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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 26, 1998 or
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[ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934. For the transition period from ___________ to ___________.
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 19,724,322 shares
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Class Outstanding at September 26, 1998
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PART I. FINANCIAL INFORMATION
Item 1. Unaudited Condensed Consolidated Financial Statements
MYLEX CORPORATION
BALANCE SHEETS
UNAUDITED
(in $000's)
<TABLE>
<CAPTION>
SEPT 26 DEC 27
1998 1997
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ASSETS
Current Assets:
Cash and Equivalents $ 10,597 $ 21,521
Short-Term Investments 29,779 23,062
Accounts Receivable, Net 18,894 14,881
Inventories 20,605 25,866
Prepaid Expenses 11,998 10,617
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Total Current Assets 91,873 95,947
Property, Plant and Equipment, Net 9,491 8,325
Other Assets, Net 238 211
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Total Assets $101,602 $104,483
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable 9,926 5,700
Accrued Liabilities 9,355 6,488
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Total Current Liabilities 19,281 12,188
Stockholders' Equity
Common Stock 211 209
Additional Paid-In Capital 54,440 58,104
Notes Receivable from Stockholders (903) (720)
Retained Earnings 28,573 34,702
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Total Stockholders' Equity 82,321 92,295
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Total Liabilities and Stockholders' Equity $101,602 $104,483
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</TABLE>
SEE NOTES TO UNAUDITED CONDENSED 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)
<TABLE>
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SEPT 26 SEPT 27
1998 1997
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NET SALES $ 36,159 $ 29,432
COST OF SALES 23,963 20,025
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GROSS PROFIT 12,196 9,407
OPERATING EXPENSES:
SELLING AND MARKETING 4,360 4,100
RESEARCH AND DEVELOPMENT 5,630 5,208
GENERAL AND ADMINISTRATION 2,865 2,152
RESTRUCTURING 3,092 -
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TOTAL OPERATING EXPENSES 15,947 11,460
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OPERATING LOSS (3,751) (2,053)
INTEREST INCOME 503 379
INTEREST EXPENSE (38) (1)
OTHER EXPENSE (41) (29)
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LOSS BEFORE TAXES (3,327) (1,704)
INCOME TAX BENEFIT (1,231) (630)
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NET LOSS $ (2,096) $ (1,074)
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LOSS PER COMMON SHARE:
BASIC $ (0.11) $ (0.05)
DILUTED $ (0.11) $ (0.05)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
BASIC 19,786 20,166
DILUTED 19,786 20,166
</TABLE>
SEE NOTES TO UNAUDITED CONDENSED 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)
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SEPT 26 SEPT 27
1998 1997
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NET SALES $ 96,638 $ 92,272
COST OF SALES 63,511 68,282
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GROSS PROFIT 33,127 23,990
OPERATING EXPENSES:
SELLING AND MARKETING 14,469 12,383
RESEARCH AND DEVELOPMENT 18,526 14,628
GENERAL AND ADMINISTRATION 7,935 6,487
RESTRUCTURING 3,092 -
TOTAL OPERATING EXPENSES 44,022 33,498
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OPERATING LOSS (10,895) (9,508)
INTEREST INCOME 1,454 1,212
INTEREST EXPENSE (183) (1)
OTHER EXPENSE (104) (86)
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LOSS BEