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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark One)
[x] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934. For the Quarterly Period ended JUNE 27, 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
______________________________________________________
(Exact name of registrant as specified in its charter)
DELAWARE 59-2291597
_______________________ ________________________________
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
34551 Ardenwood Blvd., Fremont, California 94555
___________________________________________ _________
(Address of principal executive offices) ZIP Code
Registrant's telephone number (including area code): (510) 796-6100
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for 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 19,838,444 shares
Class Outstanding at June 26, 1998
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PART I. FINANCIAL INFORMATION
Item 1. Unaudited Condensed Consolidated Financial Statements
MYLEX CORPORATION
CONSOLIDATED BALANCE SHEET
(IN $000'S)
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JUNE 27 DEC 27
ASSETS 1998 1997
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CURRENT ASSETS:
CASH AND EQUIVALENTS $ 4,365 $ 21,521
SHORT-TERM MARKETABLE INVESTMENTS 35,364 23,062
ACCOUNTS RECEIVABLE 17,363 15,071
ALLOWANCE FOR DOUBTFUL ACCOUNTS (153) (190)
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ACCOUNTS RECEIVABLE, NET 17,210 14,881
INVENTORIES 24,900 25,866
PREPAID EXPENSES AND OTHER CURRENT ASSETS 8,002 10,617
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TOTAL CURRENT ASSETS 89,841 95,947
PROPERTY AND EQUIPMENT, NET 8,078 8,325
OTHER ASSETS 240 211
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TOTAL ASSETS $ 98,159 $104,483
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LIABILITIES AND STOCKHOLDERS EQUITY
CURRENT LIABILITIES:
ACCOUNTS PAYABLE $ 9,212 $ 5,700
ACCRUED LIABILITIES 3,773 6,488
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TOTAL CURRENT LIABILITIES 12,985 12,188
STOCKHOLDERS' EQUITY
COMMON STOCK 211 209
TREASURY STOCK (11,165) (7,292)
ADDITIONAL PAID-IN CAPITAL 66,323 65,396
NOTES RECEIVABLE FROM STOCKHOLDERS (864) (720)
RETAINED EARNINGS 30,669 34,702
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TOTAL STOCKHOLDERS' EQUITY 85,174 92,295
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 98,159 $104,483
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</TABLE>
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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MYLEX CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS, THREE MONTHS ENDED
UNAUDITED
(IN $000'S, EXCEPT FOR SHARE DATA)
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JUNE 27 JUNE 28
1998 1997
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NET SALES $ 32,130 $ 26,926
COST OF SALES 20,889 17,982
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GROSS PROFIT 11,241 8,944
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OPERATING EXPENSES:
SELLING AND MARKETING 5,327 4,665
RESEARCH AND DEVELOPMENT 6,809 5,024
GENERAL AND ADMINISTRATION 2,889 1,939
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TOTAL OPERATING EXPENSES 15,025 11,628
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OPERATING PROFIT (LOSS) (3,784) (2,684)
INTEREST INCOME 614 451
INTEREST EXPENSE (103) -
OTHER EXPENSE 13 (38)
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LOSS BEFORE TAXES (3,260) (2,271)
INCOME TAX BENEFIT (1,206) (840)
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NET LOSS $ (2,054) $ (1,431)
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LOSS PER COMMON SHARE:
BASIC $ (0.10) $ (0.07)
DILUTED $ (0.10) $ (0.07)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
BASIC 20,005 20,558
DILUTED 20,005 20,558
</TABLE>
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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MYLEX CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS, SIX MONTHS ENDED
UNAUDITED
(IN $000'S, EXCEPT FOR SHARE DATA)
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JUNE 27 JUNE 28
1998 1997
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NET SALES $ 60,478 $ 62,839
COST OF SALES 39,548 48,258
