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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark One)
[x] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934. For the Quarterly Period ended MARCH 28, 1998 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
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(State or other jurisdiction of (IRS Employer Identification No.
incorporation or organization)
34551 Ardenwood Blvd., Fremont, California 94555
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(Address of principal executive offices) ZIP Code
Registrant's telephone number (including area code): (510) 796-6100
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common Stock, $.01 par value 20,269,347 shares
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Class Outstanding at March 28, 1998
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PART I. FINANCIAL INFORMATION
Item 1. Unaudited Condensed Consolidated Financial Statements
MYLEX CORPORATION
CONSOLIDATED BALANCE SHEET
(IN $000'S)
<TABLE>
<CAPTION>
MAR 28 DEC 27
ASSETS 1998 1997
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CURRENT ASSETS:
CASH AND EQUIVALENTS $ 11,544 $ 21,521
SHORT-TERM MARKETABLE INVESTMENTS 35,068 23,062
ACCOUNTS RECEIVABLE 17,572 15,071
ALLOWANCE FOR DOUBTFUL ACCOUNTS (178) (190)
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ACCOUNTS RECEIVABLE, NET 17,394 14,881
INVENTORIES 24,548 25,866
PREPAID EXPENSES AND OTHER CURRENT ASSETS 9,290 10,617
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TOTAL CURRENT ASSETS 97,844 95,947
PROPERTY AND EQUIPMENT, NET 8,117 8,325
OTHER ASSETS 192 211
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TOTAL ASSETS $ 106,153 $ 104,483
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
ACCOUNTS PAYABLE $ 9,745 $ 5,700
ACCRUED LIABILITIES 6,923 6,488
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TOTAL CURRENT LIABILITIES 16,668 12,188
STOCKHOLDERS' EQUITY
COMMON STOCK 209 209
TREASURY STOCK (8,216) (7,292)
ADDITIONAL PAID-IN CAPITAL 65,635 65,396
NOTES RECEIVABLE FROM STOCKHOLDERS (866) (720)
RETAINED EARNINGS 32,723 34,702
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TOTAL STOCKHOLDERS' EQUITY 89,485 92,295
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 106,153 $ 104,483
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</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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MYLEX CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS, THREE MONTHS ENDED
(IN $000'S, EXCEPT FOR SHARE DATA)
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MAR 28 MAR 31
1998 1997
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NET SALES $ 28,348 $ 35,914
COST OF SALES 18,659 30,276
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GROSS PROFIT 9,689 5,638
OPERATING EXPENSES:
SELLING AND MARKETING 4,782 3,619
RESEARCH AND DEVELOPMENT 6,087 4,395
GENERAL AND ADMINISTRATION 2,180 2,396
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TOTAL OPERATING EXPENSES 13,049 10,410
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OPERATING LOSS (3,360) (4,772)
INTEREST INCOME 337 382
INTEREST EXPENSE (42) -
OTHER EXPENSE (76) (19)
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LOSS BEFORE TAXES (3,141) (4,409)
INCOME TAX (BENEFIT) EXPENSE (1,162) (1,631)
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NET LOSS $ (1,979) $ (2,778)
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LOSS PER COMMON SHARE:
BASIC $ (0.10) $ (0.13)
DILUTED $ (0.10) $ (0.13)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
BASIC 20,182 20.726
DILUTED 20,182 20.726
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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MYLEX CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS, THREE MONTHS ENDED
(IN $000'S)
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MAR 28 MAR 31
1998 1997
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CASH FLOWS FROM OPERATING ACTIVITIES:
NET LOSS $ (1,979) $ (2,778)
DEPRECIATION AND AMORTIZATION 874 537
AMORTIZATION OF DISCOUNT/PREMIUM ON SHORT-TERM
MARKETABLE INVESTMENTS (255) (34)
CHANGES IN OPERATING ASSETS AND LIABILITIES
ACCOUNTS RECEIVABLE (2,513) 1,220
INVENTORIES 1,318 4,250
PREPAID EXPENSES AND
OTHER CURRENT ASSETS 1,327 (28)
ACCOUNTS PAYABLE 4,061 8,126
ACCRUED LIABILITIES 480 (974)
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NET CASH PROVIDED BY OPERATING ACTIVITIES $ 3,313 $ 10,319
CASH FLOWS FROM INVESTING ACTIVITIES:
CAPITAL EXPENDITURES (668) (1,536)
MATURITIES OF SHORT-TERM INVESTMENTS 11,750 4,734
PURCHASE OF SHORT-TERM MARKETABLE INVESTMENTS (23,501) (5,448)
