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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 March 31, 1997 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)
DELAWARE 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 20,781,806 shares
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Class Outstanding at March 31, 1997
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MYLEX CORPORATION
CONSOLIDATED BALANCE SHEET
(IN $000'S)
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UNAUDITED
MAR 31 DEC 31
ASSETS 1997 1996
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CURRENT ASSETS:
CASH AND EQUIVALENTS $ 23,922 $ 15,849
SHORT-TERM MARKETABLE INVESTMENTS 19,286 18,538
ACCOUNTS RECEIVABLE 26,937 28,168
ALLOWANCE FOR DOUBTFUL ACCOUNTS (425) (436)
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ACCOUNTS RECEIVABLE, NET 26,512 27,732
INVENTORIES 37,430 41,680
PREPAID EXPENSES AND OTHER CURRENT ASSETS 6,508 6,480
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TOTAL CURRENT ASSETS 113,658 110,279
PROPERTY AND EQUIPMENT, NET 7,123 6,124
OTHER ASSETS 192 183
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TOTAL ASSETS $ 120,973 $ 116,586
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LIABILITIES AND STOCKHOLDERS EQUITY
CURRENT LIABILITIES:
ACCOUNTS PAYABLE $ 14,283 $ 6,157
ACCRUED LIABILITIES 5,055 6,191
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TOTAL CURRENT LIABILITIES 19,338 12,348
LONG-TERM LIABILITIES 66 66
STOCKHOLDERS' EQUITY
COMMON STOCK 208 207
ADDITIONAL PAID-IN CAPITAL 64,218 63,789
NOTES RECEIVABLE FROM SHAREHOLDERS (720) (465)
RETAINED EARNINGS 37,863 40,641
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TOTAL STOCKHOLDERS' EQUITY 101,569 104,172
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TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 120,973 $ 116,586
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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)
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MAR 31 MAR 31
1997 1996
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NET SALES $ 35,914 $ 48,497
COST OF SALES 30,276 29,967
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GROSS PROFIT 5,638 18,530
OPERATING EXPENSES:
SELLING AND MARKETING 3,619 3,755
RESEARCH AND DEVELOPMENT 4,395 3,171
GENERAL AND ADMINISTRATION 2,396 3,426
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TOTAL OPERATING EXPENSES 10,410 10,352
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OPERATING PROFIT (LOSS) (4,772) 8,178
INTEREST INCOME 382 430
INTEREST EXPENSE - 6
OTHER EXPENSE (19) (60)
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INCOME (LOSS) BEFORE TAXES (4,409) 8,542
INCOME TAX (BENEFIT) EXPENSE (1,631) 3,417
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NET INCOME (LOSS) $ (2,778) $ 5,125
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EARNINGS (LOSS) PER COMMON SHARE: $ (0.13) $ 0.24
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: 20,723 21,297
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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MYLEX CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS, THREE MONTHS ENDED
UNAUDITED
(IN $000'S)
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MAR 31 MAR 31
1997 1996
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CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME (LOSS) $ (2,778) $ 5,125
DEPRECIATION AND AMORTIZATION 537 458
AMORTIZATION OF DISCOUNT/PREMIUM ON SHORT-TERM
MARKETABLE INVESTMENTS (34) (42)
CHANGES IN OPERATING ASSETS AND LIABILITIES
ACCOUNTS RECEIVABLE, NET 1,220 (5,494)
INVENTORIES 4,250 (15,461)
PREPAID EXPENSES AND
OTHER CURRENT ASSETS (28) (5)
ACCOUNTS PAYABLE 8,126 11,950
ACCRUED LIABILITIES (974) 3,028
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NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ 10,319 $ (441)
CASH FLOWS FROM INVESTING ACTIVITIES:
CAPITAL EXPENDITURES (1,536) (1,206)
MATURITIES OF SHORT-TERM INVESTMENTS 4,734 -
PURCHASE OF SHORT-TERM MARKETABLE INVESTMENTS (5,448) -
DECREASE(INCREASE) IN OTHER ASSETS (9) (22)
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NET CASH USED IN INVESTING ACTIVITIES $ (2,259) $ (1,228)
CASH FLOWS FROM FINANCING ACTIVITIES:
REPAYMENT OF CAPITAL LEASE OBLIGATIONS (118) (104)
PROCEEDS FROM EXERCISE OF STOCK OPTIONS 386 463
NOTES RECEIVABLE FROM SHAREHOLDERS (255) -
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NET CASH PROVIDED BY FINANCING ACTIVITIES $ 13 $ 359
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NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS $ 8,073 $ (1,310)
CASH AND CASH EQUIVALENTS: AT BEGINNING OF PERIOD $ 15,849 $ 11,733
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CASH AND CASH EQUIVALENTS: AT END OF PERIOD $ 23,922 $ 10,423
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NON-CASH FINANCING AND INVESTMENT ACTIVITIES:
TAX BENEFIT RELATED TO DISQUALIFYING DISPOSITION
OF STOCK OPTIONS $ 44 $ 383
CASH PAID DURING THE PERIOD:
CASH PAID FOR INTEREST - $ 6
CASH PAID FOR INCOME TAXES - $ 795
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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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, 1996. The results of
operations for the three months ended March 31, 1997, 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.
The Financial Accounting Standards Board recently issued Statement of Financial
Accounting Standards No. 128, " Earnings Per Share." SFAS No. 128 requires the
presentation of basic earnings per share ("EPS") and, for companies with complex
capital structures, diluted EPS. SFAS No. 128 is effective for annual and
interim periods ending after December 15, 1997. The Company expects that basic
EPS will be higher than primary earnings per share as presented in the
accompanying consolidated financial statements and that diluted EPS will not
differ materially from fully diluted earnings per share as presented in the
accompanying consolidated financial statements.
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NOTE B. INVENTORIES (in $000's)
March 31, December 31,
1997 1996
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Raw Material $ 19,113 $ 26,623
Work-in-process 7,608 6,885
Finished Goods 10,709 8,172
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Total $ 37,430 $ 41,680
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 $5 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.
On February 10, 1997 the Company reached an agreement to settle the outstanding
complaint brought against the Company by one of its former officers in April,
1996, alleging breach of contract and violation of the Fair Housing and
Employment Act. The settlement resulted in a charge to after tax earnings of
$300 thousand.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS
Mylex Corporation is a leading producer of RAID technology and network
management products. Mylex produces high performance disk array (RAID)
controllers, and complementary computer products for network servers, mass
storage systems, workstations and system boards. Through its wide range of RAID
controllers and its BusLogic line of Ultra-SCSI host adapter products, Mylex
provides enabling intelligent I/O technologies that increase network management
control, enhance CPU utilization, optimize I/O performance, and ensure data
security and availability. Products are sold globally through a network of
OEMs, major distributors, VARs and system integrators. More than twenty leading
network file server and storage subsystem OEMs, including Digital Equipment
Corporation, NEC and Siemens, have designed Mylex RAID controllers into their
server and storage subsystem products. The Company was re-incorporated under
the laws of the State of Delaware in December 1996.
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 the storage and input/output, or
"I/O," challenges facing the emerging client/server computing environment. In
1992, the Company introduced its first RAID controller product into the personal
computer network market. Sales of RAID controller products have grown rapidly
since 1992, and represented 90% of the Company's net sales during first quarter
of 1997.
The trend toward client/server computing that began in the mid-1980s 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.
Mylex 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
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several disk drives and allowing the server microprocessor to access those
drives simultaneously, thus increasing system storage I/O performance. In
addition, lost data on any drive can be recreated using special RAID
algorithms, thus ensuring the immediate availability of RAID protected data
even in the event of a disk drive failure. Mylex 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 PCI bus standard
represented a majority of its disk array product sales in the first quarter
of 1997. The Company believes that its proprietary software and firmware as
well as its large installed base of RAID units are key competitive advantages
in the RAID controller market.
The Company's acquisition of BusLogic in February, 1996 made available to the
Company a complete line of host bus adapter products to broaden its product
offering. The Company now offers host bus adapter products that interface with
all common bus interfaces, such as ISA, EISA, VESA, Microchannel and PCI. These
products are highly suited to applications that demand high data throughput and
low CPU utilization. Consequently, the Company has moved beyond the "single
product" stage, providing an offering of product solutions for desktop PC's to
large networked systems.
As of March 31, 1996, the Company had approximately 382 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 three months of 1997 the Company financed its operations
primarily from existing cash balances and cash generated from operations.
At March 31, 1997, the Company's working capital decreased to $94.3 million
from $97.9 million at December 31, 1996. This decrease in working capital was
due to an increase of current liabilities of $7.0 million, represented primarily
by an $8.1 million increase in accounts payable, reduced by an increase in
current assets of $3.4 million, represented primarily by an increase of cash and
short term investments of $8.8 million, offset by reductions of $1.2 million in
accounts receivable and $4.3 million in net inventories. The decrease in net
inventories was due primarily to an adjustment in the Company's inventory
reserve provisions. This increase in the reserve provision was necessitated by
recent and further anticipated decline in revenues from HP, an anticipated
decline in IBM's demand for the Company's current PCI raid products and by the
Company's reassessment of the impact that the Company's new product transitions
will have on the demand of its current RAID products. HP orders placed with the
Company have declined faster than anticipated due to a recent
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design win at HP by a competitor of the Company and the resulting accelerated
phase out by HP of the Company's competing product. The Company also
expects that IBM shipments will decline in future quarters as IBM uses its
internally designed RAID controller in more systems than had been originally
indicated by IBM and that NEC now plans on a faster transition to ROME, the
Company's new RAID on the motherboard, than previously anticipated. These
events, along with a customer order flow that was strong up until the latter
part of the quarter gave the Company little visibility until the end of Q1
1997 and lead to a significant increase in its inventory reserve provision.
Accounts payable increased to $14.3 million at March 31, 1997, compared to $6.2
million at December 31, 1996, a rise of $8.1 million, or 132%. This increase
was due to the majority of the Company's quarterly procurement and production
occurring in the last month of the quarter.
Net accounts receivable decreased to $26.5 million at March 31, 1997, compared
to $27.7 million at December 31, 1996, a decrease of $1.2 million or 4%. This
decrease was attributable to lower sales as compared to the fourth quarter of
1996. The Company's cash and marketable investments increased by $8.8 million
from $34.4 million to $43.2 million, between December 31, 1996 and March 31,
1997.
The Company has an agreement with Comerica Bank for a $20 million unsecured
revolving line of credit which expires June 30, 1998. Borrowings under the line
of credit bears interest at either the Bank's base rate, or Eurodollar or Libor
option rate plus 1 3/4%, at the election of the Company at the time of each
advance. 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. The Company is
presently engaged in a stock repurchase program pursuant to which it may, over
time, purchase up to 3,000,000 shares of its Common Stock. Management decision
to repurchase, from time to time, will be based on the Company's cash needs and
market conditions.
RESULTS OF OPERATIONS
SALES AND GROSS PROFITS. The Company's net sales for the three months ended
March 31, 1997, totaled $35.9 million, compared to $48.5 million for the
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corresponding period of fiscal year 1996, a decrease of approximately 26%.
Sales decreased primarily due to reduced level of shipments of the Company's
disk array products to HP, IBM and DEC and to the 41% decline in the Company's
host bus adapter (HBA) sales as compared to the first quarter of 1996. Sales
and the expectations of sales growth in the first quarter of 1996 by the
Company's OEM customers were unusually high and as a consequence, these
customers purchased RAID controllers from the Company in anticipation of
continuing strong file server sales. These additional purchases by the
Company's customers resulted in an abnormally high increase in revenues for the
Company in the first quarter of 1996. Sales have not been significantly
impacted by inflation over the last three fiscal years.
Gross profit for the three months ended March 31, 1997, was $5.6 million or 16%
of net sales, compared to $18.5 million or 38% of net sales for the same period
in 1996 or a decrease of $12.9 million. This decrease in gross profit was
largely attributable to the increase in the Company's inventory reserve
provision in Q1 of 1997.
The Company's largest customer during the first quarter of 1997 was Digital
Equipment Corporation ("DEC"), which accounted for $7.5 million or 21% of the
Company's net sales during that period. The Company's second largest customer
during the quarter was IBM, which accounted for $4.5 million or 12% of net
sales. In response to declining sales to HP, the Company continued to diversify
its customer base with shipments to NEC and Siemens which each accounted for 9%
of 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 March 31, 1997, totaled $5.1 million, as compared to
$40.0 million as of the corresponding period in 1996. The decrease in the
backlog is attributable to the general slow down in the rate of growth of the
file server market as compared to the fourth quarter of 1996, a reduction of
inventory of the Company's current products by its customers as they await the
introduction of the Company's new products and the decreases in HP and IBM
orders described above.
Because almost all of the orders for the Company's products may be canceled
prior to shipment and its customers have the right to change delivery schedules,
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 $5.1
million backlog at March 31, 1997, all but a small percentage of the orders
would
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have been scheduled for delivery within the three months ended June 30, 1997,
unless the orders were canceled or rescheduled by the respective customer.
During the last half of 1993, the Company shifted its principal activity from
the supply of system board products to the manufacture of I/O devices and
storage management enhancing computer peripheral products. Additionally, the
acquisition of BusLogic in early 1996 has broadened the Company's product
offering with a complementary line of host bus adapters. 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 hardware platforms. These include personal
computer platforms that use PCI, ISA, 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 system monitoring programs.
Mylex disk array controllers DAC960P, DAC960PD, DACPU and DAC960PL provide high
performance, fault tolerant data storage solutions for the PCI bus platforms.
The Mylex SCSI-to-SCSI disk array controllers (DAC960S/SU/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.
During 1996, the Company developed a family of RAID products that are scaleable
("Scaleable RAID") and are based on the Company's firmware, RAID co-processor
and SCSI controller chips and incorporate Intel's i960*RP I/O co-processor.
Together, these RAID products offer a truly scaleable solution that gives OEMs
and integrators choices with respect to integrating RAID in environments from
the desktop to the super server. This family of products currently consists of
three offerings that can be used by themselves or in combination. The DAC960PG
is an extension of the Company's industry leading RAID controller products. It
is a complete board level RAID solution that plugs into a standard PCI slot.
The DAC960PG can be used in all servers from entry level to super server. ROME
is
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the Company's RAID on the motherboard implementation and combines the
Company's RAID co-processor and SCSI controller chips. This design is
targeted to the mid-range departmental server. When used in concert with the
Company's RAID firmware and operating system drivers, ROME will provide RAID
functionality in a cost effective package. Finally, the DAC960PC is a hybrid
solution that enables RAID ready motherboards with embedded Mylex SCSI
channels to be easily upgraded by plugging in a PCI add-in card. This
configuration gives the OEM the most flexibility by allowing the option to
implement RAID now or at a later time. However, there can be no assurance
that Scaleable RAID products will gain or sustain market acceptance or that
their sales will produce adequate gross margins.
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 disk drives and a low-cost RAID
solution. 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 or sustain market acceptance or that their sales
will produce adequate gross margins.
Host Bus Adapters
The Company's host adapter product family represents one of the broadest host
adapter product offerings available by providing a common interface to all of
today's PC bus architectures, including PCI, VESA, EISA, ISA and Micro Channel.
These products are ideal for data intensive LAN servers, desktop publishing
workstations and multimedia applications where efficient I/O is essential. The
HBA will support up to 15 SCSI devices that include; disk, tape, floppy, CD-ROM
and optical drives and scanners. These devices can either be internal or
external to the system and be used in a multi-tasking configuration. The
Company continues to develop follow on versions of its PCI based products.
However, these products are introduced, there can be no assurance that they will
gain or sustain market acceptance or that their sales will produce adequate
gross margins. The sales of host bus adapters faltered during 1996 and has
continued to decline in the first quarter of 1997, due primarily to the late
introduction and slow rate of growth of sales of new PCI products. The effect
of this delay was heightened by a fast rate of declining sales for the older
EISA and microchannel products.
Network Attached Storage Products
In addition to RAID controllers and host bus adapters, the Company is in the
process of developing a family of products that represent a new method of
adding services to a network based on a new server design that offers
advantages in simplicity, cost and performance. These servers belongs to a
family of products
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called AutoNet-TM-. Standard servers are based on personal computer
architectures, and while they perform well for many applications they are
overly complex and costly for basic network services. The AutoNet server
design is anticipated to integrate all of the functions of a server,
including a network operating system. Initial applications for the new
servers are expected to be in the areas of file service and network attached
storage. However, there can be no assurance that the Company will be able to
develop and introduce the AutoNet products in a timely manner or that any
such products will gain or sustain market acceptance. In any event, it is
not expected that sales of AutoNet products will be material to the Company
any earlier than the third quarter of 1997.
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 its new PCI and SCSI to SCSI disk array,
HBA products and network attached storage product families, with features that
meet changing customer requirements and with competitive prices. There can be no
assurance that the Company will be successful in doing so. Delays in product
enhancement and development 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 and utilize their own controllers 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 family
of processors. 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
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development efforts or that such products, if developed, will have the same
degree of market acceptance or the same gross margins as the Company's present
RAID products.
SALES AND MARKETING EXPENSES
Sales and marketing expenses for the three months ended March 31, 1997, totaled
$3.6 million, a decrease of $136 thousand or 4% from the corresponding period in
1996. Sales and marketing expenses represented 10% of net sales for the three
months ended March 31, 1997, as compared to 8% for the same period a year ago.
This increase in sales and marketing expenses as a percent of sales was a result
of the decrease in sales compared to the corresponding period of 1996.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses for the three months ended March 31, 1997,
totaled $4.4 million, an increase of 39%, from the $3.2 million incurred
during the corresponding period in 1996. Research and development expenses
represented 12% of net sales for the three months ended March 31, 1997, as
compared to 7% in the comparable 1996 quarter. Research and development
expenses increased during the first quarter of 1997 due, primarily, to
expenses incurred for the staffing and the development of the Company's new
Autonet-TM- network attached storage product, the expansion of its R&D
facility in Boulder, Colorado and increased staffing expense resulting from
higher salaries and increased engineering head count at the Company's Fremont
and Santa Clara locations. The Company continued its investment in research
and development activities during the first quarter of 1997 in an effort to
implement its strategies of maintaining leadership in the RAID market, take
advantage of its existing and prospective SCSI host adapter and IC technology
and to introduce new products, such as Autonet-TM-. 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 IC technology or
that the Company will be able to introduce its new product offerings on a
timely basis.
GENERAL AND ADMINISTRATIVE
General and administrative expenses for the three months ended March 31, 1997,
totaled $2.4 million, a decrease of $1.0 million or 30% from the corresponding
period of 1996. General and administrative expenses were 7% of net sales for
the three months ended March 31, 1997, and were a comparable percent of sales in
the first quarter of 1996. The decrease in general and administrative expenses
quarter to quarter was due primarily to the substantial one-time merger expenses
incurred by the Company in the first quarter of 1996
14
<PAGE>
related to the acquisition of BusLogic and to reduced bonus expenses in first
quarter of 1997. These reduced expenses were partially offset by settlement
costs of $300 thousand, on an after tax basis, resulting from a lawsuit that
was settled during the quarter.
INCOME TAXES
The Company's effective tax rate for the first quarter of 1997 was 37% as
opposed to 40% for the first quarter of 1996. The decrease in the tax rate is
due to the tax reduction program that the Company implemented in the third
quarter of 1996 and reflects the effective tax rate the Company expects to incur
for the year ending December 31, 1997.
15
<PAGE>
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 $5 million (which would vary based on the price of the Company's Common
Stock) and unspecified punitive damages. The Company has filed a cross complaint
against Dr. Chowdry and 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 this
proceeding that would have a material adverse effect on the Company.
In addition to the matter 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.
SAFE-HARBOR STATEMENT UNDER PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995:
The statements contained in this Form 10-Q that are not historical facts, may
contain forward looking information with respect to plans, projections or future
performance of the Company, the occurrence of which involve certain risks and
uncertainties, without limitation, demand and competition for the Company's
products, particularly its RAID controller products, the ability of the Company
to develop and timely introduce new products which gain and sustain market
acceptance and have adequate gross margins, the impact on the Company of its
acquisition of BusLogic in early 1996, and other risks and uncertainties
detailed in the Company's filings with the Securities and Exchange Commission,
including the prospectus with respect to its public offering in September 1995
and its 1996 Form 10-K. These forward looking statements speak only as of the
date hereof, and the Company disclaims any intent or obligation to update those
statements.
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 May 1997.
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
of Per Share Earnings 19
27 Financial Data Schedule
18
<PAGE>
MYLEX CORPORATION EXHIBIT 11.1
EARNINGS (LOSS) PER SHARE COMPUTATION
THREE MONTHS March 31, 1997 AND 1996
The basis for computing net income (loss) 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 March 31, 1997.
The computation of earnings (loss) per share is as follows:
(in $000's except for per share data) THREE MONTHS ENDED
MAR 31 MAR 31
1997 1996
---------- ---------
NET EARNINGS (LOSS) $ (2,778) $ 5,125
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING DURING THE PERIOD 20,723 19,643
NUMBER OF COMMON SHARE EQUIVALENTS RESULTING
FROM STOCK OPTIONS AND WARRANTS, COMPUTED
USING THE TREASURY STOCK METHOD AND THE
AVERAGE STOCK PRICE - 1,654
---------- ---------
NUMBER OF COMMON AND COMMON SHARES
EQUIVALENTS USED IN COMPUTATION 20,723 21,297
---------- ---------
EARNINGS (LOSS) PER SHARE $ (0.13) $ 0.24
---------- ---------
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 23,922
<SECURITIES> 19,286
<RECEIVABLES> 26,937
<ALLOWANCES> (425)
<INVENTORY> 37,430
<CURRENT-ASSETS> 113,658
<PP&E> 13,817
<DEPRECIATION> (6,694)
<TOTAL-ASSETS> 120,973
<CURRENT-LIABILITIES> 19,338
<BONDS> 0
0
0
<COMMON> 208
<OTHER-SE> 101,361
<TOTAL-LIABILITY-AND-EQUITY> 120,873
<SALES> 35,914
<TOTAL-REVENUES> 37,595
<CGS> 30,276
<TOTAL-COSTS> 40,486
<OTHER-EXPENSES> 19
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (382)<F1>
<INCOME-PRETAX> (4,409)
<INCOME-TAX> (1,631)
<INCOME-CONTINUING> (2,778)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,778)
<EPS-PRIMARY> (.13)
<EPS-DILUTED> (.13)
<FN>
<F1>Interest Income
</FN>
</TABLE>
