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SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934, for the fiscal year ended December 31, 1996
[ ] Transitional 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
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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
incorporation or organization) Identification No.)
34551 Ardenwood Boulevard
Fremont, California 94555
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(Address of principal executive office) (Zip code)
Registrant's telephone number, including area code: 510-796-6100
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act: Common
Stock, $.01 par value
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No _____
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based upon the mean of the closing bid and asked price of the
Common Stock on February 28, 1997, as reported on Nasdaq, was $233,321,412. As
of February 28, 1997, registrant had outstanding 21,017,655 shares of Common
Stock. Shares of Common Stock held by each executive officer and director and by
each person who owns 5% or more of the outstanding Common Stock have been
excluded in that such persons may be deemed to be affiliates. This determination
of affiliate status is not necessarily a conclusive determination for other
purposes.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in the definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this form 10-K. [ ]
DOCUMENTS INCORPORATED BY REFERENCE
Parts II and IV incorporate information by reference from the Annual
Report to Shareholders for the year ended December 31, 1996. Part III
incorporates information by reference from the definitive proxy statement for
the 1997 Annual Meeting of Shareholders. To be held May 30, 1997, which
proxy statement will be filed in April, 1996.
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TABLE OF CONTENTS
PART I
PAGE
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Item 1. Business 5
Item 2. Properties 16
Item 3. Legal Proceedings 16
Item 4. Submission of Matters to a
Vote of Security Holders 17
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters 18
Item 6. Selected Financial Data 18
Item 7. Management's Discussion and Analysis of
Financial Condition and Results
of Operations 18
Item 8. Consolidated Financial Statements and
Supplementary Data 18
Item 9. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure 18
PART III
Item 10. Directors and Executive Officers
of the Registrant 19
Item 11. Executive Compensation 19
Item 12. Security Ownership of Certain
Beneficial Owners and Management 19
Item 13. Certain Relationships and Related
Transactions 19
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PART IV
Item 14. Exhibits, Consolidated Financial Statements,
Financial Statement Schedules, and
Reports on Form 8-K 20
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PART I
ITEM 1. BUSINESS
GENERAL
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. Through
1996, more than twenty leading network file server and storage subsystem
OEMs, including IBM, Hewlett-Packard Company, Digital Equipment Corporation,
NEC and Siemens, had 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.
In February 1996, Mylex acquired BusLogic Inc., a Santa Clara, California-based
supplier of high-performance SCSI (Small Computer Systems Interface) I/O
solutions used in network file servers, personal computers and workstations.
The acquisition of BusLogic has strengthen Mylex by adding significant SCSI
technology and ASIC (Application Specific Integrated Circuit) development
capabilities to the Company's capabilities and has broadened the Company's
product offering.
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 87% of the Company's net sales during 1996.
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
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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 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 1996. 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 acquisition of BusLogic 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 allowing an offering of product solutions for desktop PC's to
large networked systems.
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
Sales of the Company's RAID controller products accounted for 87% of the
Company's net sales in 1996 and 75% of net sales in 1995. Conversely the
Company's net sales of its host bus adapters (HBA's) were 11% in 1996 and 21% in
1995. RAID controller products are used principally in personal computer
network applications. The use of RAID technology in the personal computer
network market has become established over the previous few years, but there can
be no assurance that another technology will not replace RAID in the disk array
controller marketplace or that there will be widespread acceptance or continuing
growth of the use of RAID products in general, or the Company's RAID controllers
in particular, in that market. Furthermore, even if the market continues to
grow, there can be no assurance that the Company will be able to continue to
market and sell its RAID controller products at the same rates, and with the
same gross margins, it has experienced to date.
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 typically used in personal computers ranging from
the desktop up to file servers and work stations. SCSI, which stands for
Small Computer System Interface, is a bus protocol that
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allows a computer to connect to multiple internal and external peripherals
from one slot and which improves I/O performance over other protocols such as
ATA, IDE and Enhanced IDE. There can be no assurance that another technology
will not replace SCSI in the marketplace, or the Company's SCSI HBA products
in particular, in that market. Furthermore, even if the market continues to
grow, there can be no assurance that the Company will be able to continue to
market and sell its HBA products at the same rates, and with the same gross
margins, it experienced in 1996.
In addition, in order to be able to compete successfully in the RAID controller
and HBA market, the Company will have to develop and market new RAID controller
and HBA products. There can be no assurance that the Company will be able to
develop and introduce new RAID controller and HBA products in a timely manner or
that any such products will gain or sustain market acceptance.
The Company's revenue depends on a customer base that is concentrated. The
Company's three largest customers, Digital Equipment Corporation ("DEC"),
International Business Machines ("IBM") and Hewlett-Packard Company ("HP"),
collectively accounted for 45% of the Company's net sales in 1996. Sales to
DEC alone represented 17% of the Company's net sales during 1996. Other
significant customers in 1996 included NEC and Siemens which accounted for 6%
and 5% of net sales respectively. The Company has no long-term purchase
commitments from its customers, and customers generally may cancel their
orders on 30-days notice. Accordingly, there can be no assurance that orders
from existing customers, including the Company's principal customers, will
continue at their historical levels, or that the Company will be able to
obtain orders from new customers. The loss of one or more of the Company's
current customers, particularly a significant customer, or cancellation or
rescheduling of orders already placed, could materially and adversely affect
the Company's business and operating results. Although the Company continues
to ship products to HP, the level of sales to HP is expected to decline
materially in 1997 due to HP's award of a design win for RAID controllers to
one of the Company's competitors. Despite the design win by the Company's
competitor, the Company has been informed by HP that it will have the
opportunity to compete for future design wins at HP during 1997.
The Company's OEM customers have integrated the Company's RAID controller
products into their servers and storage subsystems. Any of these OEM
customers may choose to develop their own RAID controller products which
could be substituted for, and thus reduce or eliminate their purchases of,
the Company's RAID controller products. Most of the Company's OEM customers,
and particularly its principal customers, have extensive product development
experience and expertise, substantial financial resources and ongoing,
substantial product development activities. As a result, it is possible that
those customers may engage in RAID development programs on a continuing
basis. The Company believes that IBM has designed and is now producing its
own RAID controller for internal consumption. Sales of RAID controllers
during the first quarter of 1997 to IBM are expected to be approximately the
same as the previous quarter. Any material reduction in purchases of RAID
controller products by any OEM
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customers as a result of such customer developing its own competing product
will materially and adversely affect the Company's business and operating
results.
COMPETITION
The markets for the Company's RAID controller and HBA products have been
competitive and are likely to become more competitive. Furthermore, there
are numerous companies with established reputations in the controller and
personal computer related markets, many of which have greater financial,
manufacturing and marketing resources than those of the Company. The Company
believes that its principal competitors for RAID controllers are American
Megatrends (AMI) and Adaptec. The principal competitor for the Company's HBA
products is Adaptec. The Company's share of the HBA market is much smaller
when compared to Adaptec, and Adaptec has significantly greater financial,
manufacturing and marketing resources than the Company.
Some OEMs, such as Compaq, have developed their own RAID controllers.
As noted, the customers historically accounting for the most significant volumes
of the Company's sales are major OEMs, any of which could develop their own
controllers at any time rather than purchase such products from the Company.
The Company's ability to compete successfully in either the personal computer
networking market or the RAID controller and the HBA markets depends upon its
ability to continue to develop products that obtain market acceptance, which can
be sold at competitive prices, while maintaining adequate gross margin levels,
and which are proven to be reliable. Although the Company believes that its
RAID controller and HBA products have certain competitive advantages, which
include performance and cost, there can be no assurance that the Company will be
able to compete successfully in the future in the market for such products or
that other companies may not develop products with greater performance or more
favorable prices and thus reduce the demand for the Company's products.
Furthermore, as more companies enter the RAID controller market, the Company
expects to encounter price competition for such products which could materially
and adversely affect its gross margins. Currently, price competition for host
bus adapter products is quite intensive.
PRODUCTS
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 adapter. 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
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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 incorporates Intel's i960*RP I/O
co-processor. Together, these RAID products offer a truly scaleable solution
that gives OEMs and integrators a choice about how to integrate RAID in
environments from the desktop to the superserver. This family of products
currently consist 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 superserver. 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 Mylex'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 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, a low-cost RAID
solution and a 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 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. 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. The sales of host bus adapters
faltered during 1996 due primarily to the late introduction and slow rate of
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growth of the new PCI products, this delay was combined with a faster 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
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. 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 processor. If another company develops a processor for RAID
applications which renders the i960
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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 margin as the Company's present
RAID products.
PRODUCT MANUFACTURE AND SUPPLIERS
Mylex organizes its manufacturing as a continuous flow process. Manufacturing
entails placing semiconductors and other electronic components on printed
circuit boards and soldering them in place through an automated process. The
Company accomplishes all manufacturing through subcontractors that typically use
Fuji Surface Mount Technology equipment. This equipment automatically positions
and attaches chips and other components to circuit boards, increasing the speed
and accuracy of the manufacturing process.
The Company's manufacturing and distribution facility is located at its Fremont,
California headquarters. The Company has recently converted to assembling all
of its products through subcontract manufacturers who are ISO 9000 certified.
Despite its arrangements with local subcontractors, however, there can be no
assurance that the Company's manufacturing resources always will be adequate to
meet product demand. In late 1996, the Company created a new subsidiary called
Mylex Distribution, Inc. with the purpose of establishing a network of forward
positioned inventory locations. These locations are strategically situated in
eleven different states. The main function of this network of locations is to
make available emergency inventory, on a timely basis, to the Company's
geographically diverse customer base.
Mylex or its subcontractors perform quality control and inspection procedures
throughout the production process to ensure that products meet industry
standards. The Company, through its subcontractors, subjects all products to
100% in circuit testing and functional testing is performed at Mylex's facility.
The Company's most critical components are the i960 RISC processor, the
Company's applications specific integrated circuits or "ASICs," the SCSI chip
and the SIMM memory module. The Company procures the i960 processor from Intel
or local distributors and its ASICs, SCSI chip and SIMM modules from Toshiba,
Symbios Logic and First Tech Corporation, respectively. Other components are
available from several sources at competitive prices.
The Company has no long-term supply contracts. There can be no assurance that
the Company will be able to obtain, on a timely basis, all the components it
requires. If the
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Company cannot obtain critical components as required, it could be unable to
meet demand for its products, thereby adversely affecting its operating
results. In addition, scarcity of such components could result in cost
increases and adversely affect the Company's gross margins.
The Company's need to manufacture products before receiving firm purchase
orders, combined with risks of technological obsolescence and rapid shifts in
market demand, could result in inventory devaluation or obsolescence, either of
which could have a material adverse effect on its operating results.
SALES AND MARKETING
As of December 31, 1996, the Company employed 61 sales and sales support
personnel who devoted substantially all their time to marketing, sales, and
technical and customer support. The Company plans to increase the number of
sales and marketing employees during 1997 to support its expanding customer base
that is becoming increasingly international.
Sales to DEC accounted for 17% of net sales in 1996 and 12% of net sales
during 1995. Sales to the next two largest customers, IBM and HP, each
accounted for an additional 14% of net sales in 1996 and 20% and 14%,
respectively, in 1995. During 1996, the Company experienced a broadening of
its customer base, but the Company is expecting that a substantial portion
of the orders that it receives in 1997 will remain concentrated in a small
group of OEM customers. Although there are OEM agreements in place with some
of the Company's largest customers that define the terms of sale and support
services, these agreements do not include specific quantity commitments and
generally allow customers to cancel any orders on 30 days notice. The
Company generally sells products on a purchase order basis. As a result,
historical sales are not necessarily an accurate indicator of future sales.
The majority of the Company's sales are with OEM customers, but the Company
does have a growing amount of sales being channeled through distributors,
system integrators and VAR's.
The OEM sales process is complex, requiring interaction with several layers
of the OEM customer's organization and extensive technical exchanges, product
demonstrations and commercial negotiations. As a result, the Company's
typical sales cycle is usually
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four to six months. OEM relationship commitments are generally made at a
high level within the customer's organization, and the sales process involves
broad participation across the Mylex organization, from the Chief Executive
Officer to the engineers who designed the product.
The Company's sales which do not involve OEM's involve the marketing and
distribution of the Company's products to system integrators, value added
resellers and distributors (who also service major OEM customers in some
international markets) throughout the world. Mylex also uses the services of
manufacturer representatives in the United States and Canada in this sales
channel.
The Company has distribution agreements with distributors, including companies
such as Tech Data, Ingram Micro and Avnet Corporation. Mylex also has
agreements with various regional and specialty distributors, both domestic and
international. The Company also conducts extensive advertising in trade
publications, conducts various joint marketing activities with its distributors,
and sponsors exhibits at approximately 15 trade shows annually.
The Company, in 1996, renamed BusLogic, Inc. to Mylex International, Inc. and
has changed the mission of this wholly-owned subsidiary to become its primary
sales and support group. This change is to separate the sales and
distribution function of the organization from the operations function so as
to better reflect the operating results of each function.
INTERNATIONAL SALES
Sales to customers outside the United States accounted for approximately 65%
of the Company's revenue in 1996. Sales to foreign affiliates of U.S.
customers are treated as foreign sales. Foreign based corporation such as
NEC and Siemens were part of a growing international customer base and posted
a combined 47% increase in 1996 sales as compared to 1995. Although there
can be no assurance given, the Company expects that international sales will
continue to represent a significant portion of the Company's revenue in 1997
and thereafter. This expectation is reinforced by 1996 sales to Japanese
based customers that tripled year-over-year.
International sales pose certain risks not faced by companies that limit
themselves to domestic sales. Fluctuations in the value of foreign currencies
relative to the U.S. dollar, for example, could make the Company's products less
price competitive and, if the Company in the future denominates any of its sales
in foreign currencies, could result in losses from foreign currency
transactions. International sales also could be adversely affected by factors
beyond the Company's control, including the imposition of government controls,
export license requirements, restrictions on technology exports, changes in
tariffs and taxes and general economic and political conditions. In some
countries, the laws do not protect the Company's intellectual property rights to
the same extent as the laws in the United States.
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BACKLOG
The Company's backlog as of December 31, 1996, totaled $7.8 million, as
compared to $36.7 million as of December 31, 1995. The decrease in the
backlog was attributable to the industry wide slow down in server shipment
growth in 1996. The Company believes that this trend has heightened the level
of caution among 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. The impact of the changes in ordering patterns on the
backlog is further adversely affected a competitor's RAID controller design
win at HP and the resulting reduction of orders in the Company's products.
Because almost all of the orders for the Company's products may be canceled
prior to shipment and customers may similarly 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. Furthermore, the Company's
manufacturing capabilities may not be sufficient, from time to time, to permit
it to ship all products subject to a substantial backlog by the shipment dates
requested by the respective customer. Of the total $7.8 million backlog at
December 31, 1996, all but a small percentage of the orders would have been
scheduled for delivery within the three months ended March 31, 1997, unless the
orders were canceled or rescheduled by the respective customer.
RESEARCH AND DEVELOPMENT
The Company conducts an active and ongoing research and development
engineering program that focuses on the development of new products and new
features for the Company's existing products. The Company continues to
expand its development activities and now has four engineering groups located
in Fremont and Santa Clara, California and in Boulder, Colorado.
As part of its product development strategy, the Company actively seeks
cooperative and codevelopment activities with industry leaders in the hardware,
software, silicon and systems businesses. For example, the Company worked on a
cooperative basis with Intel to include a RAID design reference in the i960*RP
I/O processor. The project, which was the culmination of several months of
cooperative work, makes it possible to implement RAID using a processor residing
on the computer system board. Mylex offers a suite of RAID software and
firmware for use with the new i960*RP I/O processors. Additionally, Mylex is
now offering a RAID solution that is scaleable, from RAID on the motherboard to
a full add-in card solution.
The Company's ability to compete successfully will depend in large part on its
ability, on a timely and cost-effective basis, to enhance its existing products
and introduce new
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products with features that meet changing customer requirements and with
competitive prices. Despite testing, new products may be affected by quality,
reliability and 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.
EMPLOYEES
As of December 31, 1996, the Company employed 371 people. Those employees
included 122 engineering and product development employees, 45 finance and
administration employees, 61 employees in the sales, marketing and technical
and customer support areas, and 143 manufacturing employees.
Recruitment of personnel in the computer industry, particularly engineers, is
highly competitive. The Company believes that its future success will depend
in part on its ability to attract and retain highly skilled management,
engineers, sales, marketing, finance and technical personnel. There can be
no assurance of the Company's ability to recruit and retain the employees
that it may require.
INTELLECTUAL PROPERTY
The Company does not hold any patents applicable to its RAID controllers and
relies on a combination of trade secret, copyright and trademark laws and
employee and third party non-disclosure agreements to protect its
intellectual property. There can be no assurance that the steps taken by the
Company to protect its rights will be adequate to prevent misappropriation of
the Company's technology or to preclude competitors from developing products
with features similar to the Company's products.
Certain patents and copyrights owned by others are of critical importance to
the high technology electronic product industry segment in which the Company
operates. The Company has obtained licenses to certain technology protected
by patents and copyrights which the Company believes are adequate for the
operation of its business as presently conducted. It is likely that such
licenses to produce, use and market new technologies will continue to be
important to the Company. In the future, the Company may be required to
obtain licenses from others, and there are no assurances that such licenses
would be available on terms satisfactory to the Company or at all.
There can be no assurance that third parties will not assert infringement or
related indemnity claims against the Company. Asserting the Company's rights
or defending against third party claims could involve substantial expense,
which could materially and adversely affect the Company's results of
operations.
ITEM 2. PROPERTIES
15
<PAGE>
The Company's headquarters, manufacturing and distribution facilities are
located in two facilities with a combined square footage of 133,182 in
Fremont, California. The Company also has two engineering facilities, one
with approximately 36,000 square feet in Santa Clara and the other with
11,000 square feet in Boulder, Colorado whose lease expires in December,
2000. Approximately 74,000 square feet of the Fremont facilities is leased
through April, 2001, while the remaining square footage will be on lease
through August, 2004. The lease in Santa Clara expires August, 1997 and the
Company intends to locate and lease equivalent space in the same general area
upon the expiration of the lease.
ITEM 3. 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 these
proceedings that would have a material adverse effect on the Company.
In April, 1996, another former officer of the Company filed a complaint
against the Company and its president alleging breach of contract and
violation of the Fair Housing and Employment Act. No specific amount of
damages was claimed. On February 10, 1997 the Company reached an agreement to
settle the claims in this complaint. The amount of the settlement net of
probable insurance proceeds, is not material to the operating results of
Mylex for 1996 nor to its financial position as of December 31, 1996. The
settlement is expected to result in a charge to after tax earnings during the
first quarter of 1997 of approximately $300,000.
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>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
Safe-Harbor Statement Under Private Securities Litigation Reform Act of
1995: The statements contained in the above Annual Report on Form 10-K, that
are not historical facts contain forward-looking information with respect to
plans, projections or future performance of the Company, the occurrence of
which involve certain risks and uncertainties, including, without limitation,
demand and competition for the Company's RAID controller products, the
ability of the Company to timely ship ordered products, the impact on the
Company of its recent acquisition of BusLogic, and other risks or
uncertainties detailed in the Company's filings with the Securities and
Exchange Commission, particularly the prospectus with respect to its public
offering in September 1995.
17
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
This information is incorporated by reference from the information under the
caption "Market for Registrant's Common Equity and Related Stockholder
Matters" on page 23 of the Annual Report to Shareholders for the year ended
December 31, 1996.
ITEM 6. SELECTED FINANCIAL DATA
This information is incorporated by reference from the information under the
caption "Selected Five Year Consolidated Financial Data" on page 18 of the
Annual Report to Shareholders for the year ended December 31, 1996.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
All other information regarding management's discussion and analysis of
financial condition and results of operations are incorporated by reference
from the information under the caption "Management's Discussion and Analysis
of Financial Condition and Results of Operations" on pages 19 through 22 of
the Annual Report to Shareholders for the year ended December 31, 1996.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated financial statements of Mylex Corporation at December 31, 1996
and 1995 and for each of the years in the three-year period ended December
31, 1996 and the Independent Auditor's Report thereon are incorporated by
reference from pages 24 through 36 of the Annual Report to Shareholders for
the year ended December 31, 1996.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
18
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
This information is incorporated by reference from the information under the
caption "Election of Directors" and "Executive Officer Compensation" in the
Registrant's definitive Proxy Statement for its 1997 Annual Meeting of
Shareholders.
ITEM 11. EXECUTIVE COMPENSATION
This information is incorporated by reference from the information under the
caption "Executive Officer Compensation" in the Registrant's definitive
Proxy Statement for its 1997 Annual Meeting of Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This information is incorporated by reference from the information under the
caption "Securities Ownership of Management and Principal Stockholders" in
the Registrant's definitive Proxy Statement for its 1997 Annual Meeting of
Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information is incorporated by reference from the information under the
caption "Certain Relationships and Related Transactions" in the Registrant's
definitive Proxy Statement for its 1997 Annual Meeting of Shareholders.
19
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
The following Consolidated Financial Statements of Mylex Corporation and the
Independent Auditor's Report, as listed under (a) (1) below, are incorporated
herein by reference from the Registrant's Annual Report to Shareholders for
the year ended December 31, 1996.
(a) (1) Financial Statements
Page in
Annual
Report
-------
Consolidated Statements of Operations - Years ended December 31,
1996, 1995 and 1994 25
Consolidated Balance Sheets at December 31, 1996 and 1995 24
Consolidated Statements of Cash Flows - Years ended December 31,
1996, 1995 and 1994 27
Consolidated Statements of Shareholder' Equity - Years ended
December 31, 1996, 1995 and 1994 26
Notes to Consolidated Financial Statements 28-35
Independent Auditor's Report 36
(2) The following financial statement schedule and report on schedule are
submitted herewith:
Page in
this Report
-----------
Schedule II - Valuation and Qualifying Accounts S-1
Independent Auditor's Report and Consent S-2, 3
20
<PAGE>
(3) Exhibits included herein:
Exhibit No. Exhibit
3.1 (a) Certificate of Incorporation, Articles of Merger and
Agreement and Plan of Merger
3.2 (a) By-laws (to be filed by amendment)
10.10 (c) 1983 Incentive Stock Option Plan, as amended and restated.
10.11 (e) 1993 Stock Option Plan, as amended.
10.13 (i) 1995 Employee Stock Purchase Plan.
10.20 (b) Lease Agreement of premises at 34551 Ardenwood Boulevard,
dated March 6, 1991.
10.20.1 (j) Amendment to Lease Agreement of premises at 34551 Ardenwood
Boulevard, dated February 26, 1996.
10.21 (h) Security and Loan Agreement, dated June 28,1996, with
Comerica Bank
10.22 (j) Lease Agreement of premises at 6607 Kaiser Drive, dated
December 9, 1995.
10.25 (d) Digital Equipment Corporation Basic Order Agreement.
10.28 (b) License Agreement with IBM, effective December 1, 1990.
10.40 (g) 401(k) Plan; Target Investment Advisory Agreement and
Standardized Adoption Agreement.
10.41 (f) Employment Agreement, dated as of January 1, 1995, with Al
Montross.
11.0 (a) Statement regarding computation of per share earnings.
13.1 (a) Selected Five Year Consolidated Financial Data, MD&A,
Market for Registrant's Common Equity and Related
Stockholder Matters, Consolidated Financial Statements,
Notes to Consolidated Financial Statements and the
Independent Auditors' Report sections from the Annual
Report to Shareholders for the fiscal year ended
December 31, 1996.
24.1 (a) Consent of Independent Auditor, KPMG Peat Marwick LLP. (see
Schedule S-2.)
21
<PAGE>
24.1.1 (a) Opinion and Consent of Independent Auditor, Price Waterhouse
LLP. (see Schedule S-3.)
