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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(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, 1996 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 0-13381
MYLEX CORPORATION
______________________________________________________
(Exact name of registrant as specified in its charter)
FLORIDA 59-2291597
_____________________________ ________________________________
(State or other jurisdiction of (IRS Employer Identification No.
incorporation or organization)
34551 Ardenwood Blvd., Fremont, California 94555
___________________________________________ _________
(Address of principal executive offices) ZIP Code
Registrant's telephone number (including area code): (510) 796-6100
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 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
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APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common Stock, $.01 par value 20,955,875 shares
------------------------------ --------------------------------
Class Outstanding at September 30,1996
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MYLEX CORPORATION
CONSOLIDATED BALANCE SHEET
(IN $000'S)
UNAUDITED
SEP 30 DEC 31
ASSETS 1996 1995
--------- ---------
CURRENT ASSETS:
CASH AND EQUIVALENTS $ 14,840 $ 11,733
SHORT-TERM MARKETABLE INVESTMENTS 11,156 25,708
ACCOUNTS RECEIVABLE 27,775 23,788
ALLOWANCE FOR DOUBTFUL ACCOUNTS (486) (707)
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ACCOUNTS RECEIVABLE, NET 27,289 23,081
INVENTORIES 49,959 26,521
PREPAID EXPENSES and OTHER CURRENT ASSETS 7,591 4,444
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TOTAL CURRENT ASSETS $ 110,835 $ 91,487
PROPERTY AND EQUIPMENT, NET 5,074 3,021
OTHER ASSETS 171 112
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TOTAL ASSETS $ 116,080 $ 94,620
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LIABILITIES AND STOCKHOLDERS EQUITY
CURRENT LIABILITIES:
ACCOUNTS PAYABLE $ 9,305 $ 12,243
ACCRUED LIABILITIES 6,588 5,969
CURRENT PORTION OF LONG-TERM
CAPITAL LEASE OBLIGATIONS 212 308
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TOTAL CURRENT LIABILITIES $ 16,105 $ 18,520
LONG-TERM CAPITAL LEASE OBLIGATIONS 72 203
STOCKHOLDERS' EQUITY
COMMON STOCK 206 196
ADDITIONAL PAID-IN CAPITAL 62,373 52,310
NOTE RECEIVABLE FROM STOCKHOLDER (310) -
RETAINED EARNINGS 37,634 23,391
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TOTAL STOCKHOLDERS' EQUITY $ 99,903 $ 75,897
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TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 116,080 $ 94,620
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SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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MYLEX CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS, THREE MONTHS ENDED
UNAUDITED
(IN $000'S, EXCEPT FOR SHARE DATA)
SEP 30 SEP 30
1996 1995
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NET SALES $ 42,206 $ 34,505
COST OF SALES 25,517 21,090
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GROSS PROFIT 16,689 13,415
OPERATING EXPENSES:
SELLING AND MARKETING 3,419 2,828
RESEARCH AND DEVELOPMENT 4,628 2,283
GENERAL AND ADMINISTRATIVE 2,068 3,015
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TOTAL OPERATING EXPENSES $ 10,115 $ 8,126
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OPERATING PROFIT $ 6,574 $ 5,289
INTEREST INCOME 273 74
INTEREST EXPENSE (4) (72)
OTHER EXPENSE (83) (52)
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INCOME BEFORE TAXES $ 6,760 $ 5,239
INCOME TAX EXPENSE 2,242 2,087
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NET INCOME $ 4,518 $ 3,152
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EARNINGS PER COMMON SHARE:
PRIMARY $ 0.21 $ 0.16
FULLY DILUTED $ 0.21 $ 0.16
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
