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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark One)
[x] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934. For the Quarterly Period ended September 27, 1997 or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from ___________ to ___________.
Commission file number 0-13381
MYLEX CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 59-2291597
- ------------------------------- --------------------------------
(State or other jurisdiction of (IRS Employer Identification No.
incorporation or organization)
34551 Ardenwood Blvd., Fremont, California 94555
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(Address of principal executive offices) ZIP Code
Registrant's telephone number (including area code): (510) 796-6100
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No______
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common Stock, $.01 par value 20,168,640 shares
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Class Outstanding at September 26, 1997
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MYLEX CORPORATION
CONSOLIDATED BALANCE SHEET
(IN $000'S)
UNAUDITED
SEPT 27 DEC 31
1997 1996
--------- ---------
ASSETS
CURRENT ASSETS:
CASH AND EQUIVALENTS $ 13,645 $ 15,849
SHORT-TERM MARKETABLE INVESTMENTS 21,918 18,538
ACCOUNTS RECEIVABLE 15,639 28,168
ALLOWANCE FOR DOUBTFUL ACCOUNTS (317) (436)
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ACCOUNTS RECEIVABLE, NET 15,322 27,732
INVENTORIES 33,292 41,680
PREPAID EXPENSES AND OTHER CURRENT ASSETS 6,839 6,480
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TOTAL CURRENT ASSETS 91,016 110,279
PROPERTY AND EQUIPMENT, NET 8,162 6,124
OTHER ASSETS 198 183
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TOTAL ASSETS $ 99,376 $ 116,586
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
ACCOUNTS PAYABLE $ 4,426 $ 6,157
ACCRUED LIABILITIES 2,155 6,191
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TOTAL CURRENT LIABILITIES 6,581 12,348
LONG-TERM LIABILITIES 66 66
STOCKHOLDERS' EQUITY
COMMON STOCK 202 207
ADDITIONAL PAID-IN CAPITAL 57,889 63,789
NOTES RECEIVABLE FROM STOCKHOLDERS (720) (465)
RETAINED EARNINGS 35,358 40,641
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TOTAL STOCKHOLDERS' EQUITY 92,729 104,172
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TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 99,376 $ 116,586
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SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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MYLEX CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS, THREE MONTHS ENDED
UNAUDITED
(IN $000'S, EXCEPT FOR PER SHARE DATA)
SEPT 27 SEPT 30
1997 1996
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NET SALES $ 29,432 $ 42,206
COST OF SALES 20,025 25,517
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GROSS PROFIT 9,407 16,689
OPERATING EXPENSES:
SELLING AND MARKETING 4,100 3,419
RESEARCH AND DEVELOPMENT 5,208 4,628
GENERAL AND ADMINISTRATION 2,152 2,068
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TOTAL OPERATING EXPENSES 11,460 10,115
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OPERATING PROFIT (LOSS) (2,053) 6,574
INTEREST INCOME 379 273
INTEREST EXPENSE (1) (4)
OTHER EXPENSE (29) (83)
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INCOME (LOSS) BEFORE TAXES (1,704) 6,760
INCOME TAX (BENEFIT) EXPENSE (630) 2,242
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NET INCOME (LOSS) $ (1,074) $ 4,518
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EARNINGS (LOSS) PER COMMON SHARE: $ (0.05) $ 0.21
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: 20,166 21,439
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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MYLEX CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS, NINE MONTHS ENDED
UNAUDITED
(IN $000'S, EXCEPT FOR PER SHARE DATA)
SEPT 27 SEPT 30
1997 1996
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NET SALES $ 92,272 $ 136,117
COST OF SALES 68,282 83,934
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GROSS PROFIT 23,990 52,183
OPERATING EXPENSES:
SELLING AND MARKETING 12,383 10,731
RESEARCH AND DEVELOPMENT 14,628 11,918
GENERAL AND ADMINISTRATION 6,487 7,408
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TOTAL OPERATING EXPENSES 33,498 30,057
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OPERATING PROFIT (LOSS) (9,508) 22,126
INTEREST INCOME 1,212 1,026
INTEREST EXPENSE (1) (18)
OTHER EXPENSE (86) (159)
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INCOME (LOSS) BEFORE TAXES (8,383) 22,975
INCOME TAX (BENEFIT)EXPENSE (3,102) 8,733
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NET INCOME (LOSS) $ (5,281) $ 14,242
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EARNINGS (LOSS) PER COMMON SHARE: $ (0.26) $ 0.66
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 20,552 21,593
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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MYLEX CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS, NINE MONTHS ENDED
UNAUDITED
(IN $000'S)
SEPT 27 SEPT 30
1997 1996
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CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME (LOSS) $ (5,281) $ 14,243
DEPRECIATION AND AMORTIZATION 1,810 1,363
AMORTIZATION OF DISCOUNT/PREMIUM ON SHORT-TERM
MARKETABLE INVESTMENTS (72) (113)
CHANGES IN OPERATING ASSETS AND LIABILITIES
ACCOUNTS RECEIVABLE, NET 12,410 (4,208)
INVENTORIES 8,388 (23,438)
PREPAID EXPENSES AND
OTHER CURRENT ASSETS (359) (135)
ACCOUNTS PAYABLE (1,731) (2,938)
ACCRUED LIABILITIES (3,722) 3,574
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NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ 11,443 $ (11,652)
CASH FLOWS FROM INVESTING ACTIVITIES:
CAPITAL EXPENDITURES (3,848) (3,416)
MATURITIES OF SHORT-TERM INVESTMENTS 14,734 14,665
PURCHASE OF SHORT-TERM MARKETABLE INVESTMENTS (18,041) -
DECREASE(INCREASE) IN OTHER ASSETS (17) (59)
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NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES $ (7,172) $ 11,190
CASH FLOWS FROM FINANCING ACTIVITIES:
REPAYMENT OF CAPITAL LEASE OBLIGATIONS (118) (227)
PROCEEDS FROM EXERCISE OF STOCK OPTIONS 347 3,589
PROCEEDS FROM PURCHASES UNDER THE EMPLOYEE
STOCK PURCHASE PLAN 307 207
PAYMENTS TO ACQUIRE COMMON STOCK (7,011) -
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NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES $ (6,475) $ 3,569
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NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS $ (2,204) $ 3,107
CASH AND CASH EQUIVALENTS: AT BEGINNING OF PERIOD $ 15,849 $ 11,733
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CASH AND CASH EQUIVALENTS: AT END OF PERIOD $ 13,645 $ 14,840
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NON-CASH FINANCING AND INVESTMENT ACTIVITIES:
TAX BENEFIT RELATED TO DISQUALIFYING DISPOSITION
OF STOCK OPTIONS $196 $5,967
COMMON STOCK ISSUED FOR NOTES RECEIVABLE FROM
STOCKHOLDERS $255 -
CASH PAID DURING THE PERIOD:
CASH PAID FOR INTEREST $1 $18
CASH PAID FOR INCOME TAXES $1,136 $5,297
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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MYLEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
In the opinion of the Company, the accompanying consolidated financial
statements contain all adjustments (consisting only of normal recurring
adjustments) necessary to fairly present the Company's financial position and
its results of operations and cash flows as of the dates and for the periods
indicated.
Certain information and footnote disclosures normally contained in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted. These condensed consolidated financial statements should be
read in conjunction with the financial statements incorporated by reference in
the Company's Form 10-K for the year ended December 31, 1996. The results of
operations for the three and nine months ended September 27, 1997, are not
necessarily indicative of the operating results for the full year.
As of the second quarter of 1997, the Company changed its fiscal periods from a
calendar month basis to fiscal month basis. The Company's fiscal quarters are
comprised of two four week months and one five week month. Additionally, each
fiscal week begins on Sunday and ends on Saturday.
PER SHARE DATA
Earnings per share is based on the weighted average common and, when dilutive,
common equivalent shares outstanding during each period, using the treasury
stock method. Common equivalent shares consist of dilutive shares issuable
upon the exercise of stock options and warrants.
The Financial Accounting Standards Board recently issued Statement of Financial
Accounting Standards No. 128, " Earnings Per Share." SFAS No. 128 requires the
presentation of basic earnings per share ("EPS") and, for companies with
complex capital structures, diluted EPS. SFAS No. 128 is effective for annual
and interim periods ending after December 15, 1997. The Company expects that
basic EPS will be higher than primary earnings per share as presented in the
accompanying consolidated financial statements and that basic loss per share
would be the same as loss per share as presented in the accompanying
consolidated financial statements.
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NOTE B. INVENTORIES (in $000's)
September 27, December 31,
1997 1996
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Raw Material $17,340 $26,623
Work-in-process 6,503 6,885
Finished Goods 9,449 8,172
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Total $33,292 $41,680
NOTE C. MERGER WITH BUSLOGIC
In February 1996, the Company closed a business combination pursuant to which
it issued 2,710,738 shares of its common stock for all of the capital stock of
BusLogic Inc. (BusLogic), a supplier of storage input/output solutions for use
in network file servers, personal computers, and workstations. This business
combination has been accounted for as a pooling of interests, and, accordingly,
the consolidated financial statements for periods prior to the combination have
been restated to include the results of operations, financial position and cash
flows of BusLogic. There were no significant transactions between the Company
and BusLogic prior to the combination that required elimination, and no
adjustments were required to conform accounting policies.
NOTE D. CONTINGENCIES
In October 1994, the former Chief Executive Officer of the Company, Dr. M.A.
Chowdry, filed a complaint against the Company and its outside directors,
claiming breach of an employment agreement that he entered into with the
Company approximately three months prior to his termination as the Company's
Chief Executive Officer. The complaint alleges compensatory and consequential
damages of over $5 million (which would vary based on the price of the
Company's Common Stock) and unspecified punitive damages. The Company believes
it has meritorious defenses and will vigorously defend this lawsuit.
Nonetheless, given the unpredictable nature of legal proceedings, there can be
no assurance that the Company will prevail.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS
Mylex Corporation is a leading producer of RAID technology and network
management products. Mylex produces high performance disk array (RAID)
controllers, and complementary computer products for network servers, mass
storage systems and workstations. Through its wide range of RAID controllers
and its line of Ultra-SCSI host adapter products, Mylex provides enabling
intelligent I/O technologies that increase network management control, enhance
CPU utilization, optimize I/O performance, and ensure data security and
availability. Products are sold globally through a network of OEMs, major
distributors, VARs and system integrators. More than twenty leading network
file server and storage subsystem OEMs, including Digital Equipment
Corporation, NEC and Siemens, have designed Mylex RAID controllers into their
server and storage subsystem products. The Company is incorporated in the
State of Delaware and has its principal offices in Fremont, California.
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 86% of the Company's net sales during the
third quarter of 1997.
The trend toward client/server computing that began in the mid-1980s has placed
particular demands on network storage systems and related I/O functions. The
development of faster microprocessors and more robust computer bus
architectures in network systems has often outstripped the capabilities of data
storage and I/O technologies, leading to systems "bottlenecks". To alleviate
or avoid such bottlenecks, networks require continual improvements in stored
data retrieval speed. In addition, the development of more complex applications
and operating systems has created the need for increased network storage
capacity. Meanwhile, the mission critical, enterprise-wide nature of networked
computing often requires a high level of "fault tolerance," or the ability to
preserve data from loss and to provide uninterrupted system service even if an
individual data storage device fails. The emergence of data-intensive
applications such as multimedia and video-on-demand are further driving the
demands for speed, capacity and reliability in network storage devices.
Mylex RAID controllers enable increased speed, greater capacity, and a high
degree of fault tolerance in network storage and I/O functions. RAID, which
stands for redundant array of independent disks, is a method for distributing
data across
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several disk drives and allowing the server microprocessor to access those
drives simultaneously, thus increasing system storage I/O performance. In
addition, lost data on any drive can be recreated using special RAID
algorithms, thus ensuring the immediate availability of RAID protected data
even in the event of a disk drive failure. Mylex controllers support all
major operating systems and bus types, and the Company endeavors to rapidly
develop products for new bus, operating system, and platform standards as
they are defined. RAID controller products based on the PCI bus standard
represented a majority of its disk array product sales in the first nine
months of 1997. The Company believes that its proprietary software and
firmware, as well as its large installed base of RAID units, are key
competitive advantages in the RAID controller market.
The Company's acquisition of BusLogic in February, 1996 made available to the
Company a complete line of host bus adapter products to broaden its product
offering. During the third quarter of 1997, the Company released its new
RAIDPlus products which adds RAID functionality to its HBA. The Company's host
bus adapter products now ship with this RAID functionality under the Company's
FlashPoint product line. These RAIDPlus products dramatically accelerates data
transfer rates and provides fault tolerance for data security. The RAIDPlus
products, along with the Company's other host bus adapter products, are
considered high performance and are well suited to applications that demand
high data throughput and low CPU utilization. Additionally, the Company has
begun shipping its new RAID controller which incorporate the SCSI chip
technology acquired in the BusLogic transaction. Consequently, the Company has
moved beyond the "single product" stage, utilizing technology from both
companies and providing an offering of product solutions for desktop PC's to
large networked systems.
As of September 27, 1997, the Company had approximately 380 employees. None of
the employees are represented by a labor union or employed under any collective
bargaining agreement.
LIQUIDITY AND CAPITAL RESOURCES
During the third quarter of 1997 the Company financed its operations primarily
from cash balances and cash generated from operations.
At September 27, 1997, the Company's working capital decreased to $84.4
million from $97.9 million at December 31, 1996. This decrease in working
capital was due primarily to the decrease of current assets by $19.3 million,
but was offset by a $5.8 million reduction in current liabilities. The
reduction in current assets resulted from a $12.4 million reduction in accounts
receivable and an $8.4 million reduction in net inventories, offset by an
increase in short-term marketable securities. The reduction in accounts
receivable was due to 20% lower sales volume in the third quarter of 1997, as
compared to the fourth
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quarter of 1996, and an improved Days Sales Outstanding (DSO). Reductions to
working capital were offset by $1.8 million decrease in accounts payable and
$4.0 million decrease in accrued liabilities due to tax benefits, resulting
from the Company's net losses, that were recorded over the first nine months
of 1997. The Company's cash and marketable investments increased by $1.2
million, from $34.4 million to $35.6 million, between December 31, 1996 and
September 27, 1997.
The Company has an agreement with Comerica Bank for a $20 million unsecured
revolving line of credit which expires June 30, 1998. Borrowings under the
line of credit bear interest at either the Bank's base rate, or the Eurodollar
or Libor option rate plus 1 3/4%, at the election of the Company at the time of
each advance. The Bank's agreement with the Company contains covenants that
relate to profitability, maintenance of specific financial ratios and limits on
additional indebtedness without the prior consent of the Bank.
The Company presently expects to finance near-term and long-term operations and
capital requirements through cash provided by continuing operations, existing
cash balances, short term investments and borrowings under the revolving bank
line of credit. However, there can be no assurance that the Company will not
require additional financing over the long term, or, if required, that such
financing will be available on terms favorable to the Company. The Company has
been engaged in a stock repurchase program pursuant to which it has purchased
to date, for $7.0 million, 700,000 shares of the Company's Common Stock.
Management's decision to repurchase shares will be based on the Company's cash
needs and market conditions from time to time.
RESULTS OF OPERATIONS
SALES AND GROSS PROFITS. The Company's net sales for the three months ended
September 27, 1997, totaled $29.4 million, compared to $42.2 million for the
corresponding period of fiscal year 1996, a decrease of approximately 30%.
Sales decreased, as compared to the third quarter of 1996, primarily due to the
cessation of shipments of the Company's disk array products to HP and IBM (for
the reasons described below), delays in OEM qualification of the Company's new
DAC960PG controller and a 12% decline in the Company's host bus adapter (HBA)
sales, as compared to the third quarter of 1996.
For the nine month period ending September 27, 1997, the Company's net sales
were $92.3 million, compared to $136.1 million for the equivalent period in
1996. The sales decline, as compared to the same period in 1996, was primarily
due to significantly reduced level of shipments to HP and IBM, delays in OEM
qualification of the Company's new DAC960PG controller and a 32% decline in HBA
sales. The reduced shipments to HP and IBM are attributable, respectively, to
HP's award of a design win to one of the Company's competitors and to IBM's
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procurement strategy change, which has resulted in a switch from the
procurement of their RAID controllers from the Company to an internally
sourced controller. Sales have not been significantly impacted by inflation
over the last three fiscal years.
Gross profit for the three months ended September 27, 1997, was $9.4 million
or 32% of net sales, compared to $16.7 million or 40% of net sales for the
same period in 1996, or a decrease of $7.3 million. This decrease in gross
margins were largely attributable to the decline in the sales of the
Company's higher margin HBA product line and to pricing pressures from the
Company's OEM customers.
For the first three quarters of 1997, gross profits were $24.0 million
compared to $52.2 million for the corresponding period in 1996. The
year-over-year decline in gross profit was primarily attributable to the 32%
reduction in revenues, and to the increase in the Company's inventory reserve
provision, during this nine month period. The cumulative inventory reserve
charge for the nine month period ended September 27, 1997 was $11.6 million.
The Company's largest customer during the third quarter of 1997 was Digital
Equipment Corporation ("DEC"), which accounted for $7.4 million or 25% of the
Company's net sales during that period. The Company's second largest customer
during the quarter was Siemens, which accounted for $3.1 million or 11% of
net sales.
For the first three quarters of 1997, DEC was the Company's largest customer
with $21.5 million or 23% of the Company's net sales. The Company's second
largest customer during this period was Siemens, which accounted for $8.2
million or 9% of net sales. However, there can be no assurance that sales to
either of the above companies will be at these levels or percentages in the
future.
While the Company has in place OEM agreements with some of the Company's
largest customers that define the terms of the sales and support services,
these agreements do not include specific quantity commitments. The Company
sells products to its customers on a purchase order basis. As a result,
historical sales cannot be relied upon as an accurate indicator of future
sales.
The Company's backlog as of September 27, 1997, totaled $8.3 million, as
compared to $11.3 million as of the end of the third quarter in 1996. The
decrease in the backlog is attributable to the decline in the level of
business with HP and IBM.
Because almost all of the orders for the Company's products may be canceled
prior to shipment and its customers have the right to change delivery
schedules,
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the Company believes that backlog as of any particular date may not be
indicative of actual net revenues for any succeeding period. Of the total
$8.3 million backlog at September 27, 1997, all but a small percentage of the
orders making up that backlog would have been scheduled for delivery within
the three months ending December 27, 1997, unless the orders were canceled or
rescheduled by the respective customer.
Products
Mylex designs its products to provide solutions for most popular operating
systems, including Novell Netware, Windows NT, SCO UNIX, and Unixware. Mylex
products also work with most popular hardware platforms. These include
personal computer platforms that uses PCI bus architectures and workstation
platforms, including Sun Microsystems, Silicon Graphics and IBM RS-6000
workstations that use the Company's SCSI to SCSI products.
Raid Controllers
Each bus-based Mylex RAID controller includes a proprietary application
specific integrated circuit, or "ASIC", that serves as an interface with the
host computer, an Intel i960 RISC processor, up to five SCSI channels to
manage the transfer of data to and from the disk drives in the array and a
dynamic cache memory ranging in size from 4 to 128 MB, depending on the
product, to buffer the transfer of information to and from the disks. The
controller also includes Mylex firmware residing on an EEPROM that implements
the RAID algorithms and the algorithms necessary for the cache and supporting
software, including I/O drivers, configuration utilities and system
monitoring programs.
Mylex disk array controllers DAC960PG, DACPL and DAC960PU provide high
performance, fault tolerant data storage solutions for the PCI bus platforms.
The Mylex SCSI-to-SCSI disk array controllers (DAC960SU/SX) bring the
performance of RAID technology to virtually any hardware platform without
requiring special host software. The Mylex disk array products are designed
for both internal and external storage options and are compatible with most
commonly used operating systems.
During 1996, the Company developed a family of RAID products that are scaleable
("Scaleable RAID") and are based on the Company's firmware, RAID co-processor
and SCSI controller chips and incorporate Intel's i960*RP I/O co-processor.
Together, these RAID products offer a truly scaleable solution that gives OEMs
and integrators choices with respect to integrating RAID in environments from
the desktop to the super server. This family of products currently consists of
two 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
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DAC960PG can be used in all servers from entry level to super server. The
other product offering, ROME is the Company's RAID on the motherboard
implementation and combines the Company's RAID co-processor and SCSI
controller chips. This design is targeted to the mid-range departmental
server. When used in concert with the Company's RAID firmware and operating
system drivers, ROME will provide RAID functionality in a cost effective
package. However, there can be no assurance that Scaleable RAID products
will gain or sustain market acceptance or that their sales will produce
adequate gross margins.
Products currently under development include new SCSI to SCSI, SCSI to Fibre
and high performance PCI controllers, and a low-cost RAID solution. There
can be no assurance that the Company will introduce its products under
development. If these products are introduced, there can be no assurance that
they will gain or sustain market acceptance or that their sales will produce
adequate gross margins.
Host Bus Adapters
The Company's host adapter product family represents a broad host adapter
product offerings available for the PCI bus interface. These products are
ideal for data intensive LAN servers, desktop publishing workstations and
multimedia applications where efficient I/O is essential. The HBA will
support up to 15 SCSI devices that include disk, tape, floppy, CD-ROM and
optical drives and scanners. These devices can either be internal or
external to the system and can be used in a multi-tasking configuration. In
July, 1997, the Company announced RAIDPlus, an enhanced host bus adapter with
RAID functionality. The Company designed RAIDPlus as a basis of product
differentiation from its competitors. By making the Company's HBA's products
RAID capable, their performance, in a multi-drive environment, is now
significantly improved over a non-RAID HBA equivalent. Along with the
performance improvement, RAID provides an enhanced level of data security
with the distribution of data over multiple drives.
Although HBA sales in the third quarter of 1997 were 12% less than such sales
for the equivalent period in 1996, HBA sales for the 1997 third quarter
increased by $1.3, or 45%, over such sales for the 1997 second quarter. This
increase is primarily attributable to the introduction of the RAIDPlus
features in July 1997, and represents the first increase for HBA sales in
succeeding quarters since the third quarter of 1996.
Network Attached Storage Products
The Company is in the process of developing a family of products that
represent a new method of adding services to a network based on a new server
design that offers advantages in simplicity, cost and performance. These
servers belongs to a family of products called AutoNet-TM-. Standard servers
are based on personal
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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. AutoNet products began shipping beta units in the late third quarter
of 1997 and anticipates production level shipments in the later part of
fourth quarter of 1997. However, expected sales will not be material to the
Company any earlier than the first quarter of 1998. Consequently, 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.
General
The markets for the Company's products are characterized by rapidly changing
technology, evolving industry standards and relatively short product life
cycles. The Company's ability to compete successfully will depend on its
ability, on a timely and cost-effective basis, to enhance its existing
products and to introduce new products, such as its new PCI and SCSI to SCSI
disk array and network attached storage product families, with features that
meet changing customer requirements and with competitive prices. There can be
no assurance that the Company will be successful in doing so. Delays in
product development, qualification and enhancement or the failure of the
Company's new products or enhancements to gain or sustain market acceptance
could have a material adverse effect on the Company's business and operating
results.
Despite testing, new products may be affected by quality, reliability or
interoperability problems, which could result in returns, delays in
collecting accounts receivable, unexpected service or warranty expenses,
reduced orders and a decline in the Company's competitive position. In
addition, there can be no assurance that new products or technologies
developed by others, or the emergence of new industry standards, will not
render the Company's products or technologies noncompetitive or obsolete. For
example, efforts by the Company's OEM customers and other manufacturers to
integrate additional functions into system boards, to use chip sets that
incorporate additional functionality, or to design and utilize their own
controllers and other devices, rather than purchase the Company's products,
could have a material adverse effect on the Company's business and operating
results.
All of the Company's RAID controller products are based on the Intel i960
family of processors. If another company develops a processor for RAID
applications which renders the i960 processor noncompetitive, whether as a
result of cost, specifications or other advantages of the new processor, or
if Intel ceases to produce the i960 processor or support the Company's
efforts to develop products based on the i960 processor, the Company will be
forced to develop new products
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based on another processor. Such development efforts will be costly, and
there can be no assurance that the Company will be able to timely complete
such development efforts or that such products, if developed, will have the
same degree of market acceptance or the same gross margins as the Company's
present RAID products.
SALES AND MARKETING EXPENSES
Sales and marketing expenses for the three months ended September 27, 1997,
totaled $4.1 million, an increase of $0.7 million or 20% from the
corresponding period in 1996. Sales and marketing expenses represented 14%
of net sales for the three months ended September 27, 1997, as compared to 8%
for the same period a year ago. This increase in sales and marketing
expenses resulted primarily from expenses related to the launch of new
products and increased sales and marketing headcount and resulting increase
in compensation expense. The increase of sales and marketing expenses as a
percent of net sales resulted from the absolute increase in such expenses and
the decrease in net sales.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses for the three months ended September 27,
1997, totaled $5.2 million, an increase of 13%, from the $4.6 million
incurred during the corresponding period in 1996. Research and development
expenses represented 18% of net sales for the three months ended September
27, 1997, as compared to 11% in the comparable 1996 quarter. Research and
development expenses increased during the third quarter of 1997 due primarily
to expenses incurred for the staffing and development of the Company's new
Autonet network attached storage product, the continued expansion of the
Company's R&D facility in Boulder, Colorado, and increased staffing
compensation expense resulting from higher salaries and increased engineering
head count at the Company's Fremont and Santa Clara locations. The increase
of research and development expenses as a percent of net sales resulted from
the absolute increase in such expenses and the decrease in net sales. The
Company continued its investment in research and development activities
during the third quarter of 1997 in an effort to implement its strategies of
maintaining leadership in the RAID market, to take advantage of its existing
and prospective SCSI host adapter and IC technology, and to introduce new
products, such as Autonet-TM-. However, no assurance can be given that such
leadership will be maintained, that the Company will be successful in taking
advantage of its SCSI host adapter or IC technology, or that the Company will
be able to introduce its new product offerings on a timely basis.
15
<PAGE>
GENERAL AND ADMINISTRATIVE
General and administrative expenses for the three months ended September 27,
1997, totaled $2.2 million, and did not materially change from the
corresponding period of 1996. General and administrative expenses were 7% of
net sales for the three months ended September 27, 1997, as compared to 5% of
net sales for the third quarter of 1996. The increase of general and
administrative expenses as a percent of net sales resulted from the decrease
in net sales.
INCOME TAXES
The Company's effective tax rate for the third quarter of 1997 was 37% as
opposed to 40% for the third quarter of 1996. The decrease in the tax rate
is due to the tax reduction program that the Company implemented in the third
quarter of 1996, and reflects the effective tax rate the Company expects to
incur for the year ending December 27, 1997.
SAFE-HARBOR STATEMENT UNDER PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995:
The statements contained in this Form 10-Q, to the extent 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 that could cause actual results to differ materially.
These risks and uncertainties include, without limitation, changes in
customer order patterns, particularly those resulting from fluctuations in
actual or projected server shipments; the ability of the Company to timely
develop, intorduce, enhance and qualify new products, demand and competition
for the Company's existing and new products, particularly its RAID
controllers, SCSI host adapter and Network Power & Light's-TM- thin-server
products; component availability; pricing pressures; the ability of the
Company to timely ship ordered products; business conditions and growth in
the computer industry and general economy; the risk of inventory obsolescence
due to shifts in market demand; and other risks and uncertainties detailed in
the Company's filings with the Securities and Exchange Commission, including
the 1996 Form 10-K and 10Q filings for the first three quarters of 1997.
These forward-looking statements speak only as of the date hereof, and the
Company disclaims any intent or obligation to update such statements.
16
<PAGE>
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In October 1994, the former Chief Executive Officer of the Company, Dr. M.A.
Chowdry, filed a complaint against the Company and its outside directors,
claiming breach of an employment agreement that he entered into with the
Company approximately three months prior to his termination as the Company's
Chief Executive Officer. The complaint alleges compensatory and
consequential damages of over $5 million (which would vary based on the price
of the Company's Common Stock) and unspecified punitive damages. The Company
has filed a cross complaint against Dr. Chowdry and believes it has
meritorious defenses and will vigorously defend this lawsuit. Nonetheless,
given the unpredictable nature of legal proceedings, there can be no
assurance that the Company will prevail.
The Company has incurred and expects to continue to incur substantial legal
expenses in defending against Dr. Chowdry's suit. Those expenses may
fluctuate from quarter to quarter and are likely to increase.
Although there can be no assurance given with respect to the results of legal
proceedings, based on information currently available to the Company, it
believes that it does not have potential liability with respect to this
proceeding that would have a material adverse effect on the Company.
In addition to the matter discussed above, the Company is a party to routine
suits and claims arising in the ordinary course of its business which the
Company does not believe will have a material adverse effect on its business.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in Fremont, California,
on the 12th day of November 1997.
MYLEX CORPORATION
By /s/ Colleen Gray
-----------------------------
Colleen Gray
Vice President of Finance and
Chief Financial Officer
18
<PAGE>
INDEX TO EXHIBITS
Mylex Corporation
Quarterly Report on Form 10-Q
Sequentially
Exhibit No. Description Numbered Page
- ----------- ------------ --------------
11.1 Statement re Computation
of Per Share Earnings 20
19
<PAGE>
MYLEX CORPORATION EXHIBIT 11.1
EARNINGS (LOSS) PER SHARE COMPUTATION
THREE and NINE MONTHS ENDED September 27, 1997 and September 30, 1996
The basis for computing net income (loss) per common share is described in
Note A to the financial statements, beginning on page 6 of the Company's
Quarterly Report on Form 10-Q for the three and nine months ended September 27,
1997 and September 30, 1996.
The computation of earnings (loss) per share is as follows:
EARNINGS PER SHARE THREE MONTHS ENDED
(in $000's except for per share data)
SEPT 27 SEPT 30
1997 1996
---------- ----------
NET EARNINGS (LOSS) $ (1,074) $ 4,518
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING DURING THE PERIOD 20,166 20,571
NUMBER OF COMMON SHARE EQUIVALENTS RESULTING
FROM STOCK OPTIONS AND WARRANTS, COMPUTED
USING THE TREASURY STOCK METHOD AND THE
AVERAGE STOCK PRICE - 868
-------- --------
NUMBER OF COMMON AND COMMON SHARES
EQUIVALENTS USED IN COMPUTATION 20,166 21,439
-------- --------
PRIMARY EARNINGS (LOSS) PER SHARE $ (0.05) $ 0.21
-------- --------
NINE MONTHS ENDED
(in $000's except for per share data)
SEPT 27 SEPT 30
1997 1996
---------- ----------
NET EARNINGS (LOSS) $ (5,281) $ 14,242
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING DURING THE PERIOD 20,552 20,152
NUMBER OF COMMON SHARE EQUIVALENTS RESULTING
FROM STOCK OPTIONS AND WARRANTS, COMPUTED
USING THE TREASURY STOCK METHOD AND THE
AVERAGE STOCK PRICE - 1,441
-------- --------
NUMBER OF COMMON AND COMMON SHARES
EQUIVALENTS USED IN COMPUTATION 20,552 21,593
-------- --------
PRIMARY EARNINGS (LOSS) PER SHARE $ (0.26) $ 0.66
-------- --------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-27-1997
<PERIOD-START> JUN-29-1997
<PERIOD-END> SEP-27-1997
<CASH> 13,645
<SECURITIES> 21,918
<RECEIVABLES> 15,630
<ALLOWANCES> 317
<INVENTORY> 33,292
<CURRENT-ASSETS> 91,016
<PP&E> 16,129
<DEPRECIATION> (7,967)
<TOTAL-ASSETS> 99,376
<CURRENT-LIABILITIES> 6,581
<BONDS> 0
0
0
<COMMON> 202
<OTHER-SE> 92,527
<TOTAL-LIABILITY-AND-EQUITY> 99,376
<SALES> 29,432
<TOTAL-REVENUES> 30,098
<CGS> 20,025
<TOTAL-COSTS> 31,485
<OTHER-EXPENSES> 29
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (378)<F1>
<INCOME-PRETAX> (1,704)
<INCOME-TAX> (630)
<INCOME-CONTINUING> (1,074)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,074)
<EPS-PRIMARY> (0.05)
<EPS-DILUTED> (0.05)
<FN>
<F1> Interest Income
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