(b) Reports on Form 8-K, none.
- --------------------------------------------------------------------
(a) Filed herewith
(b) Filed as an exhibit to the Registrant's Annual Report on Form 10-K, for the
year ended December 31, 1992, Commission File No. 0-13381, and incorporated
herein by reference.
(c) Filed as an exhibit to the Registration Statement on Form S-8, July 24,
1989, No. 33-30104, and incorporated herein by reference.
(d) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q, for
the period ended September 30, 1993, and incorporated herein by reference.
(e) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1993, and incorporated herein by reference.
(f) Filed as an exhibit to the Registrant's Registration Statement on Form S-3,
No. 33-61877, on August 17, 1995, and incorporated herein by reference.
(g) Filed as an exhibit to the Registrant's Annual Report on Form 10-K, for the
year ended December 31, 1994, and incorporated herein by reference.
(h) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q, for
period ended June 30, 1996, and incorporated herein by reference.
(i) Filed as an exhibit to the Registrant's definitive Proxy Statement for its
1996 Annual Meeting of Shareholders.
(j) Filed as an exhibit to Registrant's Quarterly Report on Form 10-K, for
period ended December 31, 1996, and incorporated herein by reference.
22
<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.
MYLEX CORPORATION
Date: March 31, 1996 By: /s/ Al Montross
---------------------------
Al Montross
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below on March 28, 1996, by the following persons in
the capacities indicated.
Signature Title
/s/ Ismael Dudhia Chairman of the Board of Directors
- ---------------------
Mr. Ismael Dudhia
/s/ Richard Love Treasurer and Director
- ---------------------
Mr. Richard Love
/s/ M. Yaqub Mirza Secretary and Director
- ---------------------
Dr. M. Yaqub Mirza
/s/ Inder Singh Director
- ---------------------
Dr. Inder Singh
/s/ Stephen McKenzie Director
- ---------------------
Mr. Stephen McKenzie
/s/ Al Montross President and Chief Executive Officer and Director
- --------------------- (Principal Executive Officer)
Mr. Al Montross
/s/ Colleen Gray Vice President Finance and Chief
- --------------------- Financial Officer
Ms. Colleen Gray (Principal Accounting Officer)
23
<PAGE>
MYLEX CORPORATION AND SUBSIDIARY
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1996, 1995, 1994
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED BALANCE
BEGINNING COST AND TO OTHER AT
CLASSIFICATION OF YEAR EXPENSES ACCOUNTS CHARGES(a) YEAR-END
-------------- ---------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C>
Amounts deducted from assets to which
they apply:
Year ended December 31, 1996:
Allowance for doubtful
accounts - accounts receivable $ 707,000 (156,000) - (115,000) $436,000
Year ended December 31, 1995:
Allowance for doubtful
accounts - accounts receivable $ 782,000 192,000 - (267,000) $707,000
Year ended December 31, 1994:
Allowance for doubtful
accounts - accounts receivable $5,604,000 317,000 - (5,139,000) $782,000
</TABLE>
(a) Doubtful accounts written off, less recoveries.
S-1
<PAGE>
Independent Auditors' Report and Consent
The Board of Directors and Stockholders
Mylex Corporation:
Under date of January 29, 1997, except as to Note 13 which is as of February
10, 1997, we reported on the consolidated balance sheets of Mylex Corporation
and subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity, and cash flows
for each of the years in the three-year period ended December 31, 1996, as
contained in the 1996 annual report to stockholders. These consolidated
financial statements and our report thereon are included in the annual report
on Form 10-K for the year ended December 31, 1996. In connection with our
audits of the aforementioned consolidated financial statements, we also
audited the related financial statement schedule as listed in Item 14(a)2 of
the Form 10-K. This financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
financial statement based on our audits. In our opinion, such financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly, in all material
respects, the information set forth therein.
We consent to incorporation by reference in the registration statement
(No. 33-31283) on Form S-8 of Mylex Corporation of our report dated January
29, 1997, relating to the consolidated balance sheet of Mylex Corporation and
subsidiaries as of December 31, 1996 and 1995, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of
the years in the three-year period ended December 31, 1996, and our report on
the related schedule, which reports appear in the December 31, 1996 annual
report on Form 10-K of Mylex Corporation.
/s/ KPMG Peat Marwick LLP
San Jose, California
March 27, 1997
S-2
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (no. 33-31283) of Mylex Corporation of our report dated
March 3, 1995 relating to the consolidated financial statements of BusLogic
Inc. appearing in this Annual Report on Form 10-K.
/s/ Price Waterhouse LLP
San Jose, California
March 26, 1997
S-3
<PAGE>
Report of Independent Accountants
To the Board of Directors and Shareholders of BusLogic Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, shareholders equity and of cash flows
present fairly, in all material respects, the financial position of BusLogic
Inc. and its subsidiaries at January 31, 1995 and 1994, and the results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with generally
accepted auditing standards which required that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ Price Waterhouse LLP
San Jose, California
March 3, 1995
S-3
<PAGE>
EXHIBIT 3.1
CERTIFICATE OF INCORPORATION
OF
MYLEX MERGER SUB, INC.
__________________
The undersigned, a natural person, for the purpose of organizing a
corporation for conducting the business and promoting the purposes hereinafter
stated, under the provisions and subject to the requirements of the laws of the
State of Delaware (particularly Chapter 1, Title 8 of the Delaware Code and the
acts amendatory thereof and supplemental thereto, and known, identified, and
referred to as the "General Corporation Law of the State of Delaware"), hereby
certifies that:
FIRST: The name of the corporation (hereinafter called the "corporation")
is Mylex Merger Sub, Inc.
SECOND: The address of the registered office of the corporation in the
State of Delaware is 1013 Centre Road in the City of Wilmington, County of New
Castle, 19805; and the name of the registered agent of the corporation in the
State of Delaware at such address is Corporation Service Company.
THIRD: The nature of the business and the purposes to be conducted and
promoted by the corporation shall be to engage in any lawful act or activity for
which corporations may be organized under the General Corporation Law of the
State of Delaware.
FOURTH: The total number of shares of stock which the corporation shall
have authority to issue is 40,000,000. The par value of each of such shares is
$.01. All such shares are of one class and are shares of Common Stock.
FIFTH: The name and the mailing address of the incorporator are as
follows:
NAME MAILING ADDRESS
---- ---------------
Eric S. Beane Brown & Bain
Suite 200
1755 Embarcadero Rd.
Palo Alto, CA 94303
<PAGE>
SIXTH: The corporation is to have perpetual existence.
SEVENTH: Whenever a compromise or arrangement is proposed between this
corporation and its creditors or any class of them and/or between this
corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for this corporation under
Section 291 of Title 8 of the Delaware Code or on the application of trustees
in dissolution or of any receiver or receivers appointed for this corporation
under Section 279 of Title 8 of the Delaware Code order a meeting of the
creditors or class of creditors, and/or of the stockholders or class of
stockholders of this corporation, as the case may be, to be summoned in such
manner as such court directs. If a majority in number representing three
fourths in value of the creditors or class of creditors, and/or of the
stockholders or class of stockholders of this corporation, as the case may be,
agree to any compromise or arrangement and to any reorganization of this
corporation as a consequence of such compromise or arrangement, such compromise
or arrangement and such reorganization shall, if sanctioned by the court to
which such application has been made, be binding on all the creditors or class
of creditors, and/or on all the stockholders or class of stockholders, of this
corporation, as the case may be, and also on this corporation.
EIGHTH: For the management of the business and for the conduct of the
affairs of the corporation, and in further definition, limitation, and
regulation of the powers of the corporation and of its directors and of its
stockholders or any class thereof, as the case may be, it is further provided:
1. The management of the business and the conduct of
the affairs of the corporation shall be vested in its Board
of Directors. The number of directors which shall
constitute the whole Board of Directors shall be fixed by,
or in the manner provided in, the Bylaws. The phrase "whole
Board" and the phrase "total number of directors" shall be
deemed to have the same meaning, to wit, the total number of
directors which the corporation would have if there were no
vacancies. No election of directors need be by written
ballot
2. After the original or other Bylaws of the corporation
have been adopted, amended, or repealed, as the case may be, in
accordance with the provisions of Section 109 of the General
Corporation Law of the State of Delaware, and, after the
corporation has received any payment for any of its stock, the
power to adopt,
<PAGE>
amend, or repeal the Bylaws of the corporation may be
exercised by the Board of Directors of the corporation;
provided, however, that any provision for the classification of
directors of the corporation for staggered terms pursuant to the
provisions of subsection (d) of Section 141 of the General
Corporation Law of the State of Delaware shall be set forth in an
initial Bylaw or in a Bylaw adopted by the stockholders entitled
to vote of the corporation unless provisions for such
classification shall be set forth in this certificate of
incorporation.
3. Whenever the corporation shall be authorized to
issue only one class of stock, each outstanding share shall
entitle the holder thereof to notice of, and the right to
vote at, any meeting of stockholders. Whenever the
corporation shall be authorized to issue more than one class
of stock, no outstanding share of any class of stock which
is denied voting power under the provisions of the
certificate of incorporation shall entitle the holder
thereof to the right to vote at any meeting of stockholders
except as the provisions of paragraph (2) of subsection (b)
of Section 242 of the General Corporation Law of the State
of Delaware shall otherwise require; provided, that no share
of any such class which is otherwise denied voting power
shall entitle the holder thereof to vote upon the increase
or decrease in the number of authorized share os such class.
NINTH: The personal liability of the directors of the corporation is
hereby eliminated to the fullest extent permitted by the provisions of
paragraph (7) of subsection (b) of Section 102 of the General Corporation
Law of the State of Delaware, as the same may be amended and supplemented.
TENTH: The corporation shall, to the fullest extent permitted by the
provisions of Section 145 of the General Corporation Law of the State of
Delaware, as the same may be amended and supplemented, indemnify any and all
persons whom it shall have power to indemnify under such section from and
against any and all of the expenses, liabilities, or other matters referred
to in or covered by such section, and the indemnification provided for herein
shall not be deemed exclusive of any other rights to which those indemnified
may be entitled under any Bylaw, agreement, vote of stockholders or
disinterested directors or otherwise, both as to action in his or her
official capacity and as to action in another capacity while holding such
office, and shall continue as to a person who has ceased to be a director,
officer, employee, or agent and shall inure to the benefit of the heirs,
executors, and administrators of such a person.
ELEVENTH: From time to time any of the provisions of this certificate of
incorporation may be amended, altered, or repealed, and other provisions
authorized
<PAGE>
by the laws of the State of Delaware at the time in force may be added or
inserted in the manner and at the time prescribed by such laws, and all
rights at any time conferred upon the stockholders of the corporation by this
certificate of incorporation are granted subject to the provisions of this
Article ELEVENTH.
Signed on December 30, 1996.
/s/ Eric S. Beane
------------------------------------
Incorporator
<PAGE>
ARTICLES OF MERGER
FOR MYLEX CORPORATION (FLORIDA)
AND
MYLEX MERGER SUB, INC. (DELAWARE)
Pursuant to Sections 607.1105 and 607.1107 of the Florida Business
Corporation Act, and Section 251 of the Delaware General Corporation Law, Mylex
Corporation, a Florida corporation ("Mylex") and Mylex Merger Sub, Inc. (the
"Surviving Corporation") hereby adopt the following Articles of Merger.
ARTICLE I. CONSTITUENT CORPORATIONS
The names of the Corporations proposing to merge and their state of
incorporation are as follows:
1. Mylex Corporation, a Florida corporation ("Mylex")
2. Mylex Merger Sub, Inc., a Delaware corporation ("Surviving
Corporation").
ARTICLE II. STATE LAW REQUIREMENTS
The laws of the State of Florida and the laws of the State of Delaware
permit the merger of the constituent corporations.
ARTICLE III. SURVIVING CORPORATION
The name of the Surviving Corporation will be Mylex Merger Sub, Inc., a
Delaware corporation.
