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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 June 28, 1997 or
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[ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the transition period from to .
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Commission file number 0-13381
MYLEX CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 59-2291597
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(State or other jurisdiction of (IRS Employer Identification No.
incorporation or organization)
34551 Ardenwood Blvd., Fremont, California 94555
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(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 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
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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 21,155,030 shares
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Class Outstanding at June 27, 1997
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEET
(IN $000'S)
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UNAUDITED
ASSETS JUNE 28 DEC 31
1997 1996
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<S> <C> <C>
CURRENT ASSETS:
CASH AND EQUIVALENTS $ 17,139 $ 15,849
SHORT-TERM MARKETABLE INVESTMENTS 14,327 18,538
ACCOUNTS RECEIVABLE 17,539 28,168
ALLOWANCE FOR DOUBTFUL ACCOUNTS (320) (436)
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ACCOUNTS RECEIVABLE, NET 17,219 27,732
INVENTORIES 39,515 41,680
PREPAID EXPENSES AND OTHER CURRENT ASSETS 6,505 6,480
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TOTAL CURRENT ASSETS 94,705 110,279
PROPERTY AND EQUIPMENT, NET 7,838 6,124
OTHER ASSETS 200 183
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TOTAL ASSETS $102,743 $116,586
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
ACCOUNTS PAYABLE $ 6,760 $ 6,157
ACCRUED LIABILITIES 2,243 6,191
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TOTAL CURRENT LIABILITIES 9,003 12,348
LONG-TERM LIABILITIES 66 66
STOCKHOLDERS' EQUITY
COMMON STOCK 201 207
ADDITIONAL PAID-IN CAPITAL 57,761 63,789
NOTES RECEIVABLE FROM SHAREHOLDERS (720) (465)
RETAINED EARNINGS 36,432 40,641
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TOTAL STOCKHOLDERS' EQUITY 93,674 104,172
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TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $102,743 $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 PER SHARE DATA)
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JUNE 28 JUNE 30
1997 1996
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NET SALES $26,926 $45,411
COST OF SALES 17,982 28,449
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GROSS PROFIT 8,944 16,962
OPERATING EXPENSES:
SELLING AND MARKETING 4,665 3,559
RESEARCH AND DEVELOPMENT 5,024 4,118
GENERAL AND ADMINISTRATION 1,939 1,914
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TOTAL OPERATING EXPENSES 11,628 9,591
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OPERATING PROFIT (LOSS) (2,684) 7,371
INTEREST INCOME 451 323
INTEREST EXPENSE - (8)
OTHER EXPENSE (38) (12)
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INCOME (LOSS) BEFORE TAXES (2,271) 7,674
INCOME TAX (BENEFIT) EXPENSE (840) 3,073
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NET INCOME (LOSS) $(1,431) $ 4,601
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EARNINGS (LOSS) PER COMMON SHARE: $ (0.07) $ 0.21
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: 20,558 21,725
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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MYLEX CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS, SIX MONTHS ENDED
UNAUDITED
(IN $000'S, EXCEPT FOR PER SHARE DATA)
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JUNE 28 JUNE 30
1997 1996
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NET SALES $62,839 $93,908
COST OF SALES 48,258 58,416
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GROSS PROFIT 14,581 35,492
OPERATING EXPENSES:
SELLING AND MARKETING 8,284 7,314
RESEARCH AND DEVELOPMENT 9,419 7,289
GENERAL AND ADMINISTRATION 4,335 5,340
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TOTAL OPERATING EXPENSES 22,038 19,943
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OPERATING PROFIT (LOSS) (7,457) 15,549
INTEREST INCOME 833 753
INTEREST EXPENSE - (14)
OTHER EXPENSE (56) (72)
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INCOME (LOSS) BEFORE TAXES (6,680) 16,216
INCOME TAX (BENEFIT)EXPENSE (2,471) 6,490
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NET INCOME (LOSS) $(4,209) $ 9,726
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EARNINGS (LOSS) PER COMMON SHARE: $ (0.20) $ 0.45
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 20,641 21,640
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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MYLEX CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS, SIX MONTHS ENDED
UNAUDITED
(IN $000'S)
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JUNE 28 JUNE 30
1997 1996
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME (LOSS) $(4,209) $ 9,726
DEPRECIATION AND AMORTIZATION 1,141 946