DECREASE(INCREASE) IN OTHER ASSETS 19 (9)
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NET CASH USED IN INVESTING ACTIVITIES $ (12,398) $ (2,259)
CASH FLOWS FROM FINANCING ACTIVITIES:
REPAYMENT OF CAPITAL LEASE OBLIGATIONS - (118)
PROCEEDS FROM EXERCISE OF STOCK OPTIONS 178 386
TREASURY STOCK (924) -
NOTES RECEIVABLE FROM SHAREHOLDERS (146) (255)
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NET CASH PROVIDED (USED IN) BY FINANCING ACTIVITIES $ (892) $ 13
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NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS $ (9,977) $ 8,073
CASH AND CASH EQUIVALENTS: AT BEGINNING OF PERIOD $ 21,521 $ 15,849
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CASH AND CASH EQUIVALENTS: AT END OF PERIOD $ 11,544 $ 23,922
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NON-CASH OPERATING ACTIVITY:
TAX BENEFIT RELATED TO DISQUALIFYING DISPOSITION
OF STOCK OPTIONS $62 $44
CASH PAID DURING THE PERIOD:
CASH PAID FOR INTEREST - -
CASH PAID FOR INCOME TAXES - -
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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MYLEX CORPORATION
NOTES TO CONDENSED 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 27, 1997. The results of operations for the three months ended
March 28, 1998, are not necessarily indicative of the operating results for
the full year.
EARNINGS (LOSS) PER SHARE
Earnings (loss) per share is based on the weighted average common and,
when dilutive, potential common shares outstanding during each period, using
the treasury stock method. Potential common shares consist of dilutive
shares issuable upon the exercise of stock options and warrants. For the
three months ended March 28, 1998 and March 31, 1997, the weighted average
common shares outstanding was used in the computation of both basic and
diluted loss per share since the effect of potential common shares was
antidilutive. At March 31, 1998 and 1997, potential common shares consisted
of 4,314,812 and 2,976,725 options to acquire shares of common stock with
weighted-average exercise prices of $11.18 and $12.90, respectively.
NOTE B. INVENTORIES (in $000's)
<TABLE>
<CAPTION>
March 28, December 28,
1998 1997
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<S> <C> <C>
Raw Material $13,269 $14,976
Work-in-process 4,998 3,428
Finished Goods 6,281 7,462
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Total $24,548 $25,866
</TABLE>
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NOTE C. 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.
NOTE D. NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes
standards of reporting and display of comprehensive income and its components
of net income and "other comprehensive income" in a full set of general
purpose financial statements. "Other comprehensive income" refers to
revenues, expenses, gains and losses that are not included in net income, but
rather are recorded directly in stockholder's equity. SFAS No. 130 is
effective for annual and interim periods beginning after October 15, 1997,
and for periods ended before that date when presented for comparative
purposes. Total comprehensive losses for the three months ended March 31,
1997 and 1998 are equal to the corresponding net losses reported in the
consolidated statement of operations since the Company did not experience any
items of other comprehensive income.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information." SFAS No. 131 establishes standards
of reporting information about operating segments in annual financial
statements by public business enterprises and requires such enterprises to
report selected information about operating segments in interim financial
reports. SFAS No. 131 is effective for fiscal years beginning after December
15, 1997.
The interim disclosures are not required to be made in the initial year of
application, but the information for the interim periods for the initial year
is required as comparative information in the second year of application. As
such, the Company will display the information required by this statement, to
the extent deemed applicable, commencing with the fiscal 1998 year-end
financial statements.
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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 92% of the Company's net sales
during the first quarter of 1998.
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 several disk drives
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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 substantial majority of
its disk array product sales in the first three months of 1998. 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.
