1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
--------------------
(Mark One)
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 27, 1998
OR
( ) Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from _______ to _______
COMMISSION FILE NO. 0-23298
QLOGIC CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 33-0537669
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3545 HARBOR BOULEVARD
COSTA MESA, CALIFORNIA 92626
(Address of principal executive offices) (Zip Code)
(714) 438-2200
(Registrant's telephone number, including area code)
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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 24, 1999, the registrant had 8,868,798 shares of common stock
outstanding.
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QLOGIC CORPORATION AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION PAGE
- -----------------------------------------------------------------------------------------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets December 27, 1998 and
March 29, 1998 ............................................................. 3
Condensed Consolidated Statements of Income three and nine months ended
December 27, 1998 and December 28, 1997 ................................... 4
Condensed Consolidated Statements of Cash Flows nine months ended
December 27, 1998 and December 28, 1997 .................................... 5
Notes to Condensed Consolidated Financial Statements ....................... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations .............................. 8
PART II. OTHER INFORMATION PAGE
- -----------------------------------------------------------------------------------------
Item 4. Submission of Matters to a Vote of Security Holders......................... 19
Item 6. Exhibits and Reports on Form 8-K ........................................... 19
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
QLOGIC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
ASSETS
DECEMBER 27, MARCH 29,
1998 1998
------------ --------
Cash and cash equivalents ..................................................... $ 36,948 $ 64,090
Short term investments ........................................................ 57,253 27,746
Accounts and notes receivable, net ............................................ 9,835 7,836
Inventories ................................................................... 10,642 3,835
Deferred income taxes ......................................................... 5,072 4,353
Prepaid expenses and other current assets ..................................... 1,001 475
-------- --------
Total current assets ................................................. 120,751 108,335
Long term investments ......................................................... 27,781 20,934
Property and equipment, net ................................................... 9,270 6,372
Other assets .................................................................. 1,888 601
-------- --------
$159,690 $136,242
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable .............................................................. $ 4,678 $ 3,765
Accrued expenses .............................................................. 15,919 13,610
Current installments of capitalized lease obligations ......................... 91 211
-------- --------
Total current liabilities ............................................ 20,688 17,586
Capitalized lease obligations, excluding current installments ................. 106 141
Other non-current liabilities ................................................. -- 466
-------- --------
Total liabilities .................................................... 20,794 18,193
-------- --------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.10 par value; 1,000,000 shares authorized (200,000
shares designated as Series A Junior Participating Preferred, $0.001 par
value); none issued and outstanding .................................... -- --
Common stock, $0.10 par value; 12,500,000 shares authorized; 8,788,291 and
8,650,826 shares issued and outstanding at December 27, 1998 and March
29, 1998, respectively ................................................. 878 865
Additional paid-in capital ............................................... 102,681 99,008
Retained earnings ........................................................ 35,337 18,176
-------- --------
Total stockholders' equity ............................................. 138,896 118,049
-------- --------
$159,690 $136,242
======== ========
See accompanying notes to condensed consolidated financial statements.
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QLOGIC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------- ---------------------------
DECEMBER 27, DECEMBER 28, DECEMBER 27, DECEMBER 28,
1998 1997 1998 1997
------- ------- ------- -------
Net revenues ................................ $30,299 $20,856 $82,106 $58,653
Cost of sales ............................... 10,875 8,594 30,839 24,884
------- ------- ------- -------
Gross profit ........................... 19,424 12,262 51,267 33,769
------- ------- ------- -------
Operating expenses:
Engineering and development ............ 5,680 4,085 17,622 11,268
Selling and marketing .................. 3,061 2,041 7,948 6,299
General and administrative ............. 1,315 952 3,906 3,426
------- ------- ------- -------
Total operating expenses ............. 10,056 7,078 29,476 20,993
------- ------- ------- -------
Operating income ....................... 9,368 5,184 21,791 12,776
Interest income, net ........................ 1,463 1,261 4,213 2,263
------- ------- ------- -------
Income before income taxes ............. 10,831 6,445 26,004 15,039
Income tax provision ........................ 3,683 2,499 8,843 5,808
------- ------- ------- -------
Net income .................................. $ 7,148 $ 3,946 $17,161 $ 9,231
======= ======= ======= =======
Basic earnings per share .................... $ 0.82 $ 0.46 $ 1.96 $ 1.28
======= ======= ======= =======
Diluted earnings per share .................. $ 0.76 $ 0.43 $ 1.84 $ 1.19
======= ======= ======= =======
Common shares used in the
calculations of basic earnings per share . 8,753 8,590 8,740 7,238
======= ======= ======= =======
Shares used in the calculations of diluted
earnings per share ....................... 9,397 9,115 9,321 7,757
======= ======= ======= =======
See accompanying notes to condensed consolidated financial statements.
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QLOGIC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
-----------------------------
DECEMBER 27, DECEMBER 28,
1998 1997
-------- --------
Cash flows from operating activities:
Net income ................................................ $ 17,161 $ 9,231
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ........................... 2,336 1,790
Write-off of acquired in-process technology ............. 1,220 --
Provision for doubtful accounts ......................... 196 161
Loss on disposal of property and equipment .............. 89 192
Benefit from deferred income taxes ...................... (719) (1,039)
Changes in assets and liabilities:
Accounts and notes receivables .......................... (2,196) (1,139)
Inventories ............................................. (6,807) 788
Prepaid expenses and other current assets ............... (526) (279)
Other assets ............................................ (1,196) (333)
Accounts payable ........................................ 913 (1,445)
Accrued expenses ........................................ 4,687 3,761
Other non-current liabilities ........................... (466) (270)
-------- --------
Net cash provided by operating activities ........... 14,692 11,418
-------- --------
Cash flows from investing activities:
Additions to property and equipment ..................... (4,677) (2,902)
Purchases of investments ................................ (72,445) (50,997)
Acquisition of business, net of cash acquired .......... (1,957) --
Maturities and sales of investments ..................... 36,091 --
-------- --------
Net cash used in investing activities ................. (42,988) (53,899)
-------- --------
Cash flows from financing activities:
Principal payments under capital leases ................. (155) (177)
Proceeds from exercise of stock options ................. 1,309 191
Proceeds from sale of common stock ...................... -- 78,107
-------- --------
Net cash provided by financing activities ............. 1,154 78,121
-------- --------
Net increase (decrease) in cash and cash equivalents ......... (27,142) 35,640
-------- --------
Cash and cash equivalents at beginning of period ............. 64,090 19,091
-------- --------
Cash and cash equivalents at end of period ................... $ 36,948 $ 54,731
======== ========
Cash paid during the period for:
Interest .................................................. $ 35 $ 66
======== ========
Income taxes .............................................. $ 8,366 $ 5,175
======== ========
Non-cash investing and financing activities:
During the nine months ended December 27, 1998, the Company recorded a
credit to additional paid-in-capital and a debit to accrued taxes
payable of $2,378, related to the tax benefit of exercises of stock
options under the Company's various stock option plans. Additionally,
during the nine months ended December 27, 1998, the Company recorded an
accrual of $906, in accordance with the performance provisions of the
Company's SDR Asset Acquisition Agreement.