ARTICLE IV. PLAN OF MERGER
Attached hereto as Exhibit "A" and incorporated herein by this reference is
the Agreement and Plan of Merger between the constituent corporations.
ARTICLE V. AUTHORIZATION FOR MERGER
The Agreement and Plan of Merger was approved by a majority of the
shareholders of Mylex entitled to vote, in accordance with the applicable
requirements of the Florida Business Corporation Act, and by the unanimous
written consent of the Board of Directors of the Surviving Corporation in
accordance with the requirements of the Delaware General Corporation Law. The
Agreement and Plan of Merger was adopted by the shareholders of Mylex as of
April 30, 1996, and by the Board of Directors of the Surviving Corporation as of
December 30, 1996. Such consent and the number of votes cast are sufficient to
approve the Merger by each of the constituent corporations.
ARTICLE VI. SERVICE OF PROCESS ON SURVIVING CORPORATION
<PAGE>
The Surviving Corporation hereby agrees that upon and after the completion
of the Merger, that it may be served with process in any proceeding for the
enforcement of any obligation or the enforcement of rights of dissenting
shareholders of Mylex by service upon the Secretary of State. The Surviving
Corporation also agrees to comply with the requirements of Section 607.1107 of
the Florida Business Corporation Act.
ARTICLE VII. EFFECTIVE DATE
The effective date of the merger shall be the date on which these Articles
of Merger are filed with the Secretary of State of Florida and Delaware.
IN WITNESS WHEREOF, the undersigned have executed these Articles of Merger
this 30th day of December, 1996.
MYLEX CORPORATION, a Florida
corporation
By: /s/ Al Montross
------------------------------
Name: Al Montross
Title: President
MYLEX MERGER SUB, INC.,
Delaware corporation
By: /s/ Al Montross
------------------------------
Name: Al Montross
------------------------
Title: President
------------------------
2
<PAGE>
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (the "Agreement") dated December 30, 1996
is entered into between Mylex Corporation, a Florida corporation ("Mylex"), and
Mylex Merger Sub, Inc., a Delaware corporation ("Mylex-Delaware").
BACKGROUND
Mylex has an aggregate authorized capital stock of 40,000,000 shares of
Common Stock, par value $.01 per share (the "Mylex Common Stock"), and as of
April 30, 1996, 19,631,550 shares of Mylex Common Stock were issued and
outstanding.
Mylex-Delaware has an aggregate authorized capital stock of 40,000,000
shares of Common Stock, par value $.01 per share (the "Mylex-Delaware Common
Stock"), of which 100 shares were duly issued and are now outstanding, all of
which are held by Mylex.
The respective Boards of Directors of Mylex and Mylex-Delaware believe that
the best interests of Mylex and Mylex-Delaware and their respective stockholders
will be served by the merger of Mylex with and into Mylex-Delaware under and
pursuant to the provisions of this Agreement, the Florida Business Corporation
Act and the Delaware General Corporation Law.
AGREEMENT
In consideration of the mutual agreements and covenants contained in this
Agreement, the parties agree as follows:
1. MERGER. On the Effective Date (as defined below) Mylex shall be
merged with and into Mylex-Delaware (the "Merger").
2. EFFECTIVE DATE. The Merger shall become effective immediately upon
the later of the filing of this Agreement or a certificate of merger with the
Secretary of State of Delaware in accordance with the provisions of the
Delaware General Corporation Law. The time of such effectiveness is
hereinafter called the "Effective Date."
3. SURVIVING CORPORATION. Mylex-Delaware shall be the surviving
corporation of the Merger and shall continue to be governed by the laws of
the State of Delaware. On the Effective Date, the separate corporate
existence of Mylex shall cease.
4. NAME OF SURVIVING CORPORATION. On the Effective Date, the
Certificate of Incorporation of Mylex-Delaware shall be amended to change the
name of Mylex-Delaware to "Mylex Corporation".
5. CERTIFICATE OF INCORPORATION. Except as provided in Section 4, the
3
<PAGE>
Certificate of Incorporation of Mylex-Delaware as it exists on the Effective
Date shall be the Certificate of Incorporation of Mylex-Delaware following the
Effective Date, unless and until the same shall thereafter be amended or
repealed in accordance with the laws of the State of Delaware.
6. BYLAWS. The Bylaws of Mylex-Delaware as they exist on the Effective
Date shall be the Bylaws of Mylex-Delaware following the Effective Date, unless
and until the same shall be amended or repealed in accordance with the
provisions thereof and the laws of the State of Delaware.
7. BOARD OF DIRECTORS AND OFFICERS. The members of the Board of
Directors and the officers of Mylex immediately prior to the Effective Date
shall be the members of the Board of Directors and the officers, respectively,
of Mylex-Delaware following the Effective Date, and such persons shall serve in
such offices for the terms provided by law or in the Mylex-Delaware Bylaws, or
until their respective successors are elected and qualified.
8. RETIREMENT OF OUTSTANDING MYLEX-DELAWARE STOCK. On the Effective
Date, each of the 100 shares of the Mylex-Delaware Common Stock presently issued
and outstanding shall be retired, and no shares of Mylex-Delaware Common Stock
or other securities of Mylex-Delaware shall be issued in respect thereof.
9. CONVERSION OF OUTSTANDING MYLEX COMMON STOCK. On the Effective
Date, each issued and outstanding share of Mylex Common Stock and all rights
in respect thereof shall be converted into one fully-paid and nonassessable
share of Mylex-Delaware Common Stock, and each certificate representing
shares of Mylex Common Stock shall for all purposes be deemed to evidence the
ownership of the same number of shares of Mylex-Delaware Common Stock as are
set forth in such certificate. After the Effective Date, each holder of an
outstanding certificate representing shares of Mylex capital stock may
surrender the same to Mylex-Delaware's registrar and transfer agent for
cancellation, and each such holder shall be entitled to receive in exchange
therefor a certificate(s) evidencing the ownership of the same number and
class of shares of Mylex-Delaware capital stock as are represented by the
certificate(s) of Mylex Common Stock surrendered to Mylex-Delaware's
registrar and transfer agent.
10. STOCK OPTIONS, WARRANTS, ETC. On the Effective Date, each stock
option, stock warrant, and other right to subscribe for or purchase shares of
Mylex Common Stock shall be converted into a stock option, stock warrant, or
other right to subscribe for or purchase the same number of shares of
Mylex-Delaware Common Stock, and each certificate, agreement, note or other
document representing such stock option, stock warrant, or other right to
subscribe for or purchase shares of Mylex Common Stock shall for all purposes
be deemed to evidence the ownership of a stock option, stock warrant, or
other right to subscribe for or purchase shares of Mylex-Delaware Common
Stock on the
4
<PAGE>
same terms and subject to the same conditions applicable to the
stock option, stock warrant or other right to subscribe for a purchase shares
of Mylex Common Stock.
11. RIGHTS AND LIABILITIES OF MYLEX-DELAWARE. At and after the
Effective Date, and in the manner and as more fully set forth in Section 259
of the Delaware General Corporation Law and Section 607.1106 of the Florida
Business Corporation Act, the title to all real estate and other property, or
any interest therein, whether owned by Mylex or Mylex-Delaware shall be
vested in Mylex-Delaware without reversion or impairment; Mylex-Delaware
shall succeed to and possess, without further act or deed, all estates,
rights, privileges, powers, and franchises, both public and private, and all
of the property, real, personal, intangible and mixed, of each of Mylex and
Mylex-Delaware without reversion or impairment; Mylex-Delaware shall
thenceforth be responsible and liable for all the liabilities and obligations
of each of Mylex and Mylex-Delaware; any claim existing or action or
proceeding pending by or against Mylex or Mylex-Delaware may be continued as
if the Merger did not occur or Mylex-Delaware may be substituted for Mylex in
the proceeding; neither the rights of creditors nor any liens upon the
property of Mylex or Mylex-Delaware shall be impaired by the Merger; and
Mylex-Delaware shall indemnify and hold harmless the officers and directors
of each of the parties hereto against all such debts, liabilities and duties
and against all claims and demands arising out of the Merger.
12. TERMINATION. This Agreement may be terminated and abandoned by
action of the respective Boards of Directors of Mylex and Mylex-Delaware at
any time prior to the Effective Date, whether before or after approval by the
stockholders of either or both of the parties hereto.
13. AMENDMENT. The Boards of Directors of the parties hereto may amend
this Agreement at any time prior to the Effective Date; provided that an
amendment made subsequent to the approval of this Agreement by the
stockholders of either of the parties hereto shall not: (a) alter or change
the number or kind of shares to be received in exchange for or on conversion
of all or any of the shares of the parties hereto, (b) change any term of the
Certificate of Incorporation of Mylex-Delaware (except as contemplated
below), or (c) change any other terms or conditions of this Agreement if such
change would adversely affect the holders of any capital stock of either
party hereto.
14. CONDITIONS. The obligations of the parties to consummate the Merger
are subject to the satisfaction of the following conditions: (i) no action,
suit or proceeding shall be pending before any court or quasijudicial or
administrative agency of any federal, state or foreign jurisdiction or before
any arbitrator wherein an unfavorable injunction, judgment, order, decree,
ruling or charge would (a) prevent consummation of the Merger, (b) cause the
Merger to be rescinded following consummation, or (c) adversely affect the
business, assets, properties, operations (financial or otherwise), or
prospects of Mylex-Delaware as a result of the Merger (and no such
injunction, judgment, order, decree, ruling or charge shall be in effect);
and (ii) the parties shall have received all consents of
5
<PAGE>
third parties that have agreements with Mylex and whose consent is required
for the assumption of such agreements by Mylex-Delaware.
15. REGISTERED OFFICE. The registered office of Mylex-Delaware in the
State of Delaware is located at 1013 Centre Road, Wilmington, Delaware 19805,
and Corporate Service Company is the registered agent of Mylex-Delaware at
such address.
16. SERVICE OF PROCESS. On and after the Effective Date, Mylex-Delaware
agrees that it may be served with process in Florida in any proceeding for
enforcement of any obligation of Mylex or Mylex-Florida arising from the
Merger.
17. DESIGNATION OF FLORIDA SECRETARY OF STATE AS AGENT FOR SERVICE OF
PROCESS. On and after the Effective Date, Mylex-Delaware irrevocably
appoints the Secretary of State of Florida as its agent to accept service of
process in any suit or other proceeding to enforce the rights of any
stockholders of Mylex or Mylex-Delaware arising from the Merger. The Florida
Secretary of State is requested to mail a copy of such process to
Mylex-Delaware at Mylex Corporation 34551 Ardenwood Blvd., Fremont, CA
94555, Attention: Colleen M. Gray, Chief Financial Officer, Telephone No.
(510) 796-6100.
18. GOVERNING LAW. This Agreement shall in all respects be construed,
interpreted and enforced in accordance with and governed by the laws of the
State of Florida.
6
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this Plan and
Agreement of Merger to be executed as of the date first written above.
ATTEST: MYLEX MERGER SUB, INC.,
a Delaware corporation
By: /s/ Colleen Gray By: /s/ Al Montross
--------------------------- -------------------------------
Asst. Secretary Title: President
[CORPORATE SEAL]
MYLEX CORPORATION,
a Florida corporation
By: /s/ Colleen Gray By: /s/ Al Montross
--------------------------- -------------------------------
Asst. Secretary Title: President
[CORPORATE SEAL]
7
<PAGE>
SECRETARY'S CERTIFICATE
The undersigned, duly appointed Secretary of MYLEX MERGER SUB, INC., a
Delaware corporation (the "Corporation"), hereby certifies that:
1. The undersigned is duly authorized to issue this Certificate;
2. The Merger was adopted pursuant to the requirements of Section 251 of
the Delaware General Corporation Law ("DGCL");
3. Pursuant to the requirements of Section 251(f) of the DGCL, the Merger
was adopted by resolution of the Board of Directors of the Corporation without a
vote of the stockholders;
4. No shares of stock of the Corporation have been issued as of the date
the Board of Directors authorized the adoption of Merger; and
5. The execution, delivery and filing of the Agreement and Plan of
Merger was duly authorized by the unanimous written consent of the
Corporation's Board of Directors.