In addition to PCI RAID controllers, the Company offers external RAID
controllers, including a fibre version, host bus adapters and a new product
utilizing the Company's new Autonet-TM- Thin Server Engine. Both the
external RAID controllers and HBA products are highly suited to applications
that demand high data throughput and low CPU utilization. The Autonet-TM-
product will allow the Company to participate in a market segment that uses
thin server technology and is only now emerging as the next growth area in
file management on the network. Consequently, the Company has moved beyond
the "single product" stage, allowing an offering of product solutions for
desktop PC's to large networked systems.
As of March 28, 1998, 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 first quarter of 1998 the Company financed its operations
primarily from cash balances and cash generated from operations.
At March 28, 1998, the Company's working capital decreased to $81.2
million from $83.8 million at December 27, 1997. This decrease in working
capital was due primarily to the increase of accounts payable by $4.0
million, but was offset by a $1.9 million increase in current assets. The
increase in current assets resulted primarily from a $2.5 million increase in
accounts receivable and a $2.0 million increase in the combined cash and
short-term marketable securities balances, offset by $1.3 million decrease in
both net inventories and prepaid expenses. The increase in accounts
receivable was due to a high percentage of the quarter's sales occurring in
the last month of the quarter. The increase in accounts payable was due to
the majority of the Company's quarterly procurement and production occurring
in the last month of the quarter.
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The Company's agreement with Comerica Bank for a $20 million unsecured
revolving line of credit has been extended for another year, now expiring in
June 1999. 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 agreement 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 $8.5 million, 864,200 shares
of the Company's Common Stock. Management's decision to repurchase shares in
the future 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 March 28, 1998, totaled $28.3 million, compared to $35.9 million for
the corresponding period of fiscal year 1997, a decrease of approximately
21%. Sales decreased, as compared to the first quarter of 1997, primarily due
to the loss of two significant RAID controller OEM customers discussed below,
and a 53% decline in the Company's host bus adapter (HBA) sales, as compared
to the first quarter of 1997.
The reduced shipments to HP and IBM are attributable, respectively, to
HP's award of a design win to one of the Company's competitors and to IBM's
procurement strategy change, which has resulted in a switch from the
procurement of their RAID controllers from the Company to an internally
sourced controller. Sales have not been significantly impacted by inflation
over the last three fiscal years.
Gross profit for the three months ended March 28, 1998, was $9.7 million
or 34% of net sales, compared to $5.6 million or 16% of net sales for the
same period in 1997, or an increase of $4.1 million, or 73%. The lower gross
profits in the first quarter of 1997 was primarily attributable to a charge
for inventory obsolescence taken in that quarter.
The Company's largest customer during the first quarter of 1998 was
Digital Equipment Corporation ("DEC"), which accounted for $9.5 million or
33% of the Company's net sales during that period. The Company's second and
third largest customers during the
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quarter were Siemens and NEC, which accounted for $4.1 million or 14% of net
sales and $2.1 million or 8% of net sales, respectively.
While the Company has in place OEM agreements with some of the Company's
largest customers that define the terms of the Company's 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 March 28, 1998, totaled $11.5 million, as
compared to $5.1 million as of the end of the first quarter in 1997. The
increase in the backlog is primarily attributable to increased orders placed
by the Company's largest customer.
Because almost all of the orders for the Company's products may be
canceled prior to shipment and its customers have the right to change
delivery schedules, the Company believes that backlog as of any particular
date may not be indicative of actual net revenues for any succeeding period.
Of the total $11.5 million backlog at March 28, 1998, all but a small
percentage of the orders making up that backlog would have been scheduled for
delivery within the three months ending June 27, 1998, unless the orders were
canceled or rescheduled by the respective customer.
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 adapters. Mylex designs its
products to provide solutions for all popular operating systems, including
Novell Netware, Windows NT, SCO UNIX, Solaris and Unixware. Mylex products
also work with all popular hardware platforms. These include personal
computer platforms that use PCI architecture and workstation platforms,
including Sun Microsystems, Silicon Graphics and IBM RS-6000 workstations
that use the Company's SCSI-to-SCSI products.
