted by our customers. Even if our new products are developed on time,
we may not be able to manufacture them at competitive prices in sufficient
volumes.
15
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 in 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 to merge with or acquire 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.
COMPETITION WITHIN OUR PRODUCT MARKETS IS INTENSE AND INCLUDES NUMEROUS
ESTABLISHED COMPETITORS.
The markets for our 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 Inc. and LSI Logic Corporation in the SCSI sector
of the I/O market. In the Fibre Channel host bus adapter sector of the I/O
market, we compete primarily with Agilent Technologies, LSI Logic Corporation,
Emulex Corporation, JNI Corporation and Adaptec Inc. In the switch products
sector, we compete with Brocade Communications and several smaller companies. In
the enclosure management sector, we compete primarily with Vitesse Semiconductor
Corporation. 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 storage area networking
products, additional domestic and foreign manufacturers may increase their
presence in these markets. We may not be able to compete successfully against
these or other competitors. 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.
OUR DISTRIBUTORS MAY NOT ADEQUATELY DISTRIBUTE OUR PRODUCTS WHICH COULD
NEGATIVELY AFFECT OUR OPERATIONS.
Our distributors generally offer a diverse array of products from several
different manufacturers and suppliers. Accordingly, we are at risk that these
distributors may give higher priority to selling products from other suppliers,
thus reducing their efforts to sell our products. A reduction in sales efforts
by our current distributors could materially adversely impact our business or
operating results. Our distributors may on occasion build inventories in
anticipation of substantial growth in sales, and if such growth does not occur
as rapidly as we anticipate, distributors may decrease the amount of product
ordered from us in subsequent quarters. In addition, if we decrease our
distributor-incentive programs, our distributors may temporarily decrease the
amounts of product purchased from us. This could result in a change of business
habits, and distributors may decide to decrease the amount of product held and
reduce their inventory
16
levels. In addition, we may from time to time take actions to reduce levels of
our products at distributors.
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 affected. 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. Constraints or delays in the supply
of our products, due to capacity constraints, unexpected disruptions at our
foundries or with our subcontractors, delays in obtaining additional production
at the existing foundries or in obtaining production from new foundries,
shortages of raw materials or other reasons, could result in the loss of
customers.
OUR PRODUCTS ARE COMPLEX AND MAY CONTAIN UNDETECTED SOFTWARE OR HARDWARE ERRORS
THAT COULD LEAD TO AN INCREASE IN OUR COSTS, REDUCE OUR NET REVENUES OR DAMAGE
OUR REPUTATION.
Products as complex as ours frequently contain undetected software or
hardware errors when first introduced or as newer versions are released. We have
from time to time found errors in existing, new or enhanced products. The
occurrence of hardware or software errors could adversely affect sales of our
products, cause us to incur significant warranty and repair costs, divert the
attention of our engineering personnel from our product development efforts and
cause significant customer relations problems.
BECAUSE WE DEPEND ON FOREIGN CUSTOMERS AND SUPPLIERS, WE ARE SUBJECT TO
INTERNATIONAL ECONOMIC, REGULATORY AND POLITICAL RISKS THAT 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;
17
- 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 from economic uncertainty. This
uncertainty has taken place especially in countries that have had a collapse in
both their currency and stock markets. These economic 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.
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 has, in the past, experienced shortages of
available foundry capacity. Accordingly, in order to secure an adequate supply
of wafers, we may consider various possible supply agreements. Those types of
agreements include the use of "take or pay" contracts, making 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 arrangements
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 ANTICIPATE ENGAGING IN MERGERS, ACQUISITIONS AND STRATEGIC INVESTMENTS,
HOWEVER, THESE ACTIVITIES 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. Mergers and acquisitions involve numerous risks,
including:
- uncertainties in identifying and pursuing target companies;
- difficulties in the assimilation of the operations, technologies and
products of the acquired companies;
- the diversion of management's attention from other business concerns;
18
- 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 realize the perceived benefits of a business
combination. Future acquisitions by us could dilute stockholders' investment,
and cause us to incur debt, contingent liabilities and amortization/impairment
expense related to goodwill and other intangible assets, all of which could
materially adversely affect our results of operations. Effective July 1, 2001,
the Financial Accounting Standards Board, or FASB, has issued, and we have
adopted, SFAS 141 "Business Combinations". SFAS 141 addresses financial
accounting and reporting for business combinations and requires that all
business combinations implemented after June 30, 2001 be accounted for using the
purchase method of accounting. As a result, we may not be able to complete a
business combination without incurring goodwill or other intangible assets.