This Certificate is executed as of the 30th day of December, 1996.
By: /s/ Colleen Gray
------------------------------
Name: Colleen Gray
-----------------------
Title: Secretary
[CORPORATE SEAL]
8
<PAGE>
Exhibit 11.0
MYLEX CORPORATION AND SUBSIDIARY
Earnings Per Share Computations
Years Ended December 31, 1996, 1995 and 1994
The basis of computing net earnings per share is described in Note 1
to the consolidated financial statements, beginning on Page 24 of the
Company's Annual Report to Shareholders for the year ended December 31, 1996.
The computation of primary and fully diluted earnings per share is as follows
(in thousands, except per share amounts):
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Primary earnings per share:
Net income $17,250 $13,307 $ 8,813
Weighted average number of common shares
outstanding during the period 20,288 18,082 16,279
Number of common share equivalents resulting
from stock options and warrants, computed
using the treasury stock method and the
average stock price 1,288 1,571 981
------- ------- -------
Number of common and common shares
equivalents used in computation 21,576 19,653 17,260
------- ------- -------
------- ------- -------
Primary earnings per share $ 0.80 $ 0.68 $ 0.51
------- ------- -------
------- ------- -------
Fully diluted earnings per share:
Net income $17,250 $13,307 $ 8,813
Interest on convertible subordinated debentures
(net of tax) - - 194
------- ------- -------
Adjusted earnings $17,250 $13,307 $ 9,007
Weighted average number of common shares
outstanding during the period 20,288 18,082 16,279
Number of common share equivalents resulting
from stock options and warrants, computed
using the treasury stock method and the
average stock price 1,288 1,843 1,524
Number of common share equivalents resulting
from convertible debentures, computed using
the "if converted" method. - - 587
------- ------- -------
Weighted average of common and dilutive common
shares outstanding 21,576 19,925 18,390
------- ------- -------
------- ------- -------
Fully diluted earnings per share $ 0.80 $ 0.67 $ 0.49
------- ------- -------
------- ------- -------
</TABLE>
26
<PAGE>
Exhibit 13.1
Financial contents
18 Selected Five Year Consolidated Financial Data
18 Summary Quarterly Income Statement
19 Management's Discussion and Analysis of
Financial Condition and Results of Operations
23 Market for Registrant's Common Equity and Related Stockholder Matters
24 Consolidated Balance Sheets
25 Consolidated Statements of Operations
26 Consolidated Statements of Stockholders' Equity
27 Consolidated Statements of Cash Flows
28 Notes to Consolidated Financial Statements
36 Independent Auditors' Report
<PAGE>
Selected Five Year consolidated financial data
<TABLE>
<CAPTION>
(In thousands except per share data)
Summary Income Statement 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Net Sales $173,123 $127,455 $92,589 $69,474 $68,290
Cost of Sales 106,103 77,172 56,159 48,509 50,832
Gross Profit 67,020 50,283 36,430 20,965 17,458
Operating Expenses and
Other Income/Expense 39,640 29,810 24,452 23,042 18,261
Income (loss) Before
Income Tax 27,380 20,473 11,978 (2,077) (803)
Income Tax Expense(Benefit) 10,130 7,165 3,165 847 (56)
Net Income (loss) $ 17,250 $13,308 $8,813 $(2,924) $(747)
Income (loss) Per Share:
Primary $0.80 $0.68 $0.51 $(0.20) $(0.05)
Fully Diluted $0.80 $0.67 $0.49 $(0.20) $(0.05)
Average Common Shares Outstanding:
Primary 21,576 19,653 17,261 15,396 14,583
Fully Diluted 21,576 19,925 18,390 15,396 14,583
Consolidated Balance Sheet Data
Total Assets $116,586 $94,620 $42,371 $26,952 $32,796
Working Capital 97,931 72,967 25,551 11,240 12,993
Long-term Obligations 66 203 493 910 1,293
Stockholders' Equity 104,172 75,897 25,943 11,610 13,471
</TABLE>
Summary quarterly income statement
<TABLE>
<CAPTION>
(In thousands, except per share data)
Dec. 31 Sep. 30 Jun. 30 Mar. 31 Dec. 31 Sep. 30 Jun. 30 Mar. 31
Quarter Ended 1996 1996 1996 1996 1995 1995 1995 1995
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales $37,009 $42,206 $ 45,411 $48,497 $40,418 $34,505 $28,601 $23,931
Gross Profit 14,839 16,689 16,962 18,530 16,076 13,415 11,481 9,311
Income From
Operations 4,120 6,574 7,371 8,178 7,136 5,289 4,369 3,256
Net Income $ 3,006 $ 4,518 $ 4,601 $ 5,125 $ 5,201 $ 3,152 $ 2,851 $ 2,104
Net Income Per Share:
Primary $ 0.14 $ 0.21 $ 0.21 $ 0.24 $ 0.24 $ 0.16 $ 0.15 $ 0.11
Fully Diluted $ 0.14 $ 0.21 $ 0.21 $ 0.24 $ 0.24 $ 0.16 $ 0.15 $ 0.11
Weighted Average Shares:
Primary 21,391 21,439 21,725 21,297 21,440 19,487 18,808 18,703
Fully Diluted 21,391 21,459 21,725 21,409 21,484 19,543 18,980 18,703
</TABLE>
<PAGE>
Management's Discussion And Analysis of financial condition and results of
operations
RESULTS OF OPERATIONS: 1996 vs 1995
YEAR ENDED DECEMBER 31, 1996, COMPARED TO YEAR ENDED DECEMBER 31, 1995.
In 1996 the Company's financial condition continued to strengthen as a result of
increased year-over-year revenue and profitability levels. In addition to its
profitable operations, the Company's financial condition was favorably impacted
by employees purchasing the Company's Common Stock through the exercise of
options granted under the Company's stock option plans.
In February 1996, the Company 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, primarily host bus adapters, for use in network file
servers, personal computers, and workstations. This business combination was
accounted for as a pooling of interests, and 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.
Sales and Profits. Consolidated sales increased by 36% to $173.1 million in
1996 from $127.5 million in 1995. Sales of the Company's disk array controller
products increased by 60% in 1996 over 1995 levels, which was a result of the
continuing trend of the computer industry to expand its use of RAID technology
as a storage solution, especially in overseas markets. Consequently, the
Company's customer base has become more diverse, both domestically and
internationally, and the Company's customers continued to ship products with
RAID functionality in higher volumes in 1996. Sales from disk array products
represented 87% of total sales in 1996 compared to 75% in 1995.
Sales of the BusLogic host bus adapter (HBA) products were a disappointment.
The Company had anticipated an increase in revenue from its host bus adapters
over 1995, but instead 1996 revenues decreased by 32%. Sales of HBA products
were 11% of total sales in 1996 compared to 21% in 1995. Sales of the older HBA
products designed for the EISA and microchannel bus architectures declined at a
faster rate than the increase in the new PCI bus based HBA products.
While annual revenues and profitability increased in 1996 over 1995 levels,
quarterly revenue and profitability declined sequentially during 1996. The
decline in revenue and profitability was primarily a result of changing forces
in the market place. These changes affected both the Company's RAID and HBA
products. Additionally, in the fourth quarter of 1996, the Company's sales were
impacted by the transition from its older RAID products to its new scaleable
RAID products as customers minimized their purchases of the older products. The
Company believes that this product transition may potentially affect sales
performance through the first quarter of 1997.
The Company continues its commitment to, and is dependent upon, development of
new products as well as enhancement of existing products. The Company believes
its future profitability is dependent to a large extent upon the industry's
continued use of its PCI and SCSI to SCSI disk array product families and SCSI
host bus adapters and their respective follow on products as well as the
acceptance of its new products. However, there can be no assurance that new
products will be successfully developed or, if developed, that such new products
or the Company's current products will achieve or sustain market acceptance.
The Company depends heavily upon its suppliers to provide high-quality materials
on a timely basis and at a reasonable price. Although many of the components
for the Company's products are available from numerous sources at competitive
prices, some of the most critically-needed components are sole-sourced. As a
result, there can be no assurance that sufficient quantities of these or other
critical components will be available for the Company's production needs.
Furthermore, manufacturers of components on which the Company relies may be
unable to continue to make those components, or the next generation of those
components, available to the Company on a timely basis and in adequate
quantities.
<PAGE>
The Company has no long-term supply contracts. There can be no assurance that
the Company will be able to obtain, on a timely basis, all the components it
requires. If the Company cannot obtain essential components as required, the
Company could be unable to meet demand for its products, thereby adversely
affecting its operating results and allowing competitors to gain market share.
In addition, scarcity of such components could result in cost increases and
adversely affect the Company's gross margin.
The Company's largest customer during 1996 was Digital Equipment Corporation
(DEC), which accounted for 17% of the Company's sales. The Company's next two
largest customers, Hewlett-Packard Company (HP) and IBM, each accounted for an
additional 14% of total sales. Many of the Company's customers manufacture and
sell products in the networked PC market, which is subject to rapid
technological change and intense price competition. These factors affecting the
networked PC market in general, or any of the Company's customers in particular,
could have a material adverse effect on the Company's future results of
operations. The Company has no long-term purchase commitments from its
customers, and customers generally may cancel their orders on 30-days notice.
Accordingly, there can be no assurance that orders from existing customers,
including the Company's principal customers, will continue at their historical
levels, or that the Company will be able to obtain orders from new customers.
Although the Company continues to ship product to HP, the level of sales is
expected to decline materially in 1997 due to HP's award of a design win to one
of the Company's competitors. Despite the competitor's design win, the Company
expects to have the opportunity to compete for future design wins at HP during
1997. Loss of one or more of the Company's current customers, particularly a
principal customer, or cancellation or rescheduling of orders already placed,
could materially and adversely affect the Company's business and operating
results.
Gross profit was $67.0 million or 38.7% of sales in 1996, compared to $50.3
million or 39.5% of sales in 1995. The decrease in gross margin percentage was
due primarily to the decline in the percent of sales of higher margin host bus
adapter products. Maintenance of current gross margins or improvements of gross
margins are dependent upon continued manufacturing cost reductions and the
successful development and market acceptance of the Company's new scalable disk
array controller products and host bus adapters and the Company's new product
lines in network attached storage and merchant chips. 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. The
Company faced competition in the market for its disk array products and
substantial competition in the market for its HBA's during 1996 and anticipates
that these competitive pressures will intensify in 1997. The increased
competition may come from new entrants into the Company's markets or from the
Company's customers who may decide to develop their own RAID solutions for the
networked PC market. The full impact of such competition on the Company's sales
and gross profits is uncertain. The Company anticipates that additional
competition could result in decreased revenue and a decline in the selling
prices for its products, which would impact both gross margins and operating
results.
Research and Development. Expenditures for research and development increased
by 82% to $16.7 million in 1996 as compared to $9.2 million in 1995. Research
and development expenses increased as a percent of sales from 7.2% in 1995 to
9.6% in 1996 due to the Company's commitment to introduce follow-on products to
its successful existing products and to invest in new products that may
potentially increase the Company's future revenues. During 1996 the Company
funded the development of a more robust SCSI controller chip with the intent of
entering the merchant chip market, completed the majority of the development on
its new generation scaleable RAID products and began the development of a
networked attached storage product. Additionally, the Company released several
upgrades to its higher volume products such as Ultra-SCSI RAID controllers for
the bus-based and bus-independent markets. The growth in research and
development expenses was primarily due to the recruitment and addition of new
technical staff and related benefits and the cost of developing beta units of
its new products. The Company expects to continue to increase its investment in
research and development activities during 1997 in order to be in a position to
meet its commitment to introduce new and innovative products and to continue its
strategy of maintaining technology leadership in the markets in which it has
positioned its products.
Selling and Marketing. Sales and marketing expenses were $14.4 million or 8.3%
of net sales in 1996, compared to $11.9 million or 9.3% of net sales in 1995.