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 and delayed 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
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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 current RAID controller products are based on the
Intel i960 family of processors. If another company develops a processor for
RAID applications which renders the i960 processor noncompetitive, whether as
a result of cost, specifications or other advantages of the new processor, or
if Intel ceases to produce the i960 processor or support the Company's
efforts to develop products based on the i960 processor, the Company will be
forced to develop new products based on another processor. Such development
efforts will be costly, and there can be no assurance that the Company will
be able to timely complete such development efforts or that such products, if
developed, will have the same degree of market acceptance or the same gross
margin as the Company's present RAID 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, a 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 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, DAC960PJ, DAC960PL and DAC960PU
provide high performance, fault tolerant data storage solutions for the PCI
bus platforms. The Mylex external disk array controllers, DAC960SF and
DAC960SX, bring the performance of RAID technology, which can operate in dual
active mode, 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.
Products currently under development include a controller optimized for
multimedia and video imaging, controllers that will provide for high speed
serial and low voltage differential (LVD) interfaces to disk drives,
clustering of storage subsystems and low-cost RAID solutions. 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.
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Host Bus Adapters
The Company's host adapter 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. As an ongoing improvement to HBA product line,
the Company decided in the last half of 1997 to add RAID level 0 and 0+1
functionality to address an emerging market for RAID in the workstation and
low-end server market. During the first quarter of 1998, the Company sales
of HBA's were significantly reduced as both the Asia Pacific region and
domestic distribution channels experienced weaken sales.
Network Attached Storage Products
In addition to RAID controllers and host bus adapters, the Company has
developed a new product called AutoNet-TM-, which is a scalable, low cost
thin server engine. Thin server technology allows the server to be optimized
to perform file services with minimal complexity and cost. 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. Initial applications for the new servers, based on the Autonet-TM-
engine, 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. Because Autonet-TM- is a
new class of product, its sales ramp and revenue contribution to the Company
is unpredictable.
Product Risks
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 high performance and
low cost PCI and external disk array controllers and network attached storage
products, based on Autonet-TM-, 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.
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SALES AND MARKETING EXPENSES
Sales and marketing expenses for the three months ended March 28, 1998,
totaled $4.8 million, an increase of $1.2 million or 32% from the
corresponding period in 1997. Sales and marketing expenses represented 17%
of net sales for the three months ended March 28, 1998, as compared to 10%
for the same period a year ago. This increase in sales and marketing
expenses resulted primarily from expenses related to increased sales and
marketing headcount and the resulting increase in compensation expense and to
increased travel cost necessary to service of the Company's customers.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses for the three months ended March 28,
1998, totaled $6.1 million, an increase of 38%, from the $4.4 million
incurred during the corresponding period in 1997. Research and development
expenses represented 22% of net sales for the three months ended March 28,
1998, as compared to 12% in the comparable 1997 quarter. Research and
development expenses increased during the first quarter of 1998 due primarily
to expenses incurred for staffing and development for the Company's new
Autonet-TM- network attached storage product, the continued expansion and
increased staffing of the Company's R&D facility in Boulder, Colorado, and
prototype expenses related to the Company's new products. The Company
continued its investment in research and development activities during the
first quarter of 1998 in an effort to implement its strategies of maintaining
leadership in the RAID market, to take advantage of its existing and
prospective SCSI 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 IC technology, or that the Company will be able to introduce its new
product offerings on a timely basis.
GENERAL AND ADMINISTRATIVE
General and administrative expenses for the three months ended March 28,
1998, totaled $2.2 million, a decrease of $216 thousand from the
corresponding period of 1997. The decrease in expenses is primarily due to
lower legal cost. General and administrative expenses were 8% of net sales
for the three months ended March 28, 1998, as compared to 7% of net sales for
the first quarter of 1997.
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INCOME TAXES
The Company's effective tax rate for the first quarter of 1998 was 37%,
the same rate as the first quarter of 1997.