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GROSS PROFIT 20,930 14,581
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OPERATING EXPENSES:
SELLING AND MARKETING 10,110 8,284
RESEARCH AND DEVELOPMENT 12,895 9,419
GENERAL AND ADMINISTRATION 5,069 4,335
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TOTAL OPERATING EXPENSES 28,074 22,038
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OPERATING LOSS (7,144) (7,457)
INTEREST INCOME 951 833
INTEREST EXPENSE (145) -
OTHER EXPENSE (63) (56)
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LOSS BEFORE TAXES (6,401) (6,680)
INCOME TAX BENEFIT (2,368) (2,471)
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NET LOSS $ (4,033) $ (4,209)
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LOSS PER COMMON SHARE:
PRIMARY $ (0.20) $ (0.20)
FULLY DILUTED $ (0.20) $ (0.20)
AVERAGE COMMON SHARES OUTSTANDING
PRIMARY 20,095 20,641
FULLY DILUTED 20,095 20,641
</TABLE>
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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MYLEX CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS, SIX MONTHS ENDED
UNAUDITED
(IN $000'S)
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JUNE 27 JUNE 28
1998 1997
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CASH FLOWS FROM OPERATING ACTIVITIES:
NET LOSS $ (4,033) $ (4,209)
DEPRECIATION AND AMORTIZATION 1,935 1,066
CHANGES IN OPERATING ASSETS AND LIABILITIES
ACCOUNTS RECEIVABLE, NET (2,329) 10,513
INVENTORIES 966 2,165
PREPAID EXPENSES AND
OTHER CURRENT ASSETS 2,568 (25)
ACCOUNTS PAYABLE 2,391 603
ACCRUED LIABILITIES (1,502) (3,657)
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NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES $ (4) $ 6,456
CASH FLOWS FROM INVESTING ACTIVITIES:
CAPITAL EXPENDITURES (1,426) (2,855)
MATURITIES OF SHORT-TERM INVESTMENTS 35,420 9,734
PURCHASE OF SHORT-TERM MARKETABLE INVESTMENTS (47,983) (5,448)
DECREASE (INCREASE) IN OTHER ASSETS 19 (17)
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NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES $(13,970) $ 1,414
CASH FLOWS FROM FINANCING ACTIVITIES:
REPAYMENT OF CAPITAL LEASE OBLIGATIONS - (118)
PROCEEDS FROM EXERCISE OF STOCK OPTIONS 315 242
PROCEEDS FROM PURCHASES UNDER THE EMPLOYEE
STOCK PURCHASE PLAN 523 307
PAYMENTS TO ACQUIRE COMMON STOCK (3,872) (7,011)
NOTES RECEIVABLE FROM STOCKHOLDERS (148) -
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NET CASH USED BY FINANCING ACTIVITIES $ (3,182) $ (6,580)
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NET (DECREASE) INCREASE IN CASH AND EQUIVALENTS $(17,156) $ 1,290
CASH AND CASH EQUIVALENTS: AT BEGINNING OF PERIOD $ 21,521 $ 15,849
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CASH AND CASH EQUIVALENTS: AT END OF PERIOD $ 4,365 $ 17,139
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NON-CASH FINANCING AND INVESTMENT ACTIVITIES:
TAX BENEFIT RELATED TO DISQUALIFYING DISPOSITION
OF STOCK OPTIONS $91 $173
COMMON STOCK ISSUED FOR NOTES RECEIVABLE FROM
STOCKHOLDERS $144 $255
CASH PAID DURING THE PERIOD:
CASH PAID FOR INTEREST - -
CASH PAID FOR INCOME TAXES $10 $810
</TABLE>
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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MYLEX CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
In the opinion of the Company, the accompanying unaudited 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 and six months ended June 27, 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 option. For the three and six months ended
June 27, 1998 and June 28, 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 June 27, 1998 and June
28, 1997, potential common shares consisted of options to acquire 4,304,841 and
2,863,406 options to acquire shares of common stock with weighted-average
exercise prices of $9.25 and $9.77, respectively.
NOTE B. INVENTORIES (in $000's)
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<CAPTION>
June 27, December 27,
1998 1997
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<S> <C> <C>
Raw Material $12,436 $14,976
Work-in-process 4,093 3,428
Finished Goods 8,371 7,462
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Total $24,900 $25,866
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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.