The 21% increase in sales and marketing expenses
<PAGE>
was primarily due to the addition of employees to manage the increased volume
and to higher commission, advertising, trade shows and travel related
expenses. The Company expects that sales and marketing expenses will
continue to increase during 1997 as the Company continues to expand its
infrastructure to support a diverse customer base which is increasingly
located overseas and to support new product lines. Additionally, the current
market opportunities through both domestic and international distribution
channels and the Company's OEM customers require an increasingly higher level
of sales support which is often times at the customer's site.
General and Administrative. General and administrative expenses increased to
$9.7 million or 5.6% of net sales in 1996 from $9.1 million or 7.2% of net sales
in 1995. The increase in general and administrative expenses of 7% during 1996
was due primarily to merger expenses incurred during the BusLogic acquisition.
The Company anticipates that general and administrative expenses will continue
to increase during 1997 due to increased staffing and as a result of increased
activity in existing litigation matters.
Impact of Inflation. The impact of inflation on the Company's business was not
material during the three years ended December 31, 1996.
Interest Income/Expenses and Other. Net interest income increased by
approximately 137% due to the Company investing the proceeds of its third
quarter 1995 follow-on offering in short-term marketable securities during all
of 1996. In 1995, the Company had such investments only in the fourth quarter.
Other expense reflects the net of expenses such as business licenses fees and
sales tax which were in line with the prior year's expenses.
Income Taxes. The Company's combined federal and state effective income tax
provision rate was 37% in 1996 as opposed to 35% in 1995. The increase
relates largely to non-deductible expenses incurred in connection with the
BusLogic merger in the first quarter of 1996.
YEAR ENDED DECEMBER 31, 1995, COMPARED TO YEAR ENDED DECEMBER 31, 1994
In 1995 the Company increased its revenues over 1994, improved its margins and
significantly increased its working capital. Additionally, the Company's cash
flow was positive due to profitable operations and the $32.7 million of proceeds
received from its follow-on offering of Common Stock.
Sales and Profits. Net sales increased by 38% to $127.5 million in 1995 from
$92.6 million in 1994. Sales of the Company's disk array controller products
increased by 89% in 1995 over 1994 levels, reflecting the increasing volumes of
products with RAID functionality being shipped by the Company's customers. The
net sales growth in 1995 was attributable to overall market growth and strong
demand for the Company's disk array controller products. Sales from disk array
products represented 75% of total sales in 1995 compared to 55% in 1994.
Conversely, net sales of the Company's HBA products decreased by 10% to $27.0
million in 1995, which was due to the late introduction of its newer PCI bus
based products.
The Company's largest customer during 1995 was IBM Corporation (IBM), which
accounted for 20% of the Company's sales. The Company's next two largest
customers, Hewlett-Packard Company and Digital Equipment Corporation, accounted
for an additional 14% and 12%, respectively, of total sales.
Gross profit was $50.3 million or 39.5% of sales in 1995, compared to $36.4
million or 39.3% of sales in 1994. The increase in gross profits in fiscal 1995
was due to increased revenues. Gross margins remain relatively the same from
the prior year in part due to the increased cost of simm memory modules, but was
offset by the introduction of new products which had cost reduced parts and
correspondingly better margins than their predecessor.
Research and Development. Expenditures for research and development increased
by 19% to $9.2 million in 1995 as compared to $7.7 million in 1994. Research
and development expenses decreased as a percent of sales from 8.3% to 7.2% in
1995 due to the significant growth of net sales. The growth in research and
development expenses was primarily due to increased technology development
efforts related to intelligent input/output management projects and continual
developments in SCSI technology.
<PAGE>
Selling and Marketing. Sales and marketing expenses were $11.9 million or 9.3%
of net sales in 1995, compared to $10.4 million or 11.2% of net sales in 1994.
The 14% increase in sales and marketing expenses was primarily due to the
addition of employees to manage the increased volume and to higher commission,
advertising and travel related expenses.
General and Administrative. General and administrative expenses increased to
$9.1 million or 7.1% of net sales in 1995 from $6.0 million or 6.5% of net sales
in 1994. The increase in general and administrative expenses of 52% during 1995
was due to increased legal expenses and to the addition of personnel to support
the growth in the Company's business.
Interest Income, Expenses and Other. In 1995, the Company had a net interest
income of $536 thousand as compared to the prior year's interest expense of $313
thousand. 1995's interest income was generated from investing the net proceeds
received from its follow-on offering of Common Stock for part of the year.
These investments that yielded interest income in 1995 stand in contrast to the
borrowing required in 1994 against the Company's line of credit. Other
income/expense reflects the net of expenses such as business licenses fees and
sales tax and were in line with the prior year's expenses.
Income Taxes. The Company's combined federal and state effective income tax
provision rate was 35% in 1995 up from 26% in 1994. The tax rate in 1994
included a benefit related to utilization of prior year's net operating losses.
LIQUIDITY AND CAPITAL RESOURCES
During 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. Working capital of the Company as of December 31, 1996 was $97.9
million, an increase of $24.9 million from the $73.0 million as of December 31,
1995. Cash balances improved by $4.1 million from $11.7 million to $15.8
million as of December 31, 1996. Short term marketable investments decreased
$7.2 million from $25.7 million at December 31, 1995 to $18.5 million at
December 31, 1996.
Net Cash provided from investment activities was $2.5 million due to the net
purchases and maturities of marketable investments of $7.4 million, which was
offset by $4.9 million in capital expenditures. The Company utilized these
resources primarily to finance an increase in inventories of $15.2 million and
accounts receivable of $4.7 million, net of $6.1 million decrease in accounts
payable. Increases in inventories coincided with the increase in revenues and
increases in the level of finished goods to better service distribution and OEM
customers. Days sales outstanding increased from 49 days at the end of 1995 to
57 days at the end of 1996. The decrease in accounts payable is due primarily
to lower inventory purchases in the second half of 1996.
At December 31, 1996, the Company's principal sources of liquidity consisted of
cash and cash equivalents, short-term marketable securities and a $20 million
line of credit. The Company's line of credit which expires in June, 1998,
bearing interest at the bank's base rate, or Eurodollar or Libor option rate
plus 1 3/4%. The basis of the rate is determined by the Company at the time of
any advance to the Company. The agreement contains covenants that include the
maintenance of specific financial ratios and prohibitions 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 its short-term marketable securities, cash provided
by continuing operations, existing cash balances, and borrowings under bank
lines of credit. The Company believes that such capital resources will meet the
Company's working capital needs through at least the end of 1997.
"Safe-Harbor" Statement Under Private Securities Litigation Reform Act of 1995:
The statements contained in the above Management's Discussion and Analysis of
Financial Condition and Results of Operation, and elsewhere in this Annual
Report, that are not historical facts contain forward looking information with
respect
<PAGE>
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, demand and competition for the Company's RAID controller and HBA
products, the ability of the Company to timely ship ordered products, the
impact on the Company of its acquisition of BusLogic in early 1996, and other
risks or uncertainties detailed in the Company's filings with the Securities
and Exchange Commission, as well as in this Annual Report. These forward
looking statements speak only as of the data hereof, and the Company
disclaims any intent or obligation to update these forward looking statements.
Market for Registrant's Common Equity and related stockholder matters
The Company's common stock ($0.01 par value) is traded on the National
Association of Securities Dealers National Marketing System ("NMS") and is
quoted on the National Association of Securities Dealers Automated Quotation
System ("NASDAQ") under the symbol MYLX.
The following table sets forth quarterly high and low bid quotations for the
Company's Common Stock for the two-year period ended December 31, 1996 as quoted
by the NASDAQ National Market System. Such bid quotations represent inter-
dealer prices without retail mark-up or mark-down or commission and may not,
therefore, represent actual transaction prices.
COMMON STOCK (MYLEX) HIGH BID LOW BID
1995
First Quarter 12 1/16 8 3/8
Second Quarter 13 3/8 10
Third Quarter 19 1/8 13
Fourth Quarter 20 5/8 14
1996
First Quarter 25 1/4 15 3/4
Second Quarter 27 3/8 15 5/8
Third Quarter 19 1/8 10
Fourth Quarter 17 1/2 10 3/8
As of January 31, 1997, there were approximately 600 shareholders of record of
the Company's Common Stock.
DIVIDENDS
The Company has not paid cash dividends on its Common Stock during either of the
two most recent fiscal years nor during the period subsequent thereto. While
the Board of Directors has general authority over dividend policy, it does not
anticipate paying cash dividends in the foreseeable future.
<PAGE>
Consolidated balance sheets
December 31, 1996 and 1995
(In thousands, except share data)
1996 1995
Assets
Current assets:
Cash and equivalents $ 15,849 11,733
Short-term marketable investments 18,538 25,708
Accounts receivable, net of allowance of
$436 and $707 in 1996 and 1995, respectively 27,732 23,081
Inventories 41,680 26,521
Prepaid expenses and other current assets 3,448 1,732
Deferred income taxes 3,032 2,712
Total current assets 110,279 91,487
Property and equipment, net 6,124 3,021
Other assets 183 112
$116,586 94,620
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 6,157 12,243
Accrued liabilities 6,073 5,969
Current portion of long-term capital lease
obligations 118 308
Total current liabilities 12,348 18,520
Long-term capital lease obligations - 131
Deferred income taxes 66 72
Commitments and contingencies
Stockholders' equity:
Common stock, $0.01 par value;
40,000,000 shares authorized; 20,693,000
and 19,590,000 shares issued and outstanding
in 1996 and 1995, respectively 207 196
Additional paid-in capital 63,789 52,310
Notes receivable from stockholders (465) -
Retained earnings 40,641 23,391
Total stockholders' equity 104,172 75,897
$116,586 94,620
See accompanying notes to consolidated financial statements.
<PAGE>
Consolidated statements of operations
Years ended December 31, 1996, 1995, and 1994
(In thousands, except per share amounts)
1996 1995 1994
Net sales $173,123 127,455 92,589
Cost of sales 106,103 77,172 56,159
Gross profit 67,020 50,283 36,430
Operating expenses:
Selling and marketing 14,391 11,935 10,359
Research and development 16,690 9,188 7,666
General and administrative 9,696 9,110 6,011
Operating income 26,243 20,050 12,394
Other income (expense)
Interest income 1,293 715 199
Interest expense (24) (179) (512)
Other expense (132) (113) (103)
Income before income tax expense 27,380 20,473 11,978
Income tax expense 10,130 7,165 3,165
Net income $17,250 13,308 8,813
Earnings per share:
Primary $.80 .68 .51
Fully diluted $.80 .67 .48
Weighted average number of shares:
Primary 21,576 19,653 17,261
Fully diluted 21,576 19,925 18,390
See accompanying notes to consolidated financial statements.