SAFE-HARBOR STATEMENT UNDER PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995: The statements contained in this Form 10-Q contains 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; demand and competition for the Company's existing
and new products, particularly its RAID controller, SCSI host adapter and
Network Power & Light's-TM- thin-server products; component availability;
pricing pressures; the ability of the Company to ship ordered product in a
timely manner; business conditions and growth in the computer industry and
general economy; instability in foreign economies, particularly in Asia; the
capability of the Company to meet the rapidly changing needs of its markets
through timely product enhancements or new product introductions; the risk of
inventory obsolescence due to shifts in market demand or other causes; the
risk of a Company product being incompatible with new products of other
companies; and other risks and uncertainties detailed in the Company's
filings with the Securities and Exchange Commission, including the 1997 Form
10-K. These forward-looking statements speak only as of the date hereof, and
the Company disclaims any intent or obligation to update such statements.
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In October 1994, the former Chief Executive Officer of the Company, Dr.
M.A. Chowdry, filed a complaint against the Company and its outside
directors, claiming breach of an employment agreement that he entered into
with the Company approximately three months prior to his termination as the
Company's Chief Executive Officer. The complaint alleges compensatory and
consequential damages of over $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.
15
<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 May 1998.
MYLEX CORPORATION
By /s/ Colleen Gray
-------------------------
Colleen Gray
Vice President of Finance and
Chief Financial Officer
16
<PAGE>
INDEX TO EXHIBITS
Mylex Corporation
Quarterly Report on Form 10-Q
Sequentially
Exhibit No. Description Numbered Page
- ----------- ----------- -------------
10.21 Second Amendment to Revolving Credit
Loan Agreement, dated April 29, 1998,
with Comerica Bank
27.1 Financial Data Schedule
17
<PAGE>
EXHIBIT 10.21
MYLEX CORPORATION
SECOND AMENDMENT TO
REVOLVING CREDIT LOAN AGREEMENT
This second Amendment to Revolving Credit Loan Agreement is entered into
as of April 29, 1998, by and between Comerica Bank-California ("Bank") and
Mylex Corporation ("Borrower")
RECITALS
Borrower and Comerica are parties to that certain Revolving Credit Loan
Agreement dated as of June 28,1996, as amended from time to time (the
"Agreement"). Borrower and Bank desire to amend the Agreement in accordance
with the terms of this Amendment.
NOW, THEREFORE, in consideration of the promises and the agreements,
provisions and covenants herein contained, the parties hereto agree as follows:
SECTION 1. AMENDMENTS TO THE LOAN AGREEMENT
1. Section 1.1 DEFINED TERMS.
"Termination Date" is amended to read JUNE 25, 1999.
2. Section 5.7 is amended to read as follows:
MAINTAIN PROFITABILITY. On a consolidated basis, maintain annual
fiscal profitability on an operating, and after tax basis with the exception of
a non-operating loss incurred due to the write-off of certain assets or
in-process technology resulting from a merger or acquisition. Bank will allow
one operating loss quarter per fiscal year for an amount not to exceed Three
Million Dollars ($3,000,000). NOT WITHSTANDING THE FOREGOING, BANK WILL ALLOW
AN ADDITIONAL OPERATING LOSS QUARTER FOR THE SECOND FISCAL QUARTER ENDING
6/30/98 FOR AN AMOUNT NOT TO EXCEED ONE MILLION FIVE HUNDRED THOUSAND DOLLARS
($1,500,000).
SECTION 2. CONDITIONS TO EFFECTIVENESS
This Amendment shall become effective as of April 29, 1998 (the "SECOND
AMENDMENT CLOSING DATE"), only upon receipt by Bank of a duly executed
counterpart of this Amendment signed by Borrower.
1
<PAGE>
SECTION 3. BORROWER'S REPRESENTATIONS AND WARRANTIES
In order to induce Bank to enter into this Amendment and to amend the Loan
Agreement in the manner provided herein, Borrower represents and warrants to
Bank that the following statements are true, correct and complete:
A. CORPORATE POWER AND AUTHORITY. Borrower has all requisite
corporate power and authority to enter into this Amendment and to carry out the
transactions contemplated by, and perform its obligations under, the Loan
Agreement as amended by this Amendment (the "Amendment Agreement"). The
Articles of Incorporation and Bylaws of Borrower have not been amended since the
copies previously delivered to the Bank.
B. AUTHORIZATION OF AGREEMENTS. The execution and delivery of this
Amendment and the performance of the Amended Agreement have been duly authorized
by all necessary corporate action on the part of borrower.