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. Nonetheless, given the
unpredictable nature of legal proceedings, there can be no assurance that the
Company will prevail.
NOTE D. SUBSEQUENT EVENT
During the second quarter of 1998, the Company analyzed each of its business
segments based on the near-term market potential, the projected financial
investment, and the strategic opportunity. The Company implemented a
restructuring plan in July 1998 that resulted, in large part, from this
analysis. As a result of this strategic decision, the Company announced a 7%
workforce reduction and discontinued the development activities of its
Network Power & Light-TM- (NP&L-TM-) division. The pre-tax charge for this
restructuring, in the range of $4.0 million to $5.0 million, will be recorded
in the third quarter of 1998.
NOTE E. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires companies to record
derivatives on the balance sheet as assets or liabilities, measured at fair
value. Gains or losses resulting from changes in the value of those derivatives
would be accounted for depending on the use of the derivative and whether it
qualifies for hedge accounting. SFAS No. 133 is effective for fiscal years
beginning after June 15, 1999, with early adoption encouraged. The Company is
presently analyzing this statement and the impact, if any, on the Company's
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 95% of the Company's net sales during the first six
months 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 six 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, and host bus adapters. Both the
external RAID controllers and HBA products are highly suited to applications
that demand high data throughput and low CPU utilization. Consequently, the
Company has moved beyond the "single market segment" stage, allowing an offering
of product solutions for desktop PC's to large networked systems.
As of June 27, 1998, the Company had approximately 400 employees. None of the
employees are represented by a labor union or employed under any collective
bargaining agreement.
LIQUIDITY AND CAPITAL RESOURCES
During the second quarter of 1998 the Company financed its operations primarily
from cash balances and cash generated from operations.
At June 27, 1998, the Company's working capital decreased to $76.9 million
from $83.8 million at December 27, 1997. This decrease in working capital
was due to a decrease in current assets of $6.1 million and an increase in
current liabilities of $797 thousand. Decreases in current assets resulted
from a net reduction in combined cash and short-term marketable investments
of $4.9 million, a $2.6 million decrease in prepaid expenses, a $1.0 million
decrease in net inventories, offset by a $2.3 million increase in accounts
receivable. The increase in accounts receivable was due to slightly higher
sales in the second quarter of 1998 and to a high percentage of the quarter's
sales occurring in the last month of the quarter, as compared to the last
quarter of 1997. Prepaid expenses decreased by $2.6 million due primarily to
the Company receiving an income tax refund in the second quarter of 1998.
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 Comerica Bank's base
rate, or the Eurodollar or Libor option rate plus 1 3/4%, at the election of the
Company at the
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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 Comerica Bank. The Company has
obtained a waiver from the bank, with respect to its profitability covenant,
related to its results of operation for the quarter ended June 27, 1998.
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 $11.3 million, 1,285,400 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
June 27, 1998, totaled $32.1 million, compared to $26.9 million for the
corresponding period of fiscal year 1997, an increase of approximately 19%.
This increase in sales was primarily due to increases in sales of the
Company's newer products, DAC960PG and DAC960SX, which amounted to $5.1
million and $1.4 million, respectively. These increases were offset by a
decline in the Company's host bus adapter sales of $1.8 million, as compared
to the second quarter of 1997.
For the six month period ending June 27, 1998, the Company's net sales were
$60.5 million, compared to $62.8 million for the first two quarters of 1997.
The sales decline was attributable to weaker than anticipated demand for the
Company's RAID and HBA products in the Asia Pacific region and through the
Company's domestic distribution channels, particularly as compared to the first
quarter of 1997.
Gross profit for the three months ended June 27, 1998 was $11.2 million or 35%
of net sales, compared to $8.9 million or 33% of net sales for the same period
in 1997, or a 26% increase of $2.3 million. The improvement in the gross profit
was attributable to a 19% increase in second quarter 1998 sales volume, compared
to the same quarter in 1997, and to a product mix, including DAC960PG and
DAC960SX, that contained a larger percentage of the Company's higher margin new
products.