See accompanying notes to condensed consolidated financial statements.
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QLOGIC CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE (1) BASIS OF PRESENTATION
In the opinion of QLogic Corporation ("QLogic" or the "Company"), the
accompanying unaudited condensed consolidated financial statements contain all
adjustments (which are normal recurring accruals) necessary to present fairly
the financial position as of December 27, 1998, the statements of income for the
three and nine months ended December 27, 1998 and December 28, 1997 and the
statements of cash flows for the nine months ended December 27, 1998 and
December 28, 1997. The accompanying financial statements should be read in
conjunction with the financial statements in the Company's Annual Report on Form
10-K for the year ended March 29, 1998. The results of operations for the three
and nine month periods ended December 27, 1998 are not necessarily indicative of
the results to be expected for the entire fiscal year. Certain items previously
reported in specific financial statement captions have been reclassified to
conform to the current presentation.
NOTE (2) BUSINESS COMBINATION
On August 20, 1998, the Company acquired the net assets of Silicon Design
Resources, Inc. ("SDR") for $2,000 in cash. In addition, the Company is
obligated to pay up to an additional $8,000 in cash provided that certain
performance targets are achieved over the next four fiscal years. These payments
will be accounted for as additional purchase price and allocated to the
intangible assets acquired. The Company accounted for the transaction using the
purchase method of accounting, and excluding the $1,596 write-off of the
acquired in-process technology in the quarter ended September 27, 1998, the
impact to the Company's financial position and results of operations from the
acquisition date was not material. Additionally, the Company incurred
approximately $413 in professional fees related to the acquisition.
The Company allocated the purchase price to the tangible and identifiable
intangible net assets as of August 20, 1998 based on the fair values of the
assets; such fair values were derived from an independent third party appraisal.
The fair value of the net assets acquired exceeded the initial payment,
resulting in negative goodwill. This negative goodwill was allocated to the
intangible assets acquired, based on their relative fair values. The allocation
of the initial payment is summarized as follows:
Net tangible assets $ 558
Completed technology 635
In-process technology 1,220
------
Net assets acquired $2,413
======
Acquired in-process technology includes the value of products in the
development stage and not considered to have reached technological feasibility.
In accordance with applicable accounting literature, the acquired in-process
technology was written off to engineering and development expense during the
quarter ended September 27, 1998. Acquired completed technology has been
capitalized and is being amortized on a straight-line basis over a period of
three years from the acquisition date. The Company accrued the portion of the
fiscal year 1999 performance payment earned during the quarter ended December
27, 1998, totaling $334, which was allocated $114 to completed technology and
$220 to in-process technology.
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NOTE (3) INVENTORIES
Components of inventories are as follows:
DECEMBER 27, MARCH 29,
1998 1998
------------ ---------
Raw materials ................ $ 8,377 $2,720
Work in process ............. 1,215 585
Finished goods .............. 1,050 530
------- ------
$10,642 $3,835
======= ======
NOTE (4) EARNINGS PER SHARE
Basic earnings per common share were computed based on the weighted
average number of common shares outstanding during the periods presented. The
weighted average number of common shares outstanding for the three months ended
December 27, 1998 and December 28, 1997, were 8,753 and 8,590, respectively. For
the nine months ended December 27, 1998 and December 28, 1997, the weighted
average number of common shares were 8,740 and 7,238, respectively.
Diluted earnings per share were computed based on the weighted average
number of common and dilutive potential common shares outstanding during the
periods presented. The Company has granted certain stock options which have been
treated as dilutive potential common shares in computing diluted earnings per
share. The weighted average number of common and dilutive potential common
shares for the three months ended December 27, 1998 and December 28, 1997, were
9,397 and 9,115, respectively. For the nine months ended December 27, 1998 and
December 28, 1997, the weighted average number of common and dilutive potential
common shares were 9,321 and 7,757, respectively.
Options to purchase 3 and 26 shares of common stock with exercise prices
that exceed the average market price of $96.43 and $34.82 during the three
months ended December 27, 1998 and December 28, 1997, respectively, were
excluded from the calculation of diluted EPS because their inclusion would have
been anti-dilutive.
Options to purchase 6 and 9 shares of common stock with exercise prices
that exceed the average market price of $63.91 and $31.30 during the nine months
ended December 27, 1998 and December 28, 1997, respectively, were excluded from
the calculation of diluted EPS because their inclusion would have been
anti-dilutive.
NOTE (5) COMMITMENT
In December 1998, the Company entered into a ten-year lease agreement for
a 165,000 square foot facility which will be used to relocate its corporate
headquarters. The lease commences upon completion of construction of the
facility, currently expected in late 1999 or early 2000. The agreement also
contains an option to purchase the facility, along with an adjacent undeveloped
lot.
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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. The Company's actual results could differ
materially from those discussed herein. Factors that could cause or contribute
to such differences include, but are not limited to, those discussed hereunder
in "Risk Factors," as well as those discussed elsewhere in this report. All
figures are in thousands except as otherwise noted.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain income
and expense items expressed in absolute terms and as a percentage of the
Company's net revenues.
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------------------- ------------------------------------------
December 27, 1998 December 28, 1997 December 27, 1998 December 28, 1997
------------------- ------------------- ------------------- -------------------
Net revenues .................... $30,299 100.0% $20,856 100.0% $82,106 100.0% $58,653 100.0%
Cost of sales ................... 10,875 35.9 8,594 41.2 30,839 37.6 24,884 42.4
------- ----- ------- ----- ------- ----- ------- -----
Gross profit ............... 19,424 64.1 12,262 58.8 51,267 62.4 33,769 57.6
Operating expenses:
Engineering and development 5,680 18.8 4,085 19.6 17,622 21.4 11,268 19.2
Selling and marketing ...... 3,061 10.1 2,041 9.8 7,948 9.7 6,299 10.7
General and administrative . 1,315 4.3 952 4.5 3,906 4.8 3,426 5.9
------- ----- ------- ----- ------- ----- ------- -----
Total operating expenses 10,056 33.2 7,078 33.9 29,476 35.9 20,993 35.8
------- ----- ------- ----- ------- ----- ------- -----
Operating income ................ $ 9,368 30.9% $ 5,184 24.9% $21,791 26.5% $12,776 21.8%
======= ===== ======= ===== ======= ===== ======= =====
NET REVENUES
The Company's net revenues are derived from the sale of fibre channel and
SCSI-based I/O products. License fees also contribute to the Company's net
revenues. Net revenues for three months ended December 27, 1998 increased $9.4
million or 45% from the three months ended December 28, 1997 to $30.3 million.