AMORTIZATION OF DISCOUNT/PREMIUM ON SHORT-TERM
MARKETABLE INVESTMENTS (75) (67)
CHANGES IN OPERATING ASSETS AND LIABILITIES
ACCOUNTS RECEIVABLE, NET 10,513 (7,779)
INVENTORIES 2,165 (27,310)
PREPAID EXPENSES AND
OTHER CURRENT ASSETS (25) 430
ACCOUNTS PAYABLE 603 12,824
ACCRUED LIABILITIES (3,657) 779
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NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ 6,456 $(10,451)
CASH FLOWS FROM INVESTING ACTIVITIES:
CAPITAL EXPENDITURES (2,855) (2,328)
MATURITIES OF SHORT-TERM INVESTMENTS 9,734 -
REDEMPTION OF SHORT -TERM INVESTMENTS - 2,600
PURCHASE OF SHORT-TERM MARKETABLE INVESTMENTS (5,448) -
(INCREASE) IN OTHER ASSETS (17) (22)
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NET CASH USED IN INVESTING ACTIVITIES $ 1,414 $ 250
CASH FLOWS FROM FINANCING ACTIVITIES:
REPAYMENT OF CAPITAL LEASE OBLIGATIONS (118) (178)
PROCEEDS FROM EXERCISE OF STOCK OPTIONS 242 3,274
PROCEEDS FROM PURCHASES UNDER THE EMPLOYEE
STOCK PURCHASE PLAN 307 207
PAYMENTS TO ACQUIRE COMMON STOCK (7,011) -
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NET CASH PROVIDED BY FINANCING ACTIVITIES $(6,580) $ 3,303
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NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS $ 1,290 $ (6,898)
CASH AND CASH EQUIVALENTS: AT BEGINNING OF PERIOD $15,849 $ 11,733
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CASH AND CASH EQUIVALENTS: AT END OF PERIOD $17,139 $ 4,835
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NON-CASH FINANCING AND INVESTMENT ACTIVITIES:
TAX BENEFIT RELATED TO DISQUALIFYING DISPOSITION
OF STOCK OPTIONS $ 173 $ 5,617
COMMON STOCK ISSUED FOR NOTES RECEIVABLE FROM
STOCKHOLDERS $ 255 -
CASH PAID DURING THE PERIOD:
CASH PAID FOR INTEREST - $ 14
CASH PAID FOR INCOME TAXES $ 810 $ 5,297
</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, 1996. The results of
operations for the three and six months ended June 28, 1997, are not necessarily
indicative of the operating results for the full year.
As of the second quarter of 1997, the Company changed its fiscal periods from
a calendar month basis to fiscal month basis. The Company's fiscal quarters
are now comprised of two four week months and one five week month.
Additionally, each fiscal week begins on Sunday and ends on Saturday. The
conversion to a fiscal month basis did not have a material impact on the
Company's results of operation for the quarterly period ended June 28, 1997.
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.
RECENT ACCOUNTING PRONOUNCEMENTS
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 basic loss per share
would be the same as loss per share as presented in the accompanying
consolidated financial statements.
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In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive Income".
This Statement establishes standards for reporting and displaying comprehensive
income and its components in the consolidated financial statements. It does
not, however, require a specific format for the statement, but requires the
Company to display an amount presenting total comprehensive income for the
period in that financial statement. The Company is in the process of
determining its preferred format. This Statement is effective for fiscal years
beginning after December 15, 1997.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related information". The Statement establishes standards for
the way the public business enterprises are to report information about
operating segments in annual financial statements and requires those
enterprises to report selected information about operating segments in
interim financial reports issued to stockholders. This Statement is
effective for financial statements for the period beginning after December
31, 1997. The Company does not believe that it currently has any separately
reportable business segments.
The Securities and Exchange Commission has approved rule amendments to clarify
and expand existing disclosure requirements for derivative financial
instruments. The amendments require enhanced disclosure of accounting policies
for derivative financial instruments in the financial statements. In addition,
the amendments expand existing disclosure requirements to include quantitative
and qualitative information about market risk inherent in market sensitive
instruments. The required quantitative and qualitative information should be
disclosed outside the financial statements and related notes thereto. The
enhanced accounting policy disclosure requirements are effective for the
quarterly period ended June 28, 1997. As the Company does not engage in
derivative instruments, no further interim period disclosure has been provided.
NOTE B. INVENTORIES (in $000's)
June 28, December 31,
1997 1996
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Raw Material $18,122 $26,623
Work-in-process 9,472 6,885
Finished Goods 11,921 8,172
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Total $39,515 $41,680
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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, that 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.