C. NO CONFLICT. The execution and delivery by Borrower of this
Amendment do not and will not contravene (i) any law or any governmental rule or
regulation applicable to Borrower or any of its Subsidiaries, (ii) the Articles
of Incorporation or Bylaws of Borrower, (iii) any order, judgment or decree of
any court or other agency of government binding on Borrower or any of its
Subsidiaries or (iv) any material agreement or instrument binding on Borrower or
any of its Subsidiaries.
D. GOVERNMENTAL CONSENTS. The execution and delivery by Borrower of
this Amendment and the performance by Borrower of the Amended Agreement do not
and will not require any registration with, consent or approval of, or notice
to, or other action to, with or by, any federal, state or other governmental
authority or regulatory body.
E. BINDING OBLIGATION. This Amendment and the Amended Agreement
have been duly executed and delivered by Borrower and are the binding
obligations of Borrower, enforceable against Borrower in accordance with their
respective terms, except in each case as such enforceability may be limited by
bankruptcy, insolvency, reorganization, liquidation, moratorium or other similar
laws of general application and equitable principles relating to or affecting
creditors' rights.
F. INCORPORATION OF REPRESENTATIONS AND WARRANTIES FROM LOAN
AGREEMENT. The representations and warranties contained in Section 4 of the
Loan Agreement are and will be true, correct and complete in all material
respects on and as of the Second Amendment Closing Date to the same extent as
though made on and as of that date, except to the extent such representations
and warranties specifically relate to an earlier date, in which case they
were true, correct and complete in all material respects on and as of such
earlier date.
G. ABSENCE OF DEFAULT. No event has occurred and is continuing or
will result from consummation of the transactions contemplated by this Amendment
that would constitute a Default or and Event of Default.
2
<PAGE>
SECTION 4. MISCELLANEOUS
A. REFERENCE TO AND EFFECT ON THE LOAN AGREEMENT.
(i) On and after the Second Amendment Closing Date, each reference
in the Loan Agreement to "this Agreement", "hereunder", "hereof", "herein" or
words of like import referring to the Loan Agreement, and each reference in any
related documents to the "Loan Agreement", "thereunder", "thereof" or words of
like import referring to the Loan Agreement shall mean and be a reference to the
Amended Agreement.
(ii) Except as specifically amended by this Amendment, the Loan
Agreement and any related documents shall remain in full force and effect and
are hereby ratified and confirmed.
(iii) The execution, deliver and performance of this Amendment shall
not, except as expressly provided herein, constitute a waiver of any provision
of, or operate as a waiver of any right, power or remedy of Bank under, the Loan
Agreement or any related documents.
B. FEES AND EXPENSES. Borrower acknowledges that all costs, fees
and expenses as described in the definition of "Bank Expenses" in the Loan
Agreement incurred by Bank and its counsel with respect to this Amendment and
the documents and transactions contemplated hereby shall be for the account of
Borrower.
C. HEADINGS. Section and subsection headings in this Amendment
are included herein for convenience of reference only and shall not constitute a
part of this amendment for any other purpose or be given any substantive effect.
D. APPLICABLE LAW. THE VALIDITY OF THIS AMENDMENT, ITS
CONSTRUCTION, INTERPRETATION AND ENFORCEMENT, AND THE RIGHTS OF THE PARTIES
HEREUNDER, SHALL BE DETERMINED ACCORDING TO THE LAWS OF THE STATE OF CALIFORNIA.
E. COUNTERPARTS. This Amendment may be executed in any number
of counterparts and by different parties hereto in separate counterparts, each
of which when so executed and delivered shall be deemed an original, but all
such counterparts together shall constitute but one and the same instrument;
signature pages may be detached from multiple separate counterparts and attached
to a single counterpart so that all signature pages are physically attached to
the same document.
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be duly executed and delivered by their respective officers thereunto duly
authorized as of the date first written above.
BORROWER:
MYLEX CORPORATION
By: /s/ Colleen Gray
Title:
BANK:
COMERICA BANK - CALIFORNIA
By: /s/ Mary Beth Suhr
Title:
4
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<PERIOD-START> DEC-28-1997
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