The increase was primarily the result of an increase in sales of Host Boards,
the TEC product line, and the GEM product line of $5.6 million, $2.5 million and
$1.2 million, respectively.
Net revenues for the nine months ended December 27, 1998 increased $23.5
million or 40% from the nine months ended December 28, 1997. The increase was
primarily the result of an increase in sales of Host Boards and the TEC Product
line of $15.2 million and $8.3 million, respectively.
Export revenues for the three months ended December 27, 1998 increased
$6.6 million or 70% from the three months ended December 28, 1997. The increase
was primarily the result of a $3.1 million increase in sales to European
customers, a $2.5 million increase in sales to Japan, and a $0.6 million
increase in sales to Canada. The Company's principal markets are in the United
States, Japan, and the United Kingdom. The Company's export revenues during the
three months ended December 27, 1998 were $16.0 million, or 53% of net revenues.
Approximately 60% of this export revenue came from shipments to Japan. The
Company's largest Japanese customers are Fujitsu Limited, Hitachi Limited and
Servants International. During the three months ended December 27, 1998, sales
to Japan increased $1.3 million or 15.2% from the quarter ended September 27,
1998. Fujitsu Limited and Hitachi Limited, both with headquarters in Japan, are
among the Company's largest five customers (see Risk Factors - Dependence on
Small Number of Customers). Servants International is an OEM ("Original
Equipment Manufacturer") distributor of the Company's products.
Export revenues for the nine months ended December 27, 1998 increased
$20.0 million or 87% from the nine months ended December 28, 1997. The increase
was primarily the result of a $10.1 million increase in sales to Japanese
customers and a $8.6 million increase in sales to Europe.
Recently the Asian markets have suffered property price deflation. This
asset deflation has taken place especially in countries that have had a collapse
in both their currency and stock markets, such as Japan. These deflationary
pressures have reduced liquidity in the banking systems of the affected
countries and, when coupled with spare industrial production capacity, could
lead to widespread financial difficulty among the companies in this region.
The Company believes that its major customers continually evaluate
whether or not to purchase products from alternate or additional sources.
Additionally, customers' economic and market conditions frequently change.
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Accordingly, there can be no assurance that a major customer will not reduce,
delay or eliminate its purchases from the Company. Any such reduction, delay or
loss of purchases could have a material adverse effect on the Company's
business, financial condition and results of operations (see Risk Factors -
Risks of Doing Business In International Markets).
COST OF SALES
Cost of sales consists primarily of raw materials (including wafers and
completed chips from third-party manufacturers), assembly and test labor,
overhead and warranty costs. The cost of sales percentage for the three months
ended December 27, 1998 was 35.9 %, a decrease of 5.3 % from the similar period
in the prior fiscal year. The percentage decrease was due to a combination of
increased volumes, operating efficiencies, and a shift in product mix to
products that are generally associated with higher average selling prices. The
Company's ability to maintain its current gross margin can be significantly
affected by factors such as supply costs and, in particular, the cost of silicon
wafers, the mix of products shipped, competitive price pressures, the timeliness
of volume shipments of new products and the Company's ability to achieve
manufacturing cost reductions. The Company anticipates that it will be
increasingly more difficult to further reduce manufacturing costs. Due to the
Company's OEM customers being pressured to reduce prices as a result of
competitive factors, the Company may be required to contractually commit to
price reductions for its products before it knows how, or if, cost reductions
can be obtained. If the Company is unable to achieve such cost reductions, the
Company's gross margins could decline and such decline could have a material
adverse effect on the Company's business, financial condition and results of
operations (see Risk Factors - Dependence on Small Number of Customers). As a
result, the Company does not anticipate cost of sales to decrease at a rate
consistent with historic trends and there can be no assurance that the Company
will be able to maintain or improve its gross margin in subsequent quarters.
OPERATING EXPENSES
Engineering and Development. Engineering and development expenses consist
primarily of salaries and other personnel related expenses, development related
equipment, occupancy costs and depreciation. For the three months ended December
27, 1998, engineering and development expenditures increased by $1.6 million
from the three month period ended December 28, 1997, primarily due to increased
salary and fringe expenses of $0.9 million, an acquired in-process technology
charge of $0.2 million related to the acquisition of SDR and new product
development expenses of $0.4 million. In particular, the Company increased its
engineering staff in the three months ended December 27, 1998, from the similar
period in the prior fiscal year. The Company expects that engineering and
development expenses will increase in absolute dollars in fiscal 1999.
For the nine months ended December 27, 1998, engineering and development
expenditures increased by $6.4 million from the nine month period ended December
28, 1997, primarily due to increased salary and fringe expenses of $3.0 million
as a result of increased engineering headcount, an acquired in-process
technology charge of $1.8 million related to the acquisition of SDR, new product
development expense of $0.7 million, depreciation of $0.4 million, legal fees of
$0.2 million, equipment maintenance of $0.1 million and travel of $0.1 million.
Selling and Marketing. Selling and marketing expenses consist primarily
of sales commissions, salaries and other expenses for selling and marketing
personnel, travel expenses and trade shows. During the three months ended
December 27, 1998, selling and marketing expenses increased by $1.0 million from
the three month period ended December 28, 1997, primarily as a result of
increased sales commissions due to increased revenue, and increased salary and
travel as result of an increase in sales and marketing headcount.
During the nine months ended December 27, 1998 selling and marketing
expenses increased by $1.6 million from the similar period in the prior fiscal
year, primarily as a result of salary, commissions and travel related expenses
for sales and marketing personnel, due to increased revenue and an increase in
sales and marketing headcount.
General and Administrative. General and administrative expenses consist
primarily of salaries and other expenses for corporate management, finance,
accounting and human resources. For the three months ended December 27, 1998,
general and administrative expenses increased $0.4 million from the similar
period in the prior fiscal year, primarily due to increased outside service
expenses.
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For the nine months ended December 27, 1998, general and administrative
expenses increased by $0.5 million from the similar period in the prior fiscal
year, primarily due to increased outside service expenses.
INTEREST INCOME, NET
Net interest income increased $0.2 million during the three months ended
December 27, 1998 from the three months ended December 28, 1997, primarily due
to larger balances of cash, cash equivalents, and investments.
During the nine months ended December 27, 1998 net interest income
increased $2.0 million from the nine months ended December 28, 1997, primarily
due to larger balances of cash, cash equivalents, and investments.
INCOME TAX PROVISION
The Company's effective tax rates were 34% and 39% for the three months
ended December 27, 1998 and December 28, 1997, respectively. The Company's
effective tax rates were 34% and 39% for the nine months ended December 27, 1998
and December 28, 1997, respectively. The tax rate in fiscal 1999 was reduced
from the comparable periods in the prior fiscal year primarily due to higher
qualifying research and experimentation expenditures and because a portion of
the Company's short term and long term investments were made in tax-exempt
securities.
NEW ACCOUNTING STANDARDS
In June 1997, the FASB issued Statement 131, "Disclosure about Segments
of an Enterprise and Related Information." The new statement is effective for
fiscal years beginning after December 15, 1997. Adoption of this new standard
will not have a significant impact on the consolidated financial statements.
In June 1998, the FASB issued Statement 133 "Accounting for Derivative
Instruments and Hedging Activities." The new statement established accounting
and reporting standards for derivative instruments and for hedging activities
and is effective for all fiscal quarters of fiscal years beginning after June
15, 1999. The Company does not expect the adoption of Statement 133 to have a
material impact on the Company's results of operations.
LIQUIDITY AND CAPITAL RESOURCES
QLogic has financed its working capital needs and capital expenditure
requirements from internally generated funds, facilities and equipment leases
and financing activities. Cash provided by operating activities was $14.7
million for the nine months ended December 27, 1998, as compared to $11.4
million for the nine months ended December 28, 1997. The growth in cash flow
provided by operating activities is due to increased net income and an increase
in accounts payable and accrued expenses, partially offset by an increase in
inventory and accounts receivable and other assets.
Cash used in investing activities was $43.0 million for the nine months
ended December 27, 1998, reflecting expenditures for purchases of investments,
property and equipment, and the acquisition of a business, SDR, partially offset
by maturities and sales of investments.
Cash provided by financing activities was $1.2 million for the nine
months ended December 27, 1998, which reflected proceeds from the exercise of
stock options, offset in part by principal payments under capital lease
liabilities.
Working capital at December 27, 1998 was $100.1 million, as compared to
$90.7 million at March 29, 1998. At December 27, 1998, the Company's principal
sources of liquidity included cash and cash equivalents of $36.9 million and
short term investments of $57.3 million. In addition, the Company has a line of
credit of up to $7.5 million with Silicon Valley Bank. The line of credit allows
the Company to borrow at the bank's prime rate. There were no borrowings under
the Company's line of credit as of December 27, 1998. The line of credit expires
July 5, 1999, and, although there can be no assurance, the Company expects to
renew this line of credit.
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The Company believes that existing cash and cash equivalent balances,
short term investments, facilities and equipment leases, and cash flows from
operating activities will provide the Company with sufficient funds to finance
its operations for at least the next 12 months.
YEAR 2000
Many existing computer systems and applications, and other control
devices, use only two digits to identify a year in the date field, without
considering the impact of the upcoming change in the century. As a result, such
systems and applications could fail or create erroneous results unless corrected
so that they can process data related to the year 2000 and beyond. The Company
relies on its systems, applications and devices in operating and monitoring all
major aspects of its business, including financial systems (such as general
ledger, accounts payable, and payroll modules), customer services,
infrastructure, embedded computer chips, networks and telecommunications
equipment and products. The Company has initially assessed how it may be
impacted by Year 2000 and has commenced a comprehensive plan to address the
following aspects of the Year 2000 problem: information systems, non-information
systems, products, suppliers and customers.
The plan, as it relates to information systems, involves a combination of
software modification, upgrades and replacement. The Company has completed
remediation of its critical information systems, however, the Company's critical
information system vendor continues to supply periodic updates to its software
for potential Year 2000 issues. These updates will be integrated in a timely
manner and management will continue to monitor the system to ensure it remains
current with the critical information system vendor. The target date for
remediation of the remainder of its information systems is March 31, 1999. The
Company has completed the assessment and development of remediation plans with
respect to substantially all of the Company's non-information systems and
expects remediation to be complete by June 30, 1999. The Company has completed
an assessment of its products and has determined its products do not contain
specific calendar year functions. However, there can be no assurance that
unforseen problems will not be encountered when the Company's components are
used in conjunction with a system containing non-compliant, non-QLogic
components. The Company is currently assessing Year 2000 issues with respect to
major suppliers and customers and expects this process to be completed by June
30, 1999, however, the Company can provide no assurance that Year 2000
compliance plans will be successfully completed by suppliers and customers in a
timely manner.
The Company currently estimates that the costs associated with the Year
2000 issue should not have a material adverse effect on the results of
operations or financial position of the Company in any given year. Historical
amounts spent on assessment and remediation have not been material to the
results of operations.
If the Company is not successful in implementing its Year 2000 compliance
plan, there may be a material adverse impact on the Company's results of
operations and financial condition. The Company believes its greatest risks and
uncertainties related to the Year 2000 issue involve interrupted product flow
from suppliers and a possible redirection or interruption of purchasing
activities from key customers due to their potential failure to fully address
their own Year 2000 issues. Possible interruptions in public utilities, such as
electricity or telecommunications, also could have material adverse impacts on
the Company's operating results. Due to the importance of addressing these
risks, and the need for the Company to focus attention to remediation efforts,
the Company expects to develop contingency plans to address those Year 2000
problems which may not be corrected by implementation of the Company's Year 2000
compliance plan. Contingency plans are expected to be completed by June 30,
1999, however, there can be no assurance that these plans will effectively
mitigate Year 2000 issues.
RISK FACTORS
Except for the historical information contained herein, the information
in this report includes forward-looking statements. When used in this report the
words "shall," "should," "forecast," "all of," "projected," "believes,"
"expects," and similar expressions are intended to identify forward looking
statements. In addition, the Company may from time to time make oral
forward-looking statements. The Company wishes to caution readers that a number
of important factors could cause results to differ materially from those in the
forward-looking statements. Factors that could cause or contribute to such
differences include those discussed below, as well as those discussed above or
elsewhere in this report.
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FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company has experienced, and expects to continue to experience,
fluctuations in sales and operating results from quarter to quarter. As a
result, the Company believes that period to period comparisons of its operating
results are not necessarily meaningful, and that such comparisons cannot be
relied upon as indicators of future performance. In addition, there can be no
assurance that the Company will maintain its current profitability in the
future. A significant portion of the Company's net revenues in each fiscal
quarter result from orders booked in that quarter. In the past, a significant
percentage of the Company's quarterly bookings and sales to major customers
occurred during the last month of the quarter, and there can be no assurance
that this trend will not return in the future. Orders placed by major customers
are typically based on their forecasted sales and inventory levels for the
Company's products. Changes in purchasing patterns by one or more of the
Company's major customers, customer order changes or rescheduling, gain or loss
of significant customers, customer policies pertaining to desired inventory
levels of the Company's products, negotiations of rebates and extended payment
terms, as well as changes in the ability of the Company to anticipate in advance
the mix of customer orders, could result in material fluctuations in quarterly
operating results. Certain large OEM customers may require the Company to
maintain higher levels of inventory as such customers attempt to minimize their
own inventories. In addition, the Company must order its products and build
inventory substantially in advance of product shipments, and because the markets
for the Company's products are subject to rapid technological and price changes,
there is a risk the Company will forecast incorrectly and produce excess or
insufficient inventory of particular products. To the extent the Company
produces excess or insufficient inventory or is required to hold excess
inventory, the Company's operating results could be adversely affected.