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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 88% of the Company's net sales during the second
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
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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. 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 six months 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. Additionally, the Company has begun shipping its new RAID controller
which incorporate the SCSI chip technology also acquired in the BusLogic
transaction. The Company now offers host bus adapter products for the PCI bus
interface and a number of older bus interfaces. These PCI based products are
considered high performance and well 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 June 28, 1997, the Company had approximately 390 employees. None of the
employees are represented by a labor union or employed under any collective
bargaining agreement.
LIQUIDITY AND CAPITAL RESOURCES
During the second quarter of 1997 the Company financed its operations primarily
from cash balances and cash generated from operations.
At June 28, 1997, the Company's working capital decreased to $85.7 million
from $97.9 million at December 31, 1996. This decrease in working capital
was due primarily to the decrease of current assets by $15.6 million but was
offset by a $3.3 million reduction in current liabilities. The reduction in
current assets was driven primarily by a $10.5 million reduction in accounts
receivable and a $2.2 million reduction in net inventories. The reduction in
accounts receivable was due to 27% lower sales volume in the second quarter
of 1997, as compared to the fourth quarter of 1996. These reductions to
working capital were offset by a $4.0 million reduction in accrued
liabilities due to tax benefits that were recorded over the first six months
of 1997. The Company's cash and marketable investments
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decreased by $2.9 million, from $34.4 million to $31.5 million, between December
31, 1996 and June 28, 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 bear 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
additional 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 engaged in a stock repurchase program pursuant to
which it has purchased, for $7.0 million 700,000 shares of the Company's
Common Stock during the second quarter of 1997. Management's decision to
repurchase shares 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
June 28, 1997, totaled $26.9 million, compared to $45.4 million for the
corresponding period of fiscal year 1996, a decrease of approximately 41%.
Sales decreased primarily due to the cessation of shipments of the Company's
disk array products to HP and IBM, weakness in the server market in which the
Company's customers participate in, particularly in Europe, delays in OEM
qualification of the Company's new external RAID controller and a 34% decline
in the Company's host bus adapter (HBA) sales, as compared to the second
quarter of 1996.
For the six month period ending June 28, 1997, the Company's net sales were
$62.8 million, compared to $93.9 million for the first two quarters of 1996.
The sales decline was primarily due to significantly reduced level of
shipments to HP and IBM and to a 38% decline in HBA sales. As compared to
the comparable 1996 period, the reduced shipments to HP and IBM are
attributable, respectively, to HP's award of a design win to one of the
Company's competitors and to IBM's procurement strategy change, which has
resulted in a switch from the procurement of their RAID controllers from the
Company to an internally sourced controller. 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 June 28, 1997, was $8.9 million or 33%
of net sales, compared to $17.0 million or 37% of net sales for the same period
in 1996 or a decrease of $8.1 million. This decrease in gross profit was
largely attributable to the decline in sales to HP and IBM and in the Company's
HBA product line.
For the first two quarters of 1997, gross profits were $14.6 million compared
to $35.5 million for the corresponding period in 1996. The year-over-year
decline in gross profit is primarily attributable to the 34% reduction in
revenues and to the increase in the Company's inventory reserve provision,
during this six month period. The cumulative inventory reserve charge as of
June 28, 1997 is $10.4 million.
The Company's largest customer during the second quarter of 1997 was Digital
Equipment Corporation ("DEC"), which accounted for $6.6 million or 25% of the
Company's net sales during that period. The Company's second largest customer
during the quarter was NEC, which accounted for $3.3 million or 12% of net
sales.
For the first two quarters of 1997, DEC was the Company's largest customer
with $14.1 million or 23% of the Company's net sales. The Company's second
largest customer during this period was NEC, which accounted for $6.6 million
or 11% 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 June 28, 1997, totaled $7.8 million, as compared to
$19.9 million as of the end of the second quarter in 1996. The decrease in the
backlog is attributable to the decline in the level of business with HP and IBM
and the Company's customers reducing their inventory of the Company's current
products as they await shipments of the Company's new products.
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 $7.8
million backlog at June 28, 1997, all but a small percentage of the orders would
have been scheduled for delivery within the three months ending September 27,
1997, unless the orders were canceled or rescheduled by the respective customer.