While the new proposal would eliminate the quarterly and yearly recurring
charges for the amortization of goodwill, a significant charge to earnings may
be recorded if it can be determined that the goodwill is impaired. This
potential charge could have a material impact on our results of operations.
We have made, and plan to continue to make, investments in technology
companies including privately held companies in a development stage. Many of
these private equity investments are inherently risky because the companies'
businesses may never develop, and we may incur losses related to these
investments. We may be required to reduce the value of those investments as
reflected on our balance sheet, which also may affect our results of operations.
In addition if we incur a charge to reflect other than temporary declines in the
value of our private equity investments below our recorded value, our balance
sheet and results of operations will be reduced.
OUR BUSINESS COULD BE MATERIALLY ADVERSELY AFFECTED AS A RESULT OF THE RISKS
ASSOCIATED WITH STRATEGIC ALLIANCES.
We have alliances with leading information technology companies, and we plan
to continue our strategy of developing key alliances in order to expand our
reach into emerging markets. There can be no assurance that we will be
successful in our ongoing strategic alliances or that we will be able to find
further suitable business relationships as we develop new products and
strategies. Any failure to continue or expand such relationships could have a
material adverse effect on our business, results of operations or financial
conditions.
There can be no assurance that companies with which we have strategic
alliances, certain of which have substantially greater financial, marketing and
technological resources than us, will not develop or market products in
competition with us in the future, discontinue their alliances with us or form
alliances with our competitors.
CONTINUED RAPID GROWTH WILL STRAIN OUR OPERATIONS AND REQUIRE THAT WE INCUR
COSTS TO UPGRADE OUR INFRASTRUCTURE.
We have recently experienced a period of rapid growth and expansion that has
placed, and continues to place, a significant strain on our resources. Unless we
manage this growth effectively, we may make mistakes in executing our business
such as inaccurate sales forecasting, material planning, inventory management or
financial reporting, which may result in unanticipated fluctuations in our
operating results. We may not be able to install adequate control systems in an
efficient and timely manner, and our current or planned personnel, systems,
procedures and controls may not be adequate to support our future operations. In
addition, we test substantially all of our products prior to shipment. If our
capacity to conduct this testing does not expand concurrently with the
anticipated growth of our business, product shipments could be delayed, which
could result in delayed or lost revenues and customer dissatisfaction.
19
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.
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 outcome of the
litigation. Our supply of wafers and other components can also be interrupted by
intellectual property infringement claims against our suppliers.
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 without any vote or future action by the stockholders. Pursuant to this
authority, in June 1996 our 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 may have the effect of delaying, deferring or
preventing a change in control of our stock. This 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, AS WELL AS
ELECTRICITY SHORTAGES.
Our California facilities, including our principal executive offices, our
principal design facilities, and our critical business operations are located
near major earthquake faults. We are 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 our
business, results of operations and financial
20
condition. Additionally, our operations depend upon a continuing adequate supply
of electricity, natural gas and water. These energy sources have historically
been available on a continuous basis and in adequate quantities for our needs.
An interruption in the supply of raw materials or energy inputs for any reason
would have an adverse effect on our manufacturing operations. Recently,
California has had power shortages resulting in rolling blackouts, or the
temporary and generally unannounced loss of electrical power. These shortages
could affect our ability to supply products to our customers on a timely basis.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Sensitivity
At September 30, 2001, our investment portfolio consisted of fixed income
securities, excluding those classified as cash equivalents, of $272.4 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 September 30, 2001, the decline in the
fair value of the portfolio would not be material to our financial position,
results of operations and cash flows.
21
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The QLogic Annual Meeting of Stockholders was held on August 28, 2001.
(b) The following persons were duly elected to serve as directors of QLogic:
H.K. Desai, Larry R. Carter, James R. Fiebiger,
Kenneth E. Hendrickson, Carol L. Miltner and George D. Wells.