Other factors that could cause the Company's sales and operating results
to vary significantly from period to period include: the time, availability and
sale of new products; seasonal OEM customer demand, such as the decline
experienced in the fiscal quarter ended June 30, 1996; changes in the mix of
products having differing gross margins; variations in manufacturing capacities,
efficiencies and costs; the availability and cost of components, including
silicon wafers; warranty expenses; variations in product development and other
operating expenses; and general economic and other conditions affecting the
timing of customer orders and capital spending. The Company's quarterly results
of operations are also influenced by competitive factors, including pricing and
availability of the Company's and its competitors' products. Although the
Company does not maintain its own wafer manufacturing facility, a large portion
of the Company's expenses are fixed and difficult to reduce in a short period of
time. If net revenues do not meet the Company's expectations, the Company's
fixed expenses would exacerbate the effect on net income of such shortfall in
net revenues. Furthermore, announcements by the Company, its competitors or
others regarding new products and technologies could cause customers to defer or
cancel purchases of the Company's products. Order deferrals by the Company's
customers, delays in the Company's introduction of new products and longer than
anticipated design-in cycles for the Company's products have in the past
adversely affected the Company's quarterly results of operations. Due to all of
the foregoing factors, as well as other unanticipated factors, it is likely that
in some future quarter or quarters the Company's operating results will be below
the expectations of public market analysts or investors. In such event, the
price of the Company's common stock price would likely be materially and
adversely affected.
DEPENDENCE ON SMALL NUMBER OF CUSTOMERS
A small number of customers account for a substantial portion of the
Company's net revenues, and the Company expects that a limited number of
customers will continue to represent a substantial portion of the Company's net
revenues for the foreseeable future. The loss of any of the Company's major
customers would have a material adverse effect on its business, financial
condition and results of operations. In addition, a majority of the Company's
customers order the Company's products through written purchase orders as
opposed to long term supply contracts and, therefore, such customers are
generally not obligated to purchase products from the Company for any extended
period. Major customers also have significant leverage over the Company and may
attempt to change the terms, including pricing, upon which the Company and such
customers do business, which could materially adversely affect the Company's
business, financial condition and results of operations. As the Company's OEM
customers are pressured to reduce prices as a result of competitive factors, the
Company may be required to commit
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to price reductions for its products before it knows how, or if, cost reductions
can be obtained. If the Company is unable to achieve such cost reductions, the
Company's gross margins could decline and such decline could have a material
adverse effect on the Company's business, financial condition and results of
operations. In addition, the Company provides its major distributors and certain
volume purchasers with price protection in the event that the Company reduces
the prices of its products. While the Company maintains reserves for such price
protection, there can be no assurance that the impact of future price reductions
by the Company will not exceed the Company's reserves in any specific fiscal
period. Any price protection in excess of recorded reserves could have a
material adverse effect on the Company's business, financial condition and
results of operations.
COMPETITION
The markets for both peripheral and host computer products are highly
competitive and are characterized by short product life cycles, price erosion,
rapidly changing technology, frequent product performance improvements and
evolving industry standards. Competition typically occurs at the design stage,
where the customer evaluates alternative design approaches. Because of shortened
product life cycles and even shorter design-in cycles, the Company's competitors
have increasingly frequent opportunities to achieve design wins in next
generation systems. A design win usually ensures a customer will purchase the
product until a higher performance standard is available or a competitor can
demonstrate a significant price/performance advantage. All of the Company's
products compete with products available from several companies, many of which
have substantially greater research and development resources, long term
guaranteed supply capacity, marketing and financial resources, manufacturing
capability and customer support organizations than those of the Company. The
Company believes that its future operating results will depend, in part, upon
its ability to continue to improve product and process technologies and develop
new technologies in order to achieve or maintain the performance advantages of
products and processes relative to competitors, to adapt products and processes
to technological changes, and to identify and adopt emerging industry standards.
Because of the complexity of its products, the Company has experienced delays
from time to time in completing products on a timely basis. If the Company is
unable to design, develop and introduce competitive new products on a timely
basis, it would have material adverse affect on future operating results.
The Company currently competes primarily with Adaptec, Inc. and LSI Logic
Corporation ("LSI Logic"), in the SCSI sector of the I/O market. In the fibre
channel sector of the I/O market, the Company is competing primarily with LSI
Logic, Emulex Corporation and Hewlett-Packard Company. Symbios Logic, Inc. has
been a competitor of the Company, however, LSI Logic acquired Symbios Logic,
Inc. on August 6, 1998. The Company may compete with some of its larger disk
drive and computer systems customers, some of which have the capability to
develop I/O controller integrated circuits for use in their products. At least
one large OEM customer in the past decided to vertically integrate and therefore
ceased purchasing from the Company.
The Company will need to continue to develop products appropriate to its
markets to remain competitive as its competitors continue to introduce products
with improved performance characteristics. While the Company continues to devote
significant resources to research and development, there can be no assurance
that such efforts will be successful or that the Company will develop and
introduce new technology and products in a timely manner. In addition, while
relatively few competitors offer a full range of SCSI and other I/O products,
additional domestic and foreign manufacturers may increase their presence in,
and resources devoted to, these markets. There can be no assurance that the
Company will compete successfully in the future.
DEPENDENCE ON WAFER SUPPLIERS AND OTHER SUBCONTRACTORS
The Company currently relies on several independent foundries to
manufacture its semiconductor products either in finished form or wafer form.
The Company conducts business with its foundries through written purchase orders
as opposed to long term supply contracts and, therefore, such foundries are
generally not obligated to supply products to the Company for any specific
period, in any specific quantity or at any specified price, except as may be
provided in a particular purchase order as may be accepted by a foundry. To the
extent a foundry terminates its relationship with the Company or should the
Company's supply from a foundry be interrupted or terminated for any other
reason, the Company may not have a sufficient amount of time to replace the
supply of products manufactured by that foundry. Until recently, there has been
a worldwide shortage of advanced process technology foundry capacity. The
manufacture of semiconductor devices is subject to a wide variety of factors,
including the availability of raw materials, the level of contaminants in the
manufacturing environment, impurities in the materials used, and
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the performance of personnel and equipment. The Company is continuously
evaluating potential new sources of supply. However, the qualification process
and the production ramp-up for additional foundries has in the past taken, and
could in the future take, longer than anticipated. There can be no assurance
that new supply sources will be able or willing to satisfy the Company's wafer
requirements on a timely basis or at acceptable quality or unit prices. While
the quality, yield and timeliness of wafer deliveries to date have been
acceptable; there can be no assurance that manufacturing yield problems will not
occur in the future.