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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 4 to 128 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 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
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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 a broad host adapter
product offerings available for the PCI bus interface. 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 can be used in a multi-tasking configuration. On
July 21, 1997, the Company announced RAIDPlus-TRADEMARK-, an enhanced host
bus adapter with RAID functionality. By making the Company's HBA's products
RAID capable, their performance, in a multi-drive environment, is now
significantly improved over a non-RAID HBA equivalent. Along with the
performance improvement, RAID provides an added enhanced level of data
security with the distribution of data over multiple drives.
The sales of host bus adapters faltered during 1996 and has continued to decline
in the second quarter of 1997, due primarily to the late introduction and slow
rate of growth of sales of new PCI based products. The effect of this delay was
heightened by a fast rate of declining sales for the older EISA and microchannel
HBA products.
Network Attached Storage Products
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 called AutoNet-TRADEMARK-. 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
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operating system. Initial applications for the new servers are expected to
be in the areas of file service and network attached storage. In any event,
it is anticipated that AutoNet products will begin shipping in the later part
of the third quarter of 1997 and expected sales will not be material to the
Company any earlier than the fourth quarter of 1997. 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.
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
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
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.
15
<PAGE>
SALES AND MARKETING EXPENSES
Sales and marketing expenses for the three months ended June 28, 1997, totaled
$4.7 million, an increase of $1.1 million or 31% from the corresponding period
in 1996. Sales and marketing expenses represented 17% of net sales for the
three months ended June 28, 1997, as compared to 8% for the same period a year
ago. This increase in sales and marketing expenses resulted primarily from
expenses related to the launch of new products. The increase of sales and
marketing expenses as a percent of net sales resulted from the absolute increase
in such expenses and the decrease in net sales.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses for the three months ended June 28, 1997,
totaled $5.0 million, an increase of 22%, from the $4.1 million incurred
during the corresponding period in 1996. Research and development expenses
represented 19% of net sales for the three months ended June 28, 1997, as
compared to 9% in the comparable 1996 quarter. Research and development
expenses increased during the second quarter of 1997 due primarily to
expenses incurred for the staffing and the development of the Company's new
Autonet-TRADEMARK- network attached storage product, the continued 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 increase of research and
development expenses as a percent of net sales resulted from the absolute
increase in such expenses and the decrease in net sales. The Company
continued its investment in research and development activities during the
second quarter of 1997 in an effort to implement its strategies of
maintaining leadership in the RAID market, to take advantage of its existing
and prospective SCSI host adapter and IC technology and to introduce new
products, such as Autonet-TRADEMARK-. 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 June 28, 1997,
totaled $1.9 million, and did not materially change from the corresponding
period of 1996. General and administrative expenses were 7% of net sales for
the three months ended June 28, 1997, as compared to 4% of net sales for the
second quarter of 1996. The increase of general and administrative expenses as a
percent of net sales resulted from the decrease in net sales.
16
<PAGE>
INCOME TAXES
The Company's effective tax rate for the second quarter of 1997 was 37% as
opposed to 40% for the second 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.
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 that could cause actual results to differ materially.
These risks and uncertainties include, without limitation, changes in
customer order patterns, particularly those resulting from fluctuations in
actual or projected server shipments, the ability of the Company to timely
develop and introduce new products which gain and sustain market acceptance
and have adequate gross margins, demand and competition for the Company's
products, particularly its RAID controller products, component availability,
the ability of the Company to timely ship ordered products, business
conditions and growth in the computer industry and general economy, the
ability of the Company to meet the rapidly changing needs of its markets
through product enhancements or new product introductions, and other risks
and uncertainties detailed in the Company's filings with the Securities and
Exchange Commission, including 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 these forward looking statements.
17
<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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The 1997 Annual Meeting of Stockholders was held on July 16, 1997. The results
of the shareholder vote on the matters presented at the meeting are listed
below.
Election of Directors:
Mr. Ismael Dudhia vote for 17,171,612
vote withheld 1,874,544
Dr. M. Yaqub Mirza vote for 17,188,262
vote withheld 1,857,894
Dr. Inder M. Singh vote for 17,173,575
vote withheld 1,872,581
18
<PAGE>
Mr. Richard Love vote for 17,188,177
vote withheld 1,857,979
Mr. Al Montross vote for 17,176,370
vote withheld 1,869,786
Mr. Stephen McKenzie vote for 17,179,052
vote withheld 1,867,104
Mr. Walter Wilson vote for 17,173,575
vote withheld 1,861,786
Proposal to amend the Company's Articles of Incorporation to increase the
authorized shares of the Company's Common Stock from 40,000,000 to 120,000,000 -
votes for 14,375,100, votes against 4,556,143 and votes abstaining 127,313.
Shares not voted were 1,752,945.
Proposal to amend the Company's Certificate of Incorporation to classify the
Board of Directors into three classes of directors - votes for 5,176,578, votes
against 7,626,439 and votes abstaining 147,795. Shares not voted were
7,860,689.
Proposal to amend the Company's Certificate of Incorporation such that
stockholder action may be taken only at annual or special meetings of the
stockholders - votes for 4,313,004, votes against 7,163,759 and votes abstaining
621,835. Shares not voted were 8,712,903.
Proposal to amend the Company's Certificate of Incorporation such that
special meetings of stockholders of the Company may be called only by the
Company's Board of Director or stockholders holding 66 2/3% or more of
outstanding shares - votes for 4,962,746, votes against 7,556,299 and votes
abstaining 604,567. Shares not voted were 7,687,889.
Proposal to amend the 1993 Stock Option Plan to increase the number of shares
subject thereto by 1,900,000 - votes for 7,677,696, votes against 4,254,497 and
votes abstaining 166,405. Shares not voted were 8,712,903.
Proposal to ratify the appointment of KPMG Peat Marwick LLP as independent
public accountants of the Company for the fiscal year ending December 27, 1997 -
votes for 17,234,513, votes against 1,315,401 and votes abstaining 508,642.
Shares not voted were 1,752,945.
19
<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 8th day of August 1997.
MYLEX CORPORATION
By /s/ Colleen Gray
----------------------
Colleen Gray
Vice President of Finance and
Chief Financial Officer
20
<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 22
21
<PAGE>
MYLEX CORPORATION EXHIBIT 11.1
EARNINGS (LOSS) PER SHARE COMPUTATION
THREE and SIX MONTHS ENDED June 28, 1997 AND June 30, 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 and six months ended June 28, 1997 and June
30, 1996.
The computation of earnings (loss) per share is as follows:
THREE MONTHS ENDED
(in $000's except for per share data)
JUNE 28 JUNE 30
1997 1996
--------- --------
NET EARNINGS (LOSS) $(1,431) $ 4,601
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING DURING THE PERIOD 20,558 20,197
NUMBER OF COMMON SHARE EQUIVALENTS RESULTING
FROM STOCK OPTIONS AND WARRANTS, COMPUTED
USING THE TREASURY STOCK METHOD AND THE
AVERAGE STOCK PRICE - 1,528
-------- --------
NUMBER OF COMMON AND COMMON SHARES
EQUIVALENTS USED IN COMPUTATION 20,558 21,725
-------- --------
EARNINGS (LOSS) PER SHARE $ (0.07) $ 0.21
-------- --------
SIX MONTHS ENDED
(in $000's except for per share data)
JUNE 28 JUNE 30
1997 1996
--------- --------
NET EARNINGS (LOSS) $(4,209) $ 9,726
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING DURING THE PERIOD 20,641 19,936
NUMBER OF COMMON SHARE EQUIVALENTS RESULTING
FROM STOCK OPTIONS AND WARRANTS, COMPUTED
USING THE TREASURY STOCK METHOD AND THE
AVERAGE STOCK PRICE - 1,704
-------- --------
NUMBER OF COMMON AND COMMON SHARES
EQUIVALENTS USED IN COMPUTATION 20,641 21,640
-------- --------
EARNINGS (LOSS) PER SHARE $ (0.20) $ 0.45
-------- --------
22
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-27-1997
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-28-1997
<CASH> 17,139
<SECURITIES> 14,327
<RECEIVABLES> 17,539
<ALLOWANCES> (320)
<INVENTORY> 39,515
<CURRENT-ASSETS> 94,705
<PP&E> 15,136
<DEPRECIATION> (7,218)
<TOTAL-ASSETS> 102,743
<CURRENT-LIABILITIES> 9,003
<BONDS> 0
0
0
<COMMON> 208
<OTHER-SE> 93,466
<TOTAL-LIABILITY-AND-EQUITY> 102,743
<SALES> 26,926
<TOTAL-REVENUES> 28,307
<CGS> 17,982
<TOTAL-COSTS> 29,610
<OTHER-EXPENSES> 38
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (451)<F1>
<INCOME-PRETAX> (2,271)
<INCOME-TAX> (840)
<INCOME-CONTINUING> (1,431)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,431)
<EPS-PRIMARY> (.07)
<EPS-DILUTED> (.07)
<FN>
<F1>Interest Income
</FN>
</TABLE>