(c) The following is a tabulation of the votes of the stockholders of QLogic
with respect to the proposals presented at the QLogic Annual Meeting of
Stockholders:
BROKER
VOTE FOR AGAINST WITHHELD ABSTAIN NON-VOTE
- ---- ---------- ---------- ---------- ------- --------
(i) Election of Directors:
H.K. Desai 73,194,114 -- 11,024,879 -- --
Larry R. Carter 83,625,188 -- 593,805 -- --
James R. Fiebiger 83,697,717 -- 521,276 -- --
Kenneth E. Hendrickson 81,872,450 -- 2,346,543 -- --
Carol L. Miltner 83,525,717 -- 693,276 -- --
George D. Wells 83,615,484 603,509 -- --
(ii) Approval and ratification of amendment to the QLogic
Corporation Stock Awards Plan to increase the number of
shares subject thereto by 2,000,000 shares, from 22,800,000
to 24,800,000. 44,769,525 39,057,977 -- 391,491 --
(iii) Approval and ratification of amendment to the QLogic
Corporation Non-Employee Director Stock Option Plan to
increase the number of shares subject thereto by 200,000
shares, from 1,800,000 to 2,000,000. 77,262,706 6,542,159 -- 414,128 --
(iv) Approval and ratification of amendment to the QLogic
Corporation Non-Employee Director Stock Option Plan to
extend the expiration date thereof from December 31,
2001 to December 31, 2006. 77,763,034 6,047,767 -- 408,192 --
(v) Ratification of appointment of KPMG LLP as
auditors for fiscal 2002 83,567,200 326,624 -- 325,169 --
22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Item Caption
- ----------- ------------
2.1 Distribution Agreement dated as of January 24, 1994 among Emulex
Corporation, a Delaware corporation, Emulex Corporation, a
California Corporation and QLogic Corporation. (2)
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. (11)
3.1 Certificate of Incorporation of Emulex Micro Devices Corporation,
dated November 13, 1992. (2)
3.2 EMD Incorporation Agreement, dated as of January 1, 1993. (2)
3.3 Certificate of Amendment of Certificate of Incorporation, dated
May 26, 1993. (2)
3.4 By-Laws of QLogic Corporation. (2)
3.5 Amendments to By-Laws of QLogic Corporation. (3)
3.6 Certificate of Amendment of Certificate of Incorporation, dated
May 26, 1993. (2)
3.7 Certificate of Amendment of Certificate of Incorporation, dated
February 15, 1999. (8)
3.8 Certificate of Amendment of Certificate of Incorporation, dated
January 5, 2000. (9)
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. (4)
4.2 Amendment to Rights Agreement, dated as of November 19, 1997
between QLogic Corporation and Harris Trust Company of California.
(5)
4.3 Amendment to Rights Agreement, dated as of January 24, 2000
between QLogic Corporation and Harris Trust Company of California.
(10)
10.1.2 Form of QLogic Corporation Non-Employee Director Stock Option
Plan, as amended. (13)
10.2.2 QLogic Corporation Stock Awards Plan, as amended. (13)
10.3 Form of Tax Sharing Agreement among Emulex Corporation, a Delaware
corporation, Emulex Corporation, a California corporation, and
QLogic Corporation. (2)
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. (2)
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. (2)
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. (2)
10.7 Intellectual Property Assignment and Licensing Agreement, dated as
of January 24, 1994, between Emulex Corporation, a California
Corporation, and QLogic Corporation. (2)
10.8 Form of QLogic Corporation Savings Plan.*(2)
10.9 Form of QLogic Corporation Savings Plan Trust.*(2)
10.11 Form of Indemnification Agreement between QLogic Corporation and
Directors. (3)
10.13 Industrial Lease Agreement between the Registrant, as lessee, and
AEW/Parker South, LLC, as lessor. (7)
10.15 Form QLogic Corporation 1998 Employee Stock Purchase Plan. (8)
10.16 Loan and Security Agreement with Silicon Valley Bank dated March
31, 1994. (1)
23
Exhibit No. Item Caption
- ----------- ------------
10.16.1 Amendment to Loan and Security Agreement with Silicon Valley Bank
dated July 6, 1998.(6)
10.16.2 Amendment to Loan and Security Agreement with Silicon Valley Bank
dated July 5, 2001. (14)
21.2 Subsidiaries of the Registrant. (13)
- ---------------
(1) Previously filed as Exhibit 10.10 to Registrant's Annual Report on
Form 10-K for the year ended April 3, 1994 and incorporated herein
by reference.
(2) Previously filed as an exhibit to Registrant's Registration
Statement on Form 10 on January 28, 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 Registration
Statement on Form 8-A on June 19, 1996, and incorporated herein by
reference.