The Company is using multiple sources of supply for certain of its
products, which may require the Company's customers to perform separate product
qualifications. The Company has not, however, developed alternate sources of
supply for certain other products and its newly introduced products are
typically produced initially by a single foundry until alternate sources can be
qualified. In particular, the Company's integrated single chip fibre channel
controller is manufactured by LSI Logic and integrates LSI Logic's transceiver
technology. LSI Logic also competes with the Company with its own fibre channel
products. In the event that LSI Logic is unable or unwilling to satisfy the
Company's requirements for this technology, the Company's marketing efforts
related to fibre channel products would be delayed and, as such, its results of
operations could be materially and adversely affected. The requirement that a
customer perform separate product qualifications or a customer's inability to
obtain a sufficient supply of products from the Company may cause that customer
to satisfy its product requirements from the Company's competitors, which would
adversely affect the Company's results of operations.
The Company's ability to obtain satisfactory wafer and other supplies is
subject to a number of other risks. These risks include, without limitation,
that the Company's suppliers may be subject to injunctions arising from alleged
violations of third party intellectual property rights. The enforcement of such
an injunction could impede a supplier's ability to provide wafers, components or
packaging services to the Company. In addition, the Company's flexibility to
move production of any particular product from one foundry to another can be
limited in that such a move can require significant re-engineering, which may
take several quarters. These efforts also divert engineering resources which
otherwise could be dedicated to new product development, which would adversely
affect new product development schedules. Accordingly, production may be
constrained even though capacity is available at one or more foundries. In
addition, the Company could encounter supply shortages if sales grow
substantially. The Company uses domestic and offshore subcontractors for die
assembly of its semiconductor products purchased in wafer form, and for assembly
of its host adapter board products. The Company's reliance on independent
subcontractors to provide these services involves a number of risks, including
the absence of guaranteed capacity and reduced control over delivery schedules,
quality assurance and costs. The Company is also subject to the risks of
shortages and increases in the cost of raw materials used in the manufacture or
assembly of the Company's products. In addition, the Company may receive orders
for large volumes of products to be shipped within short periods, and the
Company may not have sufficient testing capacity to fill such orders. The
Company utilizes foundries in Korea for supply of its semiconductor products.
This region of the world is subject to geological instability as well as
political instability which could result in the interruption of product supply
to the Company. Constraints or delays in the supply of the Company's products,
whether because of capacity constraints, unexpected disruptions at the Company's
foundries or subcontractors, delays in obtaining additional production at the
existing foundries or in obtaining production from new foundries, shortages of
raw materials, or other reasons, could result in the loss of customers and other
material adverse effects on the Company's operating results, including those
that may result should the Company be forced to purchase products from higher
cost foundries or pay expediting charges to obtain additional supply.
TRANSACTIONS TO OBTAIN MANUFACTURING CAPACITY, FUTURE CAPITAL NEEDS
Although the Company is currently not experiencing any difficulties in
obtaining sufficient foundry capacity due to the current abundance of worldwide
semiconductor fabrication capacity, the Company and the semiconductor industry
have in the past experienced shortages of available foundry capacity.
Accordingly, in order to secure an adequate supply of wafers, especially wafers
manufactured using advanced process technologies, the Company may consider
various possible transactions, including the use of "take or pay" contracts that
commit the Company to purchase specified quantities of wafers over extended
periods or equity investments in or advances to wafer manufacturing companies in
exchange for guaranteed production capacity, or the formation of joint ventures
to own and operate or construct foundries or to develop certain products. Any of
these transactions would involve financial risk to the Company and could require
the Company to commit substantial capital or provide technology licenses in
return for guaranteed production capacity.
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RELIANCE ON HIGH PERFORMANCE COMPUTER AND COMPUTER PERIPHERAL MARKET
A significant portion of the Company's host adapter board products are
currently used in high-performance file servers, workstations and other office
automation products. The Company's growth has been supported by increasing
demand for sophisticated I/O solutions which support database systems, servers,
workstations, Internet/intranet applications, multimedia and telecommunications.
Should there be a slowing in the growth of demand for such systems, the
Company's business, financial condition and results of operations could be
materially and adversely affected.
As a supplier of controller products to manufacturers of computer
peripherals such as disk drives and other data storage devices, a portion of the
Company's business is dependent on the overall market for computer peripherals.
This market, which itself is dependent on the market for computers, has
historically been characterized by periods of rapid growth followed by periods
of oversupply and contraction. As a result, suppliers to the computer
peripherals industry from time to time experience large and sudden fluctuations
in demand for their products as their customers adjust to changing conditions in
their markets. If these fluctuations are not accurately anticipated, such
suppliers, including the Company, could produce excessive or insufficient
inventories of various components which could have a material adverse effect on
the Company's business, financial condition and results of operations.
RAPID TECHNOLOGICAL CHANGE, DEPENDENCE ON NEW PRODUCTS, INDUSTRY STANDARDS
The markets in which the Company and its competitors compete are
characterized by rapidly changing technology, evolving industry standards and
continuing improvements in products and services. The Company's future success
depends on its ability to enhance its current products and to develop and
introduce in a timely manner new products that keep pace with technological
developments and industry standards, compete effectively on the basis of price
and performance, adequately address OEM customer and end-user customer
requirements and achieve market acceptance. The Company believes that to remain
competitive in the future it will need to continue to develop new products,
which will require the investment of significant financial resources in new
product development. In anticipation of the implementation of fibre channel data
transfer interface technologies, the Company has invested and will continue to
invest significant resources in developing its integrated circuit single chip
PCI to fibre channel controllers. There can be no assurance that fibre channel
will be adopted as a predominant industry standard. The Company is aware of
products for alternative I/O standards and enabling technologies being developed
by its competitors. The Company believes that certain competitors, including LSI
Logic, have extensive development efforts related to products based on the Low
Voltage Differential ("LVD") technology. There can be no assurance that such
technology will not be adopted as an industry standard and if an alternative
standard is adopted, there can be no assurance that the Company will timely
develop products for such standard. Further, even if fibre channel is adopted,
there can be no assurance that the Company's integrated PCI to fibre channel
controller will be fully developed in time to be accepted for use in fibre
channel technology or that, if developed, will achieve market acceptance, or be
capable of being manufactured at competitive prices in sufficient volumes. In
the event that fibre channel is not adopted as an industry standard, or that the
Company's integrated circuit PCI to fibre channel controllers are not timely
developed or do not gain market acceptance, the Company's business, financial
condition and results of operations could be materially and adversely affected.