<PAGE>
Consolidated statements of stockholders' equity
<TABLE>
<CAPTION>
Notes
receivable Total
Additional from Stock
Common Stock paid-in Stock Retained holders'
(In thousands, except share data) Shares Amount capital holders earnings equity
<S> <C> <C> <C> <C> <C> <C>
Balances as of December 31, 1993 15,687,000 $157 12,475 (194) 1,220 13,658
Common stock issued for cash upon
exercise of options, net of 294,000
shares surrendered at exercise 867,000 9 507 - - 516
Subordinated debentures converted 681,000 7 2,631 - - 2,638
Tax benefit from disqualifying
dispositions of stock options - - 2,252 - - 2,252
Notes receivable from stockholders - - - 194 - 194
Net income - - - - 8,813 8,813
Balances as of December 31, 1994 17,235,000 173 17,865 - 10,033 28,071
Common stock issued for cash upon
exercise of options and warrants 355,000 3 1,105 - - 1,108
Issuance of common stock, net
of expenses of $422 2,000,000 20 32,718 - - 32,738
Tax benefit from disqualifying
dispositions of stock options - - 622 - - 622
Adjustment to conform BusLogic,
Inc. fiscal year-end - - - - 50 50
Net income - - - - 13,308 13,308
Balances as of December 31, 1995 19,590,000 196 52,310 - 23,391 75,897
Common stock issued for cash and notes
receivable upon exercise of options 1,068,000 11 4,145 (465) - 3,691
Common stock issued under employee
stock purchase plan 35,000 - 465 - 465
Tax benefit from disqualifying
dispositions of stock options - - 6,869 - - 6,869
Net income - - - - 17,250 17,250
Balances as of December 31, 1996 20,693,000 $207 63,789 (465) 40,641 104,172
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
Consolidated statements of cash flows
Years ended December 31, 1996, 1995, and 1994
<TABLE>
<CAPTION>
(In thousands)
1996 1995 1994
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $17,250 13,308 8,813
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Amortization of net discount on short-term
marketable investments (249) - -
Tax benefit related to disqualifying
dispositions of stock options 6,869 622 2,252
Depreciation and amortization 1,814 1,563 1,576
Deferred income taxes (326) (1,319) (1,135)
Interest expense on convertible debentures converted to
common stock - - 313
Changes in operating assets and liabilities:
Accounts receivable, net (4,651) (8,366) (7,030)
Inventories (15,159) (12,750) (6,439)
Prepaid expenses and other current assets (1,787) (969) 372
Accounts payable (6,086) 7,157 794
Accrued liabilities 104 15 3,072
Net cash (used in) provided by operating activities (2,221) (739) 2,588
Cash flows from investing activities:
Capital expenditures (4,917) (1,683) (1,277)
Purchase of short-term marketable investments (7,246) (25,708) -
Sales and maturities of short-term investments 14,665 - -
Net cash provided by (used in) investing activities 2,502 (27,391) (1,277)
Cash flows from financing activities:
Proceeds from exercise of stock options and warrants 3,691 1,108 516
Proceeds from employee stock purchase plan 465 - -
Repayment of capital lease obligations (321) (471) (385)
Net proceeds from issuance of common stock - 32,738 -
Repayments against line of credit, net of borrowings - (2,350) (150)
Proceeds from issuance of convertible subordinated debentures - - 300
Repayment of convertible subordinated debentures - - (300)
Repayment of notes receivable from stockholders - - 194
Net cash provided by financing activities 3,835 31,025 175
Net increase in cash and equivalents 4,116 2,895 1,486
Adjustment to conform Buslogic, Inc. fiscal year end - 50 -
Cash and equivalents at beginning of year 11,733 8,788 7,302
Cash and equivalents at end of year $15,849 11,733 8,788
</TABLE>
<PAGE>
Supplemental disclosures of cash flow information:
Cash paid during the year:
<TABLE>
<S> <C> <C> <C>
Interest $24 178 267
Income taxes $5,656 7,294 1,109
Noncash financing and investing activities:
Common Stock issued for notes receivable
from stockholders $(465) - -
Conversion of subordinated debentures $ - - 2,638
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
Notes to consolidated financial statements
December 31, 1996, 1995, and 1994
1.Summary of Significant Accounting Policies
Basis of Presentation and Preparation. The accompanying consolidated
financial statements include the accounts of Mylex Corporation (the Company
or Mylex) and its wholly owned subsidiaries. All material intercompany
accounts have been eliminated in the consolidated financial statements.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities as of the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Revenue Recognition. Net sales are recognized upon shipment to customers,
including sales made to distributors under agreements allowing limited right
of return and price protection on merchandise unsold by the distributors.
For sales made to distributors, reserves are provided for expected returns
and price protection at the time of shipment.
Financial Instruments. Cash equivalents consist of highly liquid
investments, principally money market accounts, with a maturity of three
months or less at the time of purchase.
The Company has classified its short-term marketable investments as
"available-for-sale." Available-for-sale securities are carried at fair
market value, with the unrealized gains and losses, net of tax, reported in a
separate component of stockholder's equity. Gains and losses on securities
sold are based on the specific identification method. Through December 31,
1996, the difference between fair value and the amortized cost of
available-for-sale securities was not significant.
Financial instruments which potentially subject the Company to concentrations
of credit risk are primarily cash and equivalents, short-term marketable
investments, and accounts receivable. The Company's cash equivalents and
short-term marketable investments are primarily in money market accounts,
U.S. government obligations, and municipal notes and bonds that have
maturities ranging through 1997. The Company believes no significant
concentration of credit risk exists with respect to these financial
instruments.
The Company sells its products primarily to original equipment manufacturers
and distributors in the personal computer (PC) industry. Generally, the
Company requires no collateral on trade receivables, although certain export
sales are guaranteed by letters of credit. The Company believes that any
credit risks are substantially mitigated by its credit evaluation process.
The Company maintains reserves for potential credit losses, but historically
has not experienced significant losses related to individual customers or
groups of customers in any particular geographic area.
Inventories. Inventories are valued at the lower of cost (first in, first
out) or market. Property and Equipment. Property and equipment are carried
at cost. Assets recorded under capital leases are stated at the present
value of future minimum lease payments at the inception of the lease.
Depreciation on property and equipment is calculated on the straight-line
method over the estimated useful life of the asset (generally five years).
Assets recorded under capital leases are amortized using the straight-line
method over the shorter of the lease term or estimated useful life of the
asset.
Impairment of Long-Lived Assets. Effective January 1, 1996, the Company
adopted Statement of Financial Accounting Standards (SFAS) No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of. SFAS No. 121 requires the Company to review the
recoverability of the carrying amount of its long-lived assets whenever
events or changes in circumstances indicate that the carrying amount of an
asset might not be recoverable.
<PAGE>
In the event that facts and circumstances indicate that the carrying amount
of long-lived assets may be impaired, an evaluation of recoverability would
be performed. If an evaluation is required, the estimated future
undiscounted cash flows associated with the asset would be compared to the
asset's carrying amount to determine if a write-down to fair value is
required. Fair value may be determined by reference to discounted future
cash flows over the remaining useful life of the related asset. Such
adoption did not have a material effect on the Company's consolidated
financial position or results of operations.
Income Taxes. The Company accounts for income taxes using the asset and
liability method, whereby deferred assets and liabilities are recorded for
differences between the book and tax carrying amounts of balance sheet items.
Deferred liabilities or assets at the end of each period are determined using
the tax rate expected to be in effect when the taxes are actually paid or
recovered. The measurement of deferred tax assets is reduced, if necessary,
by a valuation allowance for any tax benefits that are not expected to be
realized. The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the enactment
date.
Translation of Foreign Currencies and Foreign Currency Transactions. The
functional currency of the Company's foreign subsidiaries is the U.S. dollar.
Resulting foreign exchange gains and losses, which have been insignificant,
are included in the results of operations. The Company's export sales are
generally transacted in U.S. dollars and have not resulted in significant
foreign exchange gains and losses.
Earnings Per Share. Earnings per share data have been computed using the
weighted average common and common equivalent shares outstanding. Common
equivalent shares consist of shares issuable upon the exercise of stock
options and warrants, except where antidilutive, using the treasury stock
method. In determining fully diluted earnings per share, convertible
subordinated debentures, if dilutive, are included in outstanding shares
using the "as if converted" method.
Stock Option Plan. The Company accounts for its stock option plan in
accordance with the provisions of Accounting Principles Board (APB) Opinion
No. 25, Accounting for Stock Issued to Employees, and related
interpretations. As such, compensation expense would be recorded on the date
of grant only if the current market price of the underlying stock exceeded
the exercise price. On January 1, 1996, the Company adopted the disclosure
requirements of Statement of Financial Accounting Standards (SFAS) No. 123,
Accounting for Stock-Based Compensation. Under SFAS No. 123 the Company must
disclose pro forma net income and pro forma earnings per share disclosures
for employee stock option grants made in 1995 and future years as if the fair
value-based method defined in SFAS No. 123 had been applied.
2.Business Combination
On February 9, 1996, the Company issued 2,710,738 shares of its common stock
for all of the outstanding stock of BusLogic Inc. (BusLogic), a supplier of
storage input/output solutions for use in network file servers, personal
computers, and workstations. The transaction was accounted for as a pooling
of interests and, accordingly, the Company's historical consolidated
financial statements have been restated to include the accounts and results
of operations of BusLogic.
Separate results of the combining entities for the periods prior to the
merger were as follows (in thousands):
Years ended December 31,
1995 1994
Net revenues:
Mylex $100,420 62,513
BusLogic 27,035 30,076
$127,455 92,589
<PAGE>
Net income:
Mylex $13,122 7,509
BusLogic 186 1,304
$13,308 8,813
In connection with the merger, approximately $884,000 of merger expenses were
incurred and charged to general and administrative expense during the first
quarter of 1996. These expenses include investment banking fees of $504,000,
legal and accounting fees of $320,000 and other merger-related expenses of
$58,000.
Prior to the combination, BusLogic's fiscal year ended January 31.
Accordingly, BusLogic's financial statements for the twelve months ended
December 31, 1995, were combined with Mylex's financial statements for the
same period and BusLogic's financial statements for the years ended January
31, 1995 and 1994, were combined with Mylex's financial statements for the
years ended December 31, 1994 and 1993, respectively. BusLogic's unaudited
results of operations for the one month ended January 31, 1995, included
sales of $2,476,000 and net loss of $50,000. An adjustment has been made to
stockholders' equity as of December 31, 1995 to eliminate the effect of
including BusLogic's results of operations for the one month ended January
31, 1995 in both the years ended December 31, 1995 and 1994.
3.Short-Term Marketable Investments
Fair values of short-term marketable investments are based on quoted market
values as of December 31, 1996 and 1995. As of December 31, 1996 and 1995,
the difference between the fair value and amortized cost of short-term
marketable investments was not significant.
As of December 31, 1996, short-term marketable investments consisted of
$18,538,000 of U.S. government securities due within one year or less.
As of December 31, 1995, short-term marketable investments consisted of
$23,615,000 of U.S. government securities and $2,093,000 of municipal notes
and bonds, with $14,667,000 due in one year or less and $11,041,000 due in
one to two years.
Inventories
4.Inventories consisted of the following (in thousands):
December 31,
1996 1995
Raw materials $26,623 17,619
Work in process 6,885 6,618
Finished goods 8,172 2,284
$41,680 26,521
5.Property and Equipment
Property and equipment consisted of the following (in thousands):
December 31,
1996 1995
Machinery and equipment $4,260 3,230
Furniture and fixtures 2,595 875
<PAGE>
Computer equipment and software 5,426 3,259
12,281 7,364
Less accumulated depreciation and amortization 6,157 4,343
$6,124 3,021
As of December 31, 1996 and 1995, equipment recorded under capital leases was
$1,318,000 and $1,605,000, respectively, and accumulated amortization thereon
was $1,318,000 and $1,426,000, respectively.
6.Accrued Liabilities
Accrued liabilities consisted of the following (in thousands):
December 31,
1996 1995
Accrued compensation and benefits $3,234 1,956
Other 2,839 4,013
$6,073 5,969
7.Line of Credit
The Company has an available line of credit up to a maximum of $20,000,000,
which expires in June 1998, bearing interest at the bank's prime rate (8.25%
as of December 31, 1996). The agreement with the Company contains covenants
that include the maintenance of specific financial ratios and prohibitions on
additional indebtedness without the prior consent of the bank. As of
December 31, 1996, the Company was in compliance with these covenants.
8.Income Taxes
Income taxes for the years ended December 31, 1996, 1995, and 1994, were
comprised of the following (in thousands):
December 31,
1996 1995 1994
Current tax expense:
Federal $3,292 6,596 1,779
State 296 1,266 269
Total current 3,588 7,862 2,048
Deferred tax expense (benefit):
Federal (351) (1,433) (1,015)
State 24 114 (120)
Total deferred (327) (1,319) (1,135)
Charge in lieu of taxes attributable to employer stock option plans:
Current year 6,869 622 1,222
Prior years -- -- 1,030
Total charge 6,869 622 2,252
Total tax expense $10,130 7,165 3,165
The reconciliation between the amount computed by applying the federal statutory
rate to income before income taxes and the actual income tax expense were as
follows (in thousands):
<PAGE>
<TABLE>
<CAPTION>
December 31, 1996 1995 1994
<S> <C> <C> <C>
Statutory federal income tax at 35% $ 9,582 7,165 4,192
State income tax, net of federal tax benefit 1,093 1,174 217
Foreign sales corporation benefit (777) (228) (106)
Change in the beginning of the year
valuation allowance -- (1,299) (1,986)
Tax benefit from stock options credited directly
to additional paid-in capital -- -- 1,030
Other, net 232 353 (182)
Total tax expense $10,130 7,165 3,165
</TABLE>
The tax effect of temporary differences that give rise to significant portions
of the deferred tax assets and liabilities is presented below (in thousands).
December 31,
1996 1995
Deferred tax assets:
Accounts receivable valuation reserves $170 304
Lower of cost or market adjustments to inventory
and other tax-related adjustments 1,813 534
Reserves and accruals for reporting purposes
not taken for tax purposes 945 1,343
State tax benefit, including net operating loss
carryovers, net of federal tax reduction 104 531
Total gross deferred tax assets 3,032 2,712
Deferred tax liabilities:
Depreciation and amortization 66 72
Total gross deferred tax liabilities 66 72
Net deferred tax assets $2,966 2,640
There is no net change in the valuation allowance for the year ended December
31, 1996. Management believes that no valuation allowance is required on
deferred tax assets based on current and projected profitability.
9.Stockholders' Equity
In December 1995, the Company adopted the 1995 Employee Stock Purchase Plan,
which authorizes the issuance of up to 300,000 shares of its common stock.
The plan permits eligible employees to purchase common stock through payroll
deductions at a purchase price of the lower of 85% of the fair market value
of the common stock at the beginning or end of each offering period.
Under SFAS No. 123, compensation cost is recognized for the fair value of the
employees' purchase rights, which was estimated using the Black-Scholes model
with the following assumptions for 1996 and 1995: dividend yield of 0 percent
for both years, expected life of six months for both years, expected
volatility of 73% for both years, and risk free interest rate of 5.12% and
7.54%. The weighted-average fair value of those purchase rights granted in
1996 and 1995 was $6.81 and $6.21.
Mylex's 1983 and 1993 incentive and nonqualified stock option plans provide
for the grant, by the Board of Directors, of stock options to employees,
officers, consultants, and outside directors at an exercise price per share
not less than the fair market value on the date of grant. Incentive stock
options granted under the 1983 plan generally vest ratably over 3 years from
date of grant and expire 10 years from date of grant. Nonqualified stock
options vest ratably over 3 years and expire 5 years from date of grant.
Options granted
<PAGE>
under the 1993 plan generally vest ratably over 4 years from the date of
grant and expire 10 years from the date of grant.
The per share weighted-average fair value of stock options granted during
1996 and 1995 was $8.34 and $6.41, respectively, on the date of grant using
the Black Scholes option-pricing model with the following weighted-average
assumptions: 1996 expected dividend yield 0%, risk-free interest rate of
5.3%, expected volatility of 73% and expected life of 4 years; 1995 expected
dividend yield 0%, risk-free interest rate of 7.86%, expected volatility of
73%, and expected life of 4 years.
The Company applies APB Opinion No. 25 in accounting for its plans and,
accordingly, no compensation cost has been recognized for its stock options
in the financial statements because at the date of grant the exercise price
per share equaled or exceeded fair value of the underlying Common Stock. Had
the Company determined compensation cost based on fair value at the grant
date for its stock options under SFAS No. 123, the Company's net income would
have been reduced to the pro forma amounts indicated below:
1996 1995
Net income:
As reported $17,250 13,308
Pro forma 15,003 12,725
Earnings per share:
As reported - primary $.80 .68
Pro forma - primary .70 .65
As reported - fully diluted .80 .67
Pro forma - fully diluted .70 .64
Pro forma net income reflects only options granted in 1996 and 1995.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the pro forma net income amounts
presented above because compensation cost is reflected over the options'
vesting period of three to four years and compensation cost for options
granted prior to January 1, 1995, is not considered.
During October 1996, the Company offered option holders under its stock
option plans the opportunity to have outstanding options repriced to the then
current fair market value of the Company's common stock of $12.87 per share.
Vesting schedules for repriced options were extended six months. The other
terms of the options remained unchanged. On October 24, 1996, the Company
canceled and reissued 516,591 options pursuant to this repricing. Repriced
options were treated as though cancelled and reissued for purposes of
determining compensation costs pursuant to SFAS No. 123.
The 1983 and 1993 plans also provide for automatic grants, to outside
directors, of options to purchase 50,000 common shares upon election to the
Board of Directors. A summary of stock option transactions under the plans
are as follows:
<TABLE>
<CAPTION>
weighted
Shares Outstanding options Average
available Number Exercise exercise
for grant of shares price price
<S> <C> <C> <C> <C>
Balances as of December 31,1993 195,000 3,519,000 $0.48-7.00$ $ 2.68
Increases in number of shares
available for grant 625,000 -- --
Granted (614,000) 614,000 4.63-10.25 5.04
Exercised -- (1,161,000) 0.48-4.13 1.58
Canceled 77,000 (568,000) 1.50-10.25 2.31
<PAGE>
Balances as of December 31, 1994 283,000 2,404,000 0.48-10.25 4.13
Increases in number of shares
available for grant 700,000 -- --
Granted (784,000) 784,000 5.60-18.88 10.11
Exercised -- (298,000) 0.48-5.75 3.69
Canceled 193,000 (195,000) 0.48-10.63 4.80
Balances as of December 31, 1995 392,000 2,695,000 0.48-18.88 6.16
Increases in number of shares
available for grant 850,000 --
Decrease in number of shares
available for grant under
BusLogic Plan (63,000) --
Granted (1,416,000) 1,416,000 12.84-25.00 16.71
Exercised -- (1,068,000) 0.48-11.06 3.87
Canceled 772,000 (813,000) 3.88-25.00 15.19
Balances as of December 31, 1996 535,000 2,230,000 0.48-13.19 9.12
Exercisable as of December 31, 1996 596,000 0.48-13.19 5.72
Exercisable as of December 31, 1995 1,115,962 0.48-10.50 3.65
</TABLE>
The following table summarizes information about stock options outstanding as of
December 31, 1996:
<TABLE>
<CAPTION>
options outstanding options exercisable
number weighted-avg. number
range of outstanding remaining weighted-avg. exercisable weighted-avg
exercise prices at 12/31/96 contractual life exercise price at 12/31/96 exercise prices
<S> <C> <C> <C> <C> <C>
From $0.48 to $5.00 634,459 6.34 $ 4.445 398,375 $ 4.27
From $5.01 to $10.00 291,863 8.11 5.796 77,801 5.72
From $10.01 to $12.85 633,950 8.33 11.333 114,509 10.46
From $12.86 to $13.19 670,591 8.85 12.898 4,930 13.19
From $ 0.48 to $13.19 2,230,591 7.89 $ 9.120 595,615 $ 5.72
</TABLE>
During July and September 1996, Mylex issued three notes to three directors
of the Company related to their exercise of options. A total of 119,984
shares were issued to these directors for cash and $465,000 in notes. The
notes are full recourse, bear interest at 6.5%, and are due on the earlier of
one year from issuance or 30 days after the date that the director could sell
shares of Mylex stock if they cease to be a director of Mylex.
10.Employee Saving Plan
In September 1994, the Company adopted the Mylex Corporation 401(k) Plan (the
401(k) Plan) which is intended to qualify under Section 401(k) of the
Internal Revenue Code of 1986, as amended. The 401(k) Plan covers
substantially all of the Company's employees. Participants may elect to
contribute a percentage of their compensation to this plan, up to a statutory
maximum amount. The Company makes contributions to the 401(k) Plan at a rate
determined by the Board of Directors, currently a 50% matching contribution
on 6% of participant compensation up to a maximum of $2,250 per year.
Matching contributions in 1996, 1995, and 1994 were $318,000, $21,000, and
$6,000, respectively.
11.Industry Information and Certain Concentrations
The Company operates in one industry and is engaged in the design,
manufacture, marketing, and support of high-performance storage management
electronics products for personal computer (PC) and non-PC
<PAGE>
servers and workstations as well as system boards for PCs. The Company sells
its products primarily to original equipment manufacturers and distributors
in the PC industry.
Sales to major customers, as a percentage of net sales, and the amount
receivable (in thousands) as of December 31, 1996, from such customers were
as follows:
Gross
amount
Customer 1996 1995 1994 receivable
Digital Equipment Corporation 17% 12% 11% $ 4,173
Hewlett-Packard 14% 14% 9% $ 1,828
IBM 14% 20% 15% $ 4,778
Export sales, principally to Europe and Japan, comprised 65%, 36%, and 23% of
net sales in 1996, 1995, and 1994, respectively. Foreign sales are
denominated in U.S. dollars. Sales of the Company's RAID controller products
comprised 87%, 75%, and 55% of net sales in 1996, 1995, and 1994,
respectively.
Although many of the components of the Company's products are available from
numerous sources, several of the most critical components, including
microprocessors, SCSI I/O processors, and custom-designed integrated
circuits, are presently available to the Company from only one source.
Furthermore, because of high industry demand, there have been instances of
worldwide shortages of DRAM SIMM memory modules. If the Company cannot
obtain essential components as required, the Company could be unable to meet
demand for its products, thereby adversely affecting its operating results.
In addition, scarcity of such components could result in cost increases and
adversely affect the Company's gross margin.
12.Commitments and Contingencies
Future minimum payments under leases as of December 31, 1996, are as follows
(in thousands):
Capital Operating
Year ending December 31, leases leases
1997 $118 1,470
1998 -- 1,184
1999 -- 1,219
2000 -- 1,253
2001 -- 798
Thereafter -- 987
Total future minimum lease payments $118 6,911
The Company leases its facilities in Fremont and Santa Clara, California, and
Boulder, Colorado, under noncancelable operating lease agreements that expire
through 2003 and provide for renewal options. Under these leases, Mylex is
required to pay property taxes, insurance, and normal maintenance costs.
Rent expense was $1,578,000, $1,125,000, and $1,149,000 in 1996, 1995, and
1994, respectively.
The former chief executive officer of the Company filed a complaint against
the Company and its outside directors in October 1994, claiming breach of his
employment agreement. The claim is for compensatory and consequential
damages of at least $5 million.
<PAGE>
In April 1996, another former officer of the Company filed a complaint
against the Company and its president alleging breach of contract and
violation of the Fair Housing and Employment Act. No specific amount of
damages has been claimed.
Although it is reasonably possible the Company may incur a loss upon
conclusion of these claims, an estimate of any loss or range of loss cannot
be made. The Company believes it has meritorious defenses and will
vigorously defend against these matters. The results of legal proceedings
cannot be predicted with certainty; however, in the opinion of management,
the Company does not have a potential liability in connection with these or
any other proceedings that would have a material adverse effect on the
Company.
13. SUBSEQUENT EVENT
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, as described in footnote 12. The amount of the
settlement, net of probable insurance proceeds, is not material to the
operating results of Mylex for 1996 nor to its financial position as of
December 31, 1996. The settlement is expected to result in a charge to
after-tax earnings during the first quarter of 1997 of approximately $300,000.
Independent auditors' report
The Board of Directors and Stockholders
Mylex Corporation:
We have audited the accompanying consolidated balance sheets of Mylex
Corporation and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1996.
These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits. We did not audit the
financial statements for the year ended January 31, 1995 of BusLogic, Inc., a
wholly owned subsidiary, which statements reflect total revenues constituting
32% of the related consolidated totals for the year ended December 31, 1994.
Those statements were audited by other auditors whose report has been
furnished to us, and our opinion, insofar as it relates to the amounts
included for BusLogic, Inc., is based solely on the report of the other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Mylex Corporation and
subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year
period ended December 31, 1996, in conformity with generally accepted
accounting principles.
\s\ KPMG Peat Marwick LLP
San Jose, California
January 29, 1997, except
as to Note 13, which is as of
February 10, 1997.
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