PRIMARY 21,439 19,487
FULLY DILUTED 21,459 19,543
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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MYLEX CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS, NINE MONTHS ENDED
UNAUDITED
(IN $000'S, EXCEPT FOR SHARE DATA)
SEP 30 SEP 30
1996 1995
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NET SALES $ 136,117 $ 87,037
COST OF SALES 83,934 52,830
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GROSS PROFIT 52,183 34,207
OPERATING EXPENSES:
SELLING AND MARKETING 10,731 8,618
RESEARCH AND DEVELOPMENT 11,918 6,345
GENERAL AND ADMINISTRATIVE 7,408 6,330
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TOTAL OPERATING EXPENSES $ 30,057 $ 21,293
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OPERATING PROFIT $ 22,126 $ 12,914
INTEREST INCOME 1,026 183
INTEREST EXPENSE (18) (156)
OTHER EXPENSE (159) (80)
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INCOME BEFORE TAXES $ 22,975 $ 12,861
INCOME TAX EXPENSE 8,733 4,753
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NET INCOME $ 14,242 $ 8,108
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EARNINGS PER COMMON SHARE:
PRIMARY $ 0.66 $ 0.43
FULLY DILUTED $ 0.66 $ 0.42
AVERAGE COMMON SHARES OUTSTANDING:
PRIMARY 21,593 19,023
FULLY DILUTED 21,593 19,316
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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MYLEX CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS, NINE MONTHS ENDED
UNAUDITED
(IN $000'S)
<TABLE>
<CAPTION>
SEP 30 SEP 30
1996 1995
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $ 14,243 $ 8,108
DEPRECIATION AND AMORTIZATION 1,363 1,096
AMORTIZATION OF DISCOUNT/PREMIUM ON SHORT-TERM
MARKETABLE INVESTMENTS (113) -
CHANGES IN OPERATING ASSETS & LIABILITIES
ACCOUNTS RECEIVABLE, NET (4,208) (7,731)
INVENTORIES (23,438) (8,716)
PREPAID EXPENSES AND
OTHER CURRENT ASSETS (135) (1,151)
ACCOUNTS PAYABLE (2,938) 4,203
ACCRUED LIABILITIES 3,574 2,441
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NET CASH USED BY OPERATING ACTIVITIES $ (11,652) $ (1,750)
CASH FLOWS FROM INVESTING ACTIVITIES:
CAPITAL EXPENDITURES (3,416) (1,212)
REDEMPTION OF SHORT-TERM INVESTMENTS 14,665 -
DECREASE(INCREASE) IN OTHER ASSETS (59) 35
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NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES $ 11,190 $ (1,177)
CASH FLOWS FROM FINANCING ACTIVITIES:
PAYMENTS AGAINST LINE OF CREDIT - (2,350)
REPAYMENT OF CAPITAL LEASE OBLIGATIONS (227) (315)
PROCEEDS FROM EXERCISE OF STOCK OPTIONS 3,589 981
PROCEEDS FROM PURCHASES UNDER EMPLOYEE
STOCK PURCHASE PLAN 207 -
PROCEEDS FROM SECONDARY STOCK OFFERING - 32,739
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NET CASH PROVIDED BY FINANCING ACTIVITIES $ 3,569 $ 31,055
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NET INCREASE IN CASH AND EQUIVALENTS $ 3,107 $ 28,128
CASH AND CASH EQUIVALENTS: AT BEGINNING OF PERIOD $ 11,733 $ 8,792
--------- ---------
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CASH AND CASH EQUIVALENTS: AT END OF PERIOD $ 14,840 $ 36,920
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NON-CASH FINANCING AND INVESTMENT ACTIVITIES:
TAX BENEFIT RELATED TO DISQUALIFYING DISPOSITION
OF STOCK OPTIONS $ 5,967 $ 588
CASH PAID DURING THE PERIOD:
CASH PAID FOR INTEREST $ 18 $ 156
CASH PAID FOR INCOME TAXES $ 5,297 $ 4,735
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
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MYLEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
In the opinion of the Company, the accompanying consolidated financial
statements contain all adjustments (consisting only of normal recurring
adjustments) necessary to fairly present the Company's financial position and
its results of operations and cash flows as of the dates and for the periods
indicated.
Certain information and footnote disclosures normally contained in
financial statements prepared in accordance with generally accepted accounting
principles have been omitted. These condensed consolidated financial statements
should be read in conjunction with the financial statements incorporated by
reference in the Company's Form 10-K for the year ended December 31, 1995. The
results of operations for the three and nine months ended September 30, 1996,
are not necessarily indicative of the operating results for the full year.
PER SHARE DATA
Earnings per share is based on the weighted average common and, when
dilutive, common equivalent shares outstanding during each period, using the
treasury stock method. Common equivalent shares consist of dilutive shares
issuable upon the exercise of stock options and warrants.
NOTE B. INVENTORIES (in $000's)
September 30, December 31,
1996 1995
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Raw Material $30,926 $17,665
Work-in-process 9,458 6,588
Finished Goods 9,575 2,268
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Total $49,959 $26,521
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NOTE C. MERGER WITH BUSLOGIC
In February 1996, the Company closed a business combination pursuant to
which it issued 2,710,738 shares of its common stock for all of the capital
stock of BusLogic Inc. (BusLogic), a supplier of storage input/output solutions
for use in network file servers, personal computers, and workstations. This
business combination has been accounted for as a pooling of interests, and,
accordingly, the consolidated financial statements for periods prior to the
combination have been restated to include the results of operations, financial
position and cash flows of BusLogic. There were no significant transactions
between the Company and BusLogic prior to the combination, which required
elimination, and no adjustments were required to conform accounting policies.
NOTE D. CONTINGENCIES
In October 1994, the former Chief Executive Officer of the Company, Dr.
M.A. Chowdry, filed a complaint against the Company and its outside directors,
claiming breach of an employment agreement that he entered into with the Company
approximately three months prior to his termination as the Company's Chief
Executive Officer. The complaint alleges compensatory and consequential damages
of over $6 million (which would vary based on the price of the Company's Common
Stock) and unspecified punitive damages. The Company believes it has meritorious
defenses and will vigorously defend this lawsuit. Nonetheless, given the
unpredictable nature of legal proceedings, there can be no assurance that the
Company will prevail.
NOTE E. SUBSEQUENT EVENT
On October 24, 1996, the Company offered option holders under the 1993
Stock Option Plan, other than Directors, the opportunity to have outstanding
options repriced to the then current fair market value of the Company's
common stock of $12.875 per share. Each of the vesting dates for each
repriced options will be extended six months. As of the date of the
offer, 516,591 shares were subject to this repricing offer.
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS
Mylex designs, manufactures and markets RAID controllers that provide
high performance, capacity enhancing fault tolerant storage and input/output
solutions for client/server computer networks. Mylex controllers integrate
the Company's proprietary ASICs, firmware and software with standard industry
components. More than twenty leading network file server and storage
subsystem OEMs, including IBM, Hewlett-Packard Company, Digital Equipment
Corporation, and NEC, have designed Mylex RAID controllers into their server
and storage subsystem products. The Company also designs, manufactures and
markets through BusLogic, Inc., its wholly-owned subsidiary, high performance
SCSI (Small Computer System Interface) I/O solutions consisting of host bus
adapters and SCSI chips (integrated circuts) used in network file servers,
personal computers and work stations. The Company was incorporated under the
laws of the State of Florida in May, 1983. The shareholders of the Company
have approved the reincorporation of the Company to Delaware.
During the late 1980s and early 1990s, the Company's principal business
involved the production and sale of system boards (so-called "mother boards")
for personal computers. In the early 1990s, Mylex responded to changes in the
computer industry by undertaking a series of product development initiatives
designed to reposition the Company to address network security or management
and input/output, or "I/O," challenges facing the emerging client/server
computing environment. In 1992, the Company introduced its first RAID
(Redundant Array of Independent Disks) controller product into the personal
computer network market. Sales of RAID controller products grew rapidly from
1992 through 1995, and represented 88% of the Company's net sales during the
first nine months of 1996. Host bus adapter products produced by BusLogic
contributed 10% of net sales in the first nine months of 1996.
The trend toward client/server computing that began in the mid-1980's has
placed particular demands on network storage systems and related I/O functions.
The development of faster microprocessors and more robust computer bus
architectures in network systems has often outstripped the capabilities of data
storage and I/O technologies, leading to systems "bottlenecks." To alleviate or
avoid such bottlenecks, networks require continual improvements in stored data
retrieval speed. In addition, the development of more complex applications and
operating systems has created the need for increased network storage capacity.
Meanwhile, the mission critical, enterprise-wide nature of networked computing
often requires a high level of "fault tolerance," or the ability to preserve
data from loss and to provide uninterrupted system service even if an individual
data storage device fails. The emergence of data-intensive applications such as
multimedia and video-on-demand are further driving the demands for speed,
capacity and reliability in network storage devices.
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RAID controllers enable increased speed, greater capacity, and a high
degree of fault tolerance in network storage and I/O functions. RAID, which
stands for redundant array of independent disks, is a method for distributing
data across several disk drives and allowing the server microprocessor to
access those drives simultaneously, thus increasing system storage I/O
performance. Mylex RAID controllers support all major operating systems and
bus types, and the Company endeavors to rapidly develop products for new bus,
operating system, and platform standards as they are defined. RAID controller
products based on the recently introduced PCI bus standard represented a
substantial majority of the Company's disk array product sales in 1996.
Along with the technology that the Company has developed for the RAID market,
the Company believes that its acquisition of BusLogic should strengthen the
Company by adding significant SCSI technology and ASIC (Application Specific
Integrated Circuit) development capabilities.
As of October 27, 1996, the Company had approximately 375 employees. None
of the employees are represented by a labor union or employed under any
collective bargaining agreement.
LIQUIDITY AND CAPITAL RESOURCES
During the first nine months of 1996 the Company financed its operations
primarily from existing cash balances, liquidation of marketable investments,
cash generated from the exercise of stock options by the Company's employees and
cash generated from operations.
As of September 30, 1996, the Company's working capital increased to
$94.7 million from $73.0 million at December 31, 1995. This increase in working
capital was due primarily to a $23.4 million increase in inventories, a $4.2
million growth in accounts receivable, $3.1 million increases in both cash and
prepaid expense balances and a $2.9 million decrease in accounts payable. This
was offset by decreases in short term marketable securities of $14.7 million and
a $.6 million increase in accrued liabilities, for a net increase in working
capital of $21.7 million.
Cash balances increased by $3.1 million from $11.7 million at December
31, 1995, to $14.8 million at September 30, 1996. This rise in the cash
balance is due primarily to the liquidation of short term marketable
securities and cash generated from operations. Short term marketable
investments were $11.1 million, a decrease of $14.7 million from December 31,
1995. This decrease was due to the sale of $10.1 million of investments and
the maturing of $4.6 million of investments.
The Company has an agreement with Comerica Bank for an unsecured
revolving line of credit which expires June 30, 1998. The line of credit bears
interest at either the Bank's base rate, or Eurodollar or Libor option rate
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plus 1 3/4%, which is determined by the Company at the time of each advance.
The line of credit is subject to an overall limit of $20,000,000. The Bank's
agreement with the Company contains covenants that relate to profitability,
maintenance of specific financial ratios and limits on indebtedness without
the prior consent of the Bank.
The Company presently expects to finance near-term and long-term operations
and capital requirements through cash provided by continuing operations,
existing cash balances, short term investments and borrowings under the
revolving bank line of credit. However, there can be no assurance that the
Company will not require additional financing over the long term, or, if
required, that such financing will be available on terms favorable to the
Company.
Accounts payable decreased to $9.3 million at September 30, 1996,
compared to $12.2 million at December 31, 1995, a reduction of $2.9 million,
or 24%. This decrease in accounts payable was principally due to the Company
instituting an inventory reduction program during the quarter ending
September 30, 1996. Consequently, raw material purchases during the third
quarter were at a lower level than raw material purchases during the fourth
quarter of 1995.
Net accounts receivable increased to $27.3 million at September 30, 1996,
compared to $23.1 million at December 31, 1995, an increase of $4.2 million or
18%. This increase was attributable to a majority of the third quarter
shipments occurring in the last half of the quarter.
RESULTS OF OPERATIONS
SALES AND GROSS PROFITS. The Company's net sales for the three months
ended September 30, 1996, totaled $42.2 million, compared to $34.5 million for
the corresponding period of fiscal year 1995, an increase of approximately 22%.
Sales increased primarily due to increased shipments of the Company's PCI bus
disk array products, which more than offset the decline in sales of the
Company's older EISA bus disk array controllers, 486 and pentium based system
boards, older non-PCI bus host bus adapters (HBA) and other peripheral products
during the third quarter of 1996, as compared to the third quarter of 1995. The
Company's HBA shipments are going through a similar transition as the Company's
RAID product shipments. Non-PCI HBA shipments have been declining throughout
the year, and have been replaced by PCI HBA shipments. Sales have not been
significantly impacted by inflation over the last three fiscal years.
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Gross profit for the three months ended September 30, 1996, was $16.7
million or 39.5% of net sales, compared to $13.4 million or 38.9% of net sales
for the same period in 1995 or an increase of $3.3 million. This increase in
gross profit was attributable to the 22% increase in net sales over the three
months ended September 30, 1995. The gross margin percentage improved slightly
due primarily to the reduction in material cost, in particular the cost of simm
memory modules. The Company expects additional price competition for its
products which will create pressure on the Company's gross margin. The Company
is taking steps to introduce feature and performance improved disk array and
host adapter products and to further reduce production and material costs in its
effort to offer competitive prices for its products without significantly
affecting its gross margin. However, there can be no assurance that the Company
will be able to develop and introduce such products in a timely manner or that
such products will gain or sustain market acceptance or that it will be able to
further reduce production or material costs.
The Company's largest customer during the third quarter of 1996 was
Hewlett Packard ("HP"), which accounted for $8.0 million or 19% of the
Company's net sales during that period. The Company's second largest customer
during the quarter was IBM, which accounted for $4.8 million or 11% of the
net sales. While there are OEM agreements in place that define the terms of
the sales and support services with some of the Company's largest customers,
these agreements do not include specific quantity commitments. The Company
sells products to its customers on a purchase order basis. As a result,
historical sales cannot be relied upon as an accurate indicator of future
sales.
The Company's backlog as of September 30, 1996 totaled $11.3 million.
This ending backlog represents a $12.5 million decrease from the
corresponding period of 1995, and a decline of $8.6 million from the second
quarter of 1996. The Company attributes the decrease in the backlog to the
industry wide slow down in server shipment growth in 1996. The Company
believes that this trend has heightened the level of caution amongst the
Company's largest customers. This lowered growth rate in 1996 is in
comparison to server shipment growth of 10% or more per quarter during 1995.
Consequently, many of the Company's customers adjusted their inventory levels
and changed their ordering patterns during 1996. Due to this changed
ordering pattern by its customers and, conversely, industry practice with
respect to customer changes in delivery schedules and cancellation of orders,
the Company believes that backlog as of any particular date may not be
indicative of actual net revenues for any succeeding period. Of the total
$11.3 million backlog at September 30, 1996, all but $375 thousand of the
orders would, in the ordinary course, be scheduled for delivery within the
three months ending December 31, 1996.
During the last half of 1993, the Company shifted its principal activity
from the supply of system board products to the manufacture of intelligent I/O
devices
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and storage management enhancing computer peripheral products. Mylex designs its
products to provide solutions for all popular operating systems, including
Novell Netware, Windows NT, SCO UNIX, Solaris, Unixware and Banyan. Mylex
products also work with all popular platforms. These include personal computer
platforms that use PCI, EISA, and Micro Channel bus architectures and
workstation platforms, including Sun Microsystems, Silicon Graphics and IBM
RS-6000 workstations that use the Company's SCSI to SCSI products.
Raid Controllers
Each bus-based Mylex RAID controller includes a proprietary application
specific integrated circuit, or "ASIC," that serves as an interface with the
host computer, an Intel i960 RISC processor, up to five SCSI channels to manage
the transfer of data to and from the disk drives in the array and a dynamic
cache memory ranging in size from 2 to 64 MB, depending on the product, to
buffer the transfer of information to and from the disks. The controller also
includes Mylex firmware residing on an EEPROM that implements the RAID
algorithms and the algorithms necessary for the cache and supporting software,
including I/O drivers, configuration utilities and the Company's Global Array
Manager software.
Mylex disk array controllers DAC960E, DAC960 Micro Channel, DAC960P,
DAC960PD, DAC960PU and DAC960PL provide high performance, fault tolerant data
storage solutions for EISA, Micro Channel and PCI bus platforms. The Mylex
SCSI-to-SCSI disk array controllers (DAC960S/SI/SU/SUI/SX) bring the
performance of RAID technology to virtually any hardware platform without
requiring special host software. The Mylex disk array products are designed
for both internal and external storage options and are compatible with most
commonly used operating systems.
Disk array products currently under development include new SCSI to SCSI
controllers, a controller optimized for multimedia and video imaging,
controllers that will provide for high speed serial interfaces to the host
and to disk drives, a low-cost RAID solution and an embedded RAID
implementation for the system board. There can be no assurance that the
Company will introduce its products under development. If these products are
introduced, there can be no assurance that they will gain market acceptance
or that their sales will produce adequate gross margins as competition in the
RAID market continues to increase.
Host Adapters
Through the acquisition of BusLogic in February, 1996, the Company has
gained a broad family of SCSI host adapter products and acquired its own SCSI
chips. These products provide a common interface to all of today's PC bus
architectures, including PCI, VESA, EISA, ISA and Micro Channel. Along with
these products, the BusLogic acquisition gives the Company significant SCSI
technology and ASIC
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development capabilities that have enabled the Company to enter the merchant
chip business. However, there can be no assurances that any such chips will
gain market acceptance.
The markets for the Company's products are characterized by rapidly
changing technology, evolving industry standards and relatively short product
life cycles. The Company's ability to compete successfully will depend on its
ability, on a timely and cost-effective basis, to enhance its existing
products and to introduce new products, such as improvements to its PCI and
SCSI to SCSI disk array product families, with features that respond to
changing customer requirements and competitive products available in the
marketplace and have competitive prices. There can be no assurance that the
Company will be successful in doing so. The Company understand that several
companies have introduced or are attempting to develop products that will
compete with the Company's products, particularly its PCI disk array
controller products. Delays in product enhancement and development, the
emergence of new competitors or the failure of the Company's new products or
enhancements to gain or sustain market acceptance could have a material
adverse effect on the Company's business and operating results.
Despite testing, new products may be affected by quality, reliability or
interoperability problems, which could result in returns, delays in collecting
accounts receivable, unexpected service or warranty expenses, reduced orders and
a decline in the Company's competitive position. In addition, there can be no
assurance that new products or technologies developed by others, or the
emergence of new industry standards, will not render the Company's products or
technologies noncompetitive or obsolete. For example, efforts by the Company's
OEM customers and other manufacturers to integrate additional functions into
system boards, to use chip sets that incorporate additional functionality, or to
design their own controllers, host adapters and other devices, rather than
purchase the Company's products, could have a material adverse effect on the
Company's business and operating results.
All of the Company's RAID controller products are based on the Intel
i960 processor. If another company develops a processor for RAID applications
which renders the i960 processor noncompetitive, whether as a result of cost,
specifications or other advantages of the new processor, or if Intel ceases
to produce the i960 processor or support the Company's efforts to develop
products based on the i960 processor, the Company will be forced to develop
new products based on another processor. Such development efforts will be
costly, and there can be no assurance that the Company will be able to timely
complete such development efforts or that such products, if developed, will
have the same degree of market acceptance and sustainability or the same
gross margin as the Company's present RAID products.
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SALES AND MARKETING EXPENSES
Sales and marketing expenses for the three months ended September 30,
1996, totaled $3.4 million, an increase of $591 thousand or 21% from the
corresponding period in 1995, but a $140 thousand decrease from the previous
quarter. Sales and marketing expenses represented 8% of net sales for the
three months ended September 30, 1996, and the three months ended September
30, 1995. Increases in sales and marketing expenditures resulted from
increased compensation and commission expenses as a result of the higher
level of sales, as well as increased advertising, promotional and travel
expenses to support those higher sales, expanded product lines and customer
base.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses for the three months ended September
30, 1996, totaled $4.6 million, an increase of 100% from the $2.3 million
incurred during the corresponding period in 1995, and an increase of $510
thousand from the previous quarter. Research and development expenses
represented 11% of net sales for the three months ended September 30, 1996,
as compared to 7% in the comparable 1995 quarter. Research and development
expenses increased during the second quarter of 1996 due, in part, to the
establishment of an R&D facility in Boulder, Colorado and to increased
staffing expense resulting from higher salaries and increased head count at
the Company's Fremont and Santa Clara locations. The Company has increased
its investment in research and development activities during 1996 in an
effort to continue its strategy of attempting to maintaining leadership in
the RAID market, to take advantage of its existing and prospective SCSI host
adapter technology and to diversify its future product offerings. However, no
assurance can be given that such leadership will be maintained, that the
Company will be successful in taking advantage of its SCSI host adapter or
chips technology or that the Company will be able to diversify with new
product offerings.
GENERAL AND ADMINISTRATIVE
General and administrative expenses for the three months ended September
30, 1996, totaled $2.1 million, a decrease of $947 thousand or 31% from the
corresponding period of 1995, and an increase of $154 thousand from the
previous quarter. General and administrative expenses totaled 5% of net
sales for the three months ended September 30, 1996, as compared to 9% in the
comparable 1995 quarter. General and administrative expenses decreased due
to lower legal costs in the third quarter of 1996.
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INCOME TAXES
The Company made a retroactive adjustment in the third quarter of 1996
to reflect a year-to-date effective tax rate of 38%. This tax rate of 38%
compared to a tax rate of 37% in the corresponding period of the prior year.
The third quarter adjustment to the tax rate was the result of the
implementation of the Company's tax reduction program, which resulted in a 2%
reduction from its tax rate of 40% for the first half of 1996.
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In October 1994, the former Chief Executive Officer of the Company, Dr.
M.A. Chowdry, filed a complaint against the Company and its outside directors,
claiming breach of an employment agreement that he entered into with the Company
approximately three months prior to his termination as the Company's Chief
Executive Officer. The complaint alleges compensatory and consequential damages
of over $6 million (which would vary based on the price of the Company's Common
Stock) and unspecified punitive damages. The Company believes it has meritorious
defenses and will vigorously defend this lawsuit. Nonetheless, given the
unpredictable nature of legal proceedings, there can be no assurance that the
Company will prevail.
The Company has incurred and expects to continue to incur substantial legal
expenses in defending against Dr. Chowdry's suit. Those expenses may fluctuate
from quarter to quarter and are likely to increase. Although there can be no
assurance given with respect to the results of legal proceedings, based on
information currently available to the Company, it believes that it does not
have potential liability with respect to these proceedings that would have a
material adverse effect on the Company.
In addition to matters discussed above, the Company is a party to routine
suits and claims arising in the ordinary course of its business which the
Company does not believe will have a material adverse effect on its business.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in Fremont, California, on
the 14th day of November 1996.
MYLEX CORPORATION
By \s \ Colleen Gray
---------------------------
Colleen Gray
Vice President of Finance and
Chief Financial Officer
17
<PAGE>
INDEX TO EXHIBITS
Mylex Corporation
Quarterly Report on Form 10-Q
Sequentially
Exhibit No. Description Numbered Page
- ----------- ----------- -------------
11.1 Statement re Computation 19-20
of Per Share Earnings
27 Financial Data Schedule
18
<PAGE>
MYLEX CORPORATION EXHIBIT 11.1
EARNINGS PER SHARE COMPUTATION
THREE MONTHS and NINE MONTHS ENDED September 30, 1996 AND 1995
The basis for computing net income per common share is described in Note A to
the financial statements, beginning on page 6 of the Company's Quarterly Report
on Form 10-Q for the three months ended September 30, 1996.