For the first two quarters of 1998, gross profits were $20.9 million compared to
$14.6 million for the corresponding period in 1997. The lower gross profit in
the first half of
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1997 was primarily attributable to a charge for inventory obsolescence taken in
the first quarter of 1997.
The Company's largest customer during the second quarter of 1998 was Digital
Equipment Corporation ("DEC"), which accounted for $10.5 million or 33% of the
Company's net sales during that period. The Company's second and third largest
customers during the quarter were Siemens and NEC, which accounted for $5.1
million or 16% of net sales and $2.6 million or 8% of net sales, respectively.
For the first two quarters of 1998, DEC was the Company's largest customer
with $20.0 million or 33% of the Company's net sales. The Company's second
and third largest customers during the first half of 1998 were Siemens and
NEC, which accounted for $9.2 million or 15% of net sales and $4.7 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 June 27, 1998, totaled $14.9 million, as compared
to $7.8 million as of the end of the second quarter in 1997. The increase in
the backlog is primarily attributable to increased orders placed by the
Company's larger customers.
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 sales for any succeeding period. Of the $14.9 million
backlog at June 27, 1998, all but a small percentage of the orders making up
that backlog would have been scheduled for delivery within the three months
ending September 26, 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,
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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 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 Intel's
i960 or Strong Arm 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 or
Strong Arm processor or support the Company's efforts to develop products
based on the i960 or Strong Arm 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
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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.
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. During the second quarter of 1998, the Company's sales of HBA's
were significantly reduced, primarily as a result of the domestic distribution
channels experiencing weakened sales.
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, 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.
SALES AND MARKETING EXPENSES
Sales and marketing expenses for the three months ended June 27, 1998, totaled
$5.3 million, an increase of $662 thousand or 14% from the corresponding period
in 1997. Sales and marketing expenses represented 17% of net sales for the
three months ended June 27, 1998, the same percentage of sales for the
comparable 1997 quarter. This increase in sales and marketing expenses resulted
primarily from expenses related to increased sales and marketing headcount and
the resulting increase in
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compensation expense and to increased travel cost necessary to service the
Company's customers.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses for the three months ended June 27, 1998,
totaled $6.8 million, an increase of 35% from the $5.0 million incurred during
the corresponding period in 1997. Research and development expenses represented
21% of net sales for the three months ended June 27, 1998, as compared to 19% in
the comparable 1997 quarter. Research and development expenses increased during
the second quarter of 1998 due primarily to expenses incurred for continued
expansion and increased staffing of the Company's R&D facility in Boulder,
Colorado, prototype expenses related to the Company's new products and product
development costs related to the Company's NP&L-TM- division, the efforts of
which have been discontinued. (See Note D of "Notes to Unaudited Condensed
Consolidated Financial Statements".) The Company continued its investment in
research and development activities during the second quarter of 1998 in an
effort to implement its strategies of maintaining leadership in the RAID market.
However, no assurance can be given that such leadership will be maintained or
that the Company will be able to introduce its new product offerings on a timely
basis.
GENERAL AND ADMINISTRATIVE
General and administrative expenses for the three months ended June 27, 1998,
totaled $2.9 million, an increase of $950 thousand from the corresponding period
of 1997. The increase in expenses was primarily due to higher legal costs
related to on-going litigation, consulting expenses related to the
Company's implementation of an "Enterprise Resource Planning" (ERP) system and
the accrual for the design, printing and shipment expense for the Company's
annual report and proxy one quarter earlier than in 1997. General and
administrative expenses were 9% of net sales for the three months ended June 27,
1998, as compared to 7% of net sales for the second quarter of 1997.
INCOME TAXES AND INTEREST EXPENSES
The Company's effective tax rate for the second quarter of 1998 was 37%, the
same rate as the second quarter of 1997. The Company recorded interest expense
of $103 thousand primarily related to royalty payments.
SAFE-HARBOR STATEMENT UNDER PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995:
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
14
<PAGE>
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 and SCSI host
adapter 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; unanticipated costs and risks of
litigation; and other risks and uncertainties detailed in the Company's filings
with the Securities and Exchange Commission, including its 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.
15
<PAGE>
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In October 1994, the former Chief Executive Officer of the Company, Dr. M.A.
Chowdry, filed a complaint against the Company and its outside directors,
claiming breach of an employment agreement that he entered into with the Company
approximately three months prior to his termination as the Company's Chief
Executive Officer. The complaint alleges compensatory and consequential damages
of over $5 million (which would vary based on the price of the Company's Common
Stock) and unspecified punitive damages. The Company has filed a cross complaint
against Dr. Chowdry and believes it has meritorious defenses and will vigorously
defend this lawsuit. 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.
Nonetheless, given the unpredictable nature of legal proceedings, there can be
no assurance that the Company will prevail.
In July, 1998, a complaint against the Company, for breach of contract and
open book account, was filed in the Superior Court of the State of California
for the County of Santa Clara by Pioneer-Standard of Maryland, Inc. Pioneer
alleges the breach of a purchase agreement for failure of the Company to
repurchase excess inventory at the conclusion of the contract. Pioneer seeks
damages in the sum of approximately $1,150,000.00 plus interest, and has
filed a motion for a writ of attachment. The action is in its very early
stages. The Company is beginning the process of evaluating the claims made
and, as yet, has not filed an answer to the complaint.
The Company has incurred and expects to continue to incur substantial legal
expenses with respect to Dr. Chowdry's suit and other litigation matters in
which it is involved. Those expenses may fluctuate from quarter to quarter
and are likely to increase.
In addition to the matter discussed above, the Company is a party to routine
suits and claims arising in the ordinary course of its business which the
Company does not believe will have a material adverse effect on its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The 1998 Annual Meeting of Stockholders was held on May 21, 1998. The results
of the shareholder vote on the matters presented at the meeting are listed
below.
<TABLE>
<CAPTION>
Election of Directors:
<S> <C> <C>
Mr. Ismael Dudhia vote for 14,384,115
vote withheld 609,462
Dr. M. Yaqub Mirza vote for 14,385,465
vote withheld 608,112
Dr. Inder M. Singh vote for 14,386,505
vote withheld 607,072
16
<PAGE>
Mr. Richard Love vote for 14,385,655
vote withheld 607,922
Mr. Al Montross vote for 14,385,355
vote withheld 608,222
Mr. Stephen McKenzie vote for 14,386,305
vote withheld 607,272
Mr. Walter Wilson vote for 14,386,605
vote withheld 606,972
</TABLE>
Proposal to ratify the appointment of KPMG Peat Marwick LLP as independent
public accountants of the Company for the fiscal year ending December 26, 1998 -
votes for 14,350,765, votes against 272,275 and votes abstaining 370,537.
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 11th day of August 1998.
MYLEX CORPORATION
By /s/ Colleen Gray
---------------------------
Colleen Gray
Vice President of Finance and
Chief Financial Officer
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-26-1998
<PERIOD-START> MAR-29-1998
<PERIOD-END> JUN-27-1998
<CASH> 4,365
<SECURITIES> 35,364
<RECEIVABLES> 17,363
<ALLOWANCES> (153)
<INVENTORY> 24,900
<CURRENT-ASSETS> 89,841
<PP&E> 18,352
<DEPRECIATION> 10,274
<TOTAL-ASSETS> 98,159
<CURRENT-LIABILITIES> 12,985
<BONDS> 0
0
0
<COMMON> 211
<OTHER-SE> 84,963
<TOTAL-LIABILITY-AND-EQUITY> 98,159
<SALES> 32,130
<TOTAL-REVENUES> 33,029
<CGS> 20,889
<TOTAL-COSTS> 35,914
<OTHER-EXPENSES> (13)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 511<F1>
<INCOME-PRETAX> (3,260)
<INCOME-TAX> (1,206)
<INCOME-CONTINUING> (2,054)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,054)
<EPS-PRIMARY> (0.10)
<EPS-DILUTED> (0.10)
<FN>
<F1>NET OF INTEREST INCOME AND INTEREST EXPENSE
</FN>
</TABLE>