The computer industry is characterized by various standards and protocols
that evolve with time. The Company's current products are designed to conform to
certain industry standards and protocols such as IDE, SCSI, Ultra SCSI and PCI.
In addition, the Company's fibre channel products have been designed to conform
to a standard that has yet to be uniformly adopted. The Company's products must
be designed to operate effectively with a variety of hardware and software
products supplied by other manufacturers, including microprocessors, operating
system software and peripherals. The Company depends on significant cooperation
with these manufacturers in order to achieve its design objectives and produce
products that interoperate successfully. While the Company believes that it
generally has good relationships with leading microprocessor, systems and
peripheral suppliers, there can be no assurance that such suppliers will not
from time to time make it more difficult for the Company to design its products
for successful interoperability. If industry acceptance of these standards was
to decline or if they were
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replaced with new standards, and if the Company did not anticipate these changes
and develop new products, the Company's business, financial condition and
results of operations could be materially and adversely affected.
The Company could experience delays in product development that are
common in the computer and semiconductor industry. Significant delays in product
development and release would adversely affect the Company's business, financial
condition and results of operations. There can be no assurance that the Company
will respond effectively to technological changes or new product announcements
by other companies or that the Company's research and development efforts will
be successful. Furthermore, introduction of new products and moving production
of existing products to different suppliers involves substantial business risks
because of the possibility of product "bugs" or performance problems, in which
event the Company could experience significant product returns, warranty
expenses and expedite charges, in addition to lower sales and lower profits.
IDENTIFICATION AND INTEGRATION OF ACQUISITIONS
The Company anticipates that its future growth may depend in part on its
ability to identify and acquire complementary businesses, technologies or
product lines that are compatible with those of the Company. Acquisitions
involve numerous risks, including identifying and pursuing acquisitions,
difficulties in the assimilation of the operations, technologies and products of
the acquired companies, the diversion of management's attention from other
business concerns, risks associated with entering markets or conducting
operations with which the Company has no or limited direct prior experience, and
the potential loss of key employees of the acquired company. Moreover, there can
be no assurance that the anticipated benefits of an acquisition will be
realized. There can be no assurance that the Company will be effective in
identifying and effecting attractive acquisitions, assimilating acquisitions or
managing future growth. Future acquisitions by the Company could result in
potentially dilutive issuances of equity securities, the incurrence of debt and
contingent liabilities and amortization expenses related to goodwill and other
intangible assets, and other material write-offs, all of which could materially
adversely affect the Company's business, financial condition, results of
operations or stock price. With respect to the possible amortization of
goodwill, the Financial Accounting Standards Board ("FASB") could abolish
pooling of interest accounting altogether. If the FASB does limit or eliminate
pooling of interests accounting treatment, the Company's ability to consummate
merger transactions without incurring goodwill would be materially and adversely
affected.
DEPENDENCE ON KEY PERSONNEL
The Company's future success is highly dependent on the continued
services of its key engineering, sales, marketing and executive personnel,
including highly skilled semiconductor design personnel and software developers,
and its ability to identify and hire additional personnel. The loss of the
services of key personnel could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company believes
that the market for key personnel in the industries in which it competes is
highly competitive. In particular, the Company has experienced difficulty in
attracting and retaining qualified engineers and other technical personnel and
anticipates that competition for such personnel will increase in the future.
There can be no assurance that the Company will be able to attract and retain
key personnel with the skills and expertise necessary to develop new products in
the future, or to manage the Company's business, both in the United States and
abroad.
RISKS OF DOING BUSINESS IN INTERNATIONAL MARKETS
The Company expects that export revenues will continue to account for a
significant percentage of the Company's net revenues for the foreseeable future.
As a result, the Company is subject to various risks, which include: a greater
difficulty of administering its business globally; compliance with multiple and
potentially conflicting regulatory requirements such as export requirements,
tariffs and other barriers; differences in intellectual property protections;
difficulties in staffing and managing foreign operations; potentially longer
accounts receivable cycles; currency fluctuations; export control restrictions;
overlapping or differing tax structures; political and economic instability; and
general trade restrictions. Recently, the Asian markets have suffered property
price deflation. This asset deflation has taken place especially in countries
that have had a collapse in both their currency and stock markets, such as
Japan. These deflationary pressures have reduced liquidity in the banking
systems of the affected countries and, when coupled with spare industrial
production capacity, could lead to widespread financial difficulty among the
companies in this region. The Company's export sales are invoiced in U.S.
dollars and, accordingly, if the relative value of the U.S. dollar in comparison
to the currency of the Company's foreign
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customers should increase, the resulting effective price increase of the
Company's products to such foreign customers could result in decreased sales.
There can be no assurance that any of the foregoing factors or the currency and
economic disruptions in the Asian markets will not have a material adverse
effect on the Company's business, financial condition and results of operations.
LACK OF SIGNIFICANT PATENT PROTECTION, INFRINGEMENT RISKS
Although the Company has patent protection on certain aspects of its
technology in certain jurisdictions, it relies primarily on trade secrets,
copyrights and contractual provisions to protect its proprietary rights. There
can be no assurance that these protections will be adequate to protect its
proprietary rights, that others will not independently develop or otherwise
acquire equivalent or superior technology or that the Company can maintain such
technology as trade secrets. There also can be no assurance that any patents the
Company possesses will not be invalidated, circumvented or challenged. In
addition, the laws of certain countries in which the Company's products are or
may be developed, manufactured or sold, including various countries in Asia, may
not protect the Company's products and intellectual property rights to the same
extent as the laws of the United States or at all. The failure of the Company to
protect its intellectual property rights could have a material adverse effect on
the Company's business, financial condition and results of operations.
The Company has experienced intellectual property claims being made
against it in the past. There can be no assurance that patent or other
intellectual property infringement claims will not be asserted against the
Company in the future. Although patent and intellectual property disputes may be
settled through licensing or similar arrangements, costs associated with such
arrangements may be substantial and there can be no assurance that necessary
licenses or similar arrangements would be available to the Company on
satisfactory terms or at all. Accordingly, an adverse determination in a
judicial or administrative proceeding or failure to obtain necessary licenses
could prevent the Company from manufacturing and selling certain of its
products, which would have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, should the Company
decide to, or be forced to, litigate such claims, such litigation could be
expensive and time consuming, could divert management's attention from other
matters or could otherwise have a material adverse effect on the Company's
business, financial condition and results of operations, regardless of the
outcome of the litigation. The Company's supply of wafers and other components
can also be interrupted by intellectual property infringement claims against its
suppliers.
YEAR 2000
Many existing computer systems and applications, and other control
devices, use only two digits to identify a year in the date field, without
considering the impact of the upcoming change in the century. As a result, such
systems and applications could fail or create erroneous results unless corrected
so that they can process data related to the year 2000 and beyond. The Company
relies on its systems, applications and devices in operating and monitoring all
major aspects of its business, including financial systems (such as general
ledger, accounts payable, and payroll modules), customer services,
infrastructure, embedded computer chips, networks and telecommunications
equipment and products. The Company has initially assessed how it may be
impacted by Year 2000 and has commenced a comprehensive plan to address the
following aspects of the Year 2000 problem: information systems, non-information
systems, products, suppliers and customers.
The plan, as it relates to information systems, involves a combination of
software modification, upgrades and replacement. The Company has completed
remediation of its critical information systems, however, the Company's critical
information system vendor continues to supply periodic updates to its software
for potential Year 2000 issues. These updates will be integrated in a timely
manner and management will continue to monitor the system to ensure it remains
current with the critical information system vendor. The target date for
remediation of the remainder of its information systems is March 31, 1999. The
Company has completed the assessment and development of remediation plans with
respect to substantially all of the Company's non-information systems and
expects remediation to be complete by June 30, 1999. The Company has completed
an assessment of its products and has determined its products do not contain
specific calendar year functions. However, there can be no assurance that
unforseen problems will not be encountered when the Company's components are
used in conjunction with a system containing non-compliant, non-QLogic
components. The Company is currently assessing Year 2000 issues with respect to
major suppliers and customers and expects this process to be completed by June
30, 1999, however,
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the Company can provide no assurance that Year 2000 compliance plans will be
successfully completed by suppliers and customers in a timely manner.
The Company currently estimates that the costs associated with the Year
2000 issue should not have a material adverse effect on the results of
operations or financial position of the Company in any given year. Historical
amounts spent on assessment and remediation have not been material to the
results of operations.
If the Company is not successful in implementing its Year 2000
compliance plan, there may be a material adverse impact on the Company's results
of operations and financial condition. The Company believes its greatest risks
and uncertainties related to the Year 2000 issue involve interrupted product
flow from suppliers and a possible redirection or interruption of purchasing
activities from key customers due to their potential failure to fully address
their own Year 2000 issues. Possible interruptions in public utilities, such as
electricity or telecommunications, also could have material adverse impacts on
the Company's operating results. Due to the importance of addressing these
risks, and the need for the Company to focus attention to remediation efforts,
the Company expects to develop contingency plans to address those Year 2000
problems which may not be corrected by implementation of the Company's Year 2000
compliance plan. Contingency plans are expected to be completed by June 30,
1999, however, there can be no assurance that these plans will effectively
mitigate Year 2000 issues.
VOLATILITY OF STOCK PRICE
The market price of the Common Stock has fluctuated substantially, and
there can be no assurance that such volatility will not continue. Future
announcements concerning the Company or its competitors or customers, quarterly
variations in operating results, the introduction of new products or changes in
product pricing policies by the Company or its competitors, conditions in the
semiconductor industry, changes in earnings estimates by analysts, market
conditions for high technology stocks in general, or changes in accounting
policies, among other factors, could cause the market price and volume
volatility in recent years and stock prices of technology companies have been
especially volatile. This volatility has had a substantial effect on the market
prices of securities of many smaller public companies for reasons frequently
unrelated to the operating performance of the specific companies. These broad
market fluctuations could adversely affect the market price of the Common Stock.
POTENTIAL EFFECT OF ANTI-TAKEOVER PROVISIONS
Pursuant to the Company's Restated Certificate of Incorporation, as
amended, the Board of Directors is authorized to approve the issuance of shares
of currently undesignated Preferred Stock, to determine the price, powers,
preferences and rights and the qualifications, limitations or restrictions
granted to or imposed on any unissued series of that Preferred Stock, and to fix
the number of shares constituting any such series and the designation of such
series, without any vote or future action by the stockholders. Pursuant to this
authority, the Board of Directors adopted a Shareholder Rights Plan and declared
a dividend of one preferred stock purchase right for each outstanding share of
the Company's Common Stock. The Shareholder Rights plan, the undesignated
Preferred Stock and certain provisions of the Delaware law may have the effect
of delaying, deferring or preventing a change in control of the Company, may
discourage bids for the Company's Common Stock at a premium over the market
price of the Common Stock and may adversely affect the market price of the
Common Stock.
FACILITIES EXPANSION
The Company currently occupies an 83,000 square foot facility in Costa
Mesa, California containing its corporate, principal product development, and
sales personnel, as well as its operational facilities. QLogic has entered into
a ten-year lease agreement to expand and relocate its Costa Mesa operations to a
165,000 square foot facility in Aliso Viejo, California. The lease commences
upon completion of the construction of the facility expected in late 1999 or
early 2000. There can be no assurance the Company will continue to grow and
expand its facility requirements. As a result, the Company may incur additional
costs associated with carrying additional facility expansion capabilities which
could adversely impact future earnings. Additionally, the Company will
experience additional costs associated with the relocation which may adversely
impact future earnings. The Company may experience an adverse impact to future
earnings due to loss of management focus or business interruption related to
issues surrounding the relocation of operations.
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PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
(a) Effective February 15, 1999, the Registrant's Common Stock will undergo a
2-for-1 stock split and a change in par value from $0.10 per share to
$0.05 per share. Concurrently, the number of authorized shares will be
increased from 12,500,000 to 50,000,000.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Registrant's stockholders adopted resolutions by written consent
without a meeting. The consent solicitation commenced during the period
covered by this report.
(b) The stockholders adopted, by such written consent, a proposal to amend
the Company's Certificate of Incorporation for the following purposes:
1. To increase the number of authorized shares of Common Stock, par value
$0.10 per share, of the Company (the "Common Stock") from 12,500,000 to
50,000,000;
2. To reduce the par value of the Common Stock from $0.10 per share to
$0.05 per share; and
3. To effect a 2-for-1 stock split of the Company's issued and outstanding
shares of Common Stock.
ITEM 5. OTHER INFORMATION
(a) Item 2.(a) is incorporated herein by this reference.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.13 Industrial Lease Agreement between the Registrant, as lessee, and
AEW/Parker South, LLC, as lessor.
10.14 Press release related to February 15, 1999 stock split.
27 Financial Data Schedule
(b) Reports on Form 8-K
The registrant has not filed any reports on Form 8-K during the quarter for
which this report is filed.
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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.
Date: February 8, 1999
QLOGIC CORPORATION
By: /s/ H. K. DESAI
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H.K. Desai
President and Chief Executive Officer
By: /s/ THOMAS R. ANDERSON
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Thomas R. Anderson
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
20
21
EXHIBIT INDEX
EXHIBIT
NO.
10.13 Industrial Lease Agreement between the Registrant, as lessee, and
AEW/Parker South, LLC, as lessor.
10.14 Press release related to February 15, 1999 stock split.
27 Financial Data Schedule
21