The computation of primary and fully diluted earnings per share is as follows:
PRIMARY EARNINGS PER SHARE THREE MONTHS ENDED
(in $000's except for per share data)
SEP 30 SEP 30
1996 1995
-------- --------
NET EARNINGS $ 4,518 $ 3,152
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 20,571 17,783
NUMBER OF COMMON SHARE EQUIVALENTS RESULTING
FROM STOCK OPTIONS AND WARRANTS, COMPUTED
USING THE TREASURY STOCK METHOD 868 1,704
-------- --------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 21,439 19,487
-------- --------
PRIMARY EARNINGS PER SHARE $ 0.21 $ 0.16
-------- --------
-------- --------
- -------------------------------------------------------------------------------
FULLY DILUTED EARNINGS PER SHARE THREE MONTHS ENDED
(in $000's except for per share data)
SEP 30 SEP 30
1996 1995
-------- --------
NET EARNINGS $ 4,518 $ 3,152
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 20,571 17,783
NUMBER OF COMMON SHARE EQUIVALENTS RESULTING
FROM STOCK OPTIONS AND WARRANTS, COMPUTED
USING THE TREASURY STOCK METHOD 888 1,760
-------- --------
WEIGHTED AVERAGE COMMON SHARES OUSTANDING 21,459 19,543
-------- --------
FULLY DILUTED EARNINGS PER SHARE $ 0.21 $ 0.16
-------- --------
-------- --------
<PAGE>
PRIMARY EARNINGS PER SHARE NINE MONTHS ENDED
(in $000's except for per share data)
SEP 30 SEP 30
1996 1995
-------- --------
NET EARNINGS $ 14,242 $ 8,108
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 20,152 17,556
NUMBER OF COMMON SHARE EQUIVALENTS RESULTING
FROM STOCK OPTIONS AND WARRANTS, COMPUTED
USING THE TREASURY STOCK METHOD 1,441 1,467
-------- --------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 21,593 19,023
-------- --------
PRIMARY EARNINGS PER SHARE $ 0.66 $ 0.43
-------- --------
-------- --------
FULLYDULUTED EARNINGS PER SHARE NINE MONTHS ENDED
(in $000's except for per share data)
SEP 30 SEP 30
1996 1995
-------- --------
NET EARNINGS $ 14,242 $ 8,108
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 20,152 17,556
NUMBER OF COMMON SHARE EQUIVALENTS RESULTING
FROM STOCK OPTIONS AND WARRANTS, COMPUTED
USING THE TREASURY STOCK METHOD 1,441 1,760
-------- --------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 21,593 19,316
-------- --------
PRIMARY EARNINGS PER SHARE $ 0.66 $ 0.42
-------- --------
-------- --------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 14,840
<SECURITIES> 11,156
<RECEIVABLES> 27,775
<ALLOWANCES> (486)
<INVENTORY> 49,959
<CURRENT-ASSETS> 110,835
<PP&E> 10,780
<DEPRECIATION> (5,706)
<TOTAL-ASSETS> 116,080
<CURRENT-LIABILITIES> 16,105
<BONDS> 0
0
0
<COMMON> 206
<OTHER-SE> 99,697
<TOTAL-LIABILITY-AND-EQUITY> 116,080
<SALES> 42,206
<TOTAL-REVENUES> 42,753
<CGS> 25,517
<TOTAL-COSTS> 35,632
<OTHER-EXPENSES> 83
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (269)<F1>
<INCOME-PRETAX> 6,760
<INCOME-TAX> 2,242
<INCOME-CONTINUING> 4,518
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,518
<EPS-PRIMARY> .21
<EPS-DILUTED> .21
<FN>
<F1>Net of $273 of interest income and $4 of interest expense.
</FN>
</TABLE>