(5) Previously filed as an exhibit to Registrant's Registration
Statement on Form 8-A/A on November 25, 1997, and incorporated
herein by reference.
(6) 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.
(7) 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.
(8) 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.
(9) 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.
(10) Previously filed as and exhibit to Registrant's Registration
Statement on Form 8-A/A dated June 1, 2000, and incorporated
herein by reference.
(11) 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.
(12) 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.
(13) Previously filed as an exhibit to Registrant's Annual Report on
Form 10-K for the year ended April 1, 2001, and incorporated
herein by reference.
(14) Previously filed as an exhibit to Registrant's Quarterly Report on
Form 10-Q for the quarter ended July 1, 2001, 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
None.
24
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: November 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)
25
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. (2)
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. (11)
3.1 Certificate of Incorporation of Emulex Micro Devices Corporation,
dated November 13, 1992. (2)
3.2 EMD Incorporation Agreement, dated as of January 1, 1993. (2)
3.3 Certificate of Amendment of Certificate of Incorporation, dated
May 26, 1993. (2)
3.4 By-Laws of QLogic Corporation. (2)
3.5 Amendments to By-Laws of QLogic Corporation. (3)
3.6 Certificate of Amendment of Certificate of Incorporation, dated
May 26, 1993. (2)
3.7 Certificate of Amendment of Certificate of Incorporation, dated
February 15, 1999. (8)
3.8 Certificate of Amendment of Certificate of Incorporation, dated
January 5, 2000. (9)
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. (4)
4.2 Amendment to Rights Agreement, dated as of November 19, 1997
between QLogic Corporation and Harris Trust Company of California.
(5)
4.3 Amendment to Rights Agreement, dated as of January 24, 2000
between QLogic Corporation and Harris Trust Company of California.
(10)
10.1.2 Form of QLogic Corporation Non-Employee Director Stock Option
Plan, as amended. (13)
10.2.2 QLogic Corporation Stock Awards Plan, as amended. (13)
10.3 Form of Tax Sharing Agreement among Emulex Corporation, a Delaware
corporation, Emulex Corporation, a California corporation, and
QLogic Corporation. (2)
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. (2)
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. (2)
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. (2)
10.7 Intellectual Property Assignment and Licensing Agreement, dated as
of January 24, 1994, between Emulex Corporation, a California
Corporation, and QLogic Corporation. (2)
10.8 Form of QLogic Corporation Savings Plan.*(2)
10.9 Form of QLogic Corporation Savings Plan Trust.*(2)
10.11 Form of Indemnification Agreement between QLogic Corporation and
Directors. (3)
10.13 Industrial Lease Agreement between the Registrant, as lessee, and
AEW/Parker South, LLC, as lessor. (7)
10.15 Form QLogic Corporation 1998 Employee Stock Purchase Plan. (8)
10.16 Loan and Security Agreement with Silicon Valley Bank dated March
31, 1994. (1)
10.16.1 Amendment to Loan and Security Agreement with Silicon Valley Bank
dated July 6, 1998.(6)
10.16.2 Amendment to Loan and Security Agreement with Silicon Valley Bank
dated July 5, 2001. (14)
26
Exhibit No. Item Caption
- ----------- ------------
21.2 Subsidiaries of the Registrant. (13)
- ---------------
(1) Previously filed as Exhibit 10.10 to Registrant's Annual Report on
Form 10-K for the year ended April 3, 1994 and incorporated herein
by reference.
(2) Previously filed as an exhibit to Registrant's Registration
Statement on Form 10 on January 28, 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 Registration
Statement on Form 8-A on June 19, 1996, and incorporated herein by
reference.
(5) Previously filed as an exhibit to Registrant's Registration
Statement on Form 8-A/A on November 25, 1997, and incorporated
herein by reference.
(6) 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.
(7) 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.
(8) 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.
(9) 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.
(10) Previously filed as and exhibit to Registrant's Registration
Statement on Form 8-A/A dated June 1, 2000, and incorporated
herein by reference.
(11) 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.
(12) 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.
(13) Previously filed as an exhibit to Registrant's Annual Report on
Form 10-K for the year ended April 1, 2001, and incorporated
herein by reference.
(14) Previously filed as an exhibit to Registrant's Quarterly Report on
Form 10-Q for the quarter ended July 1, 2001, 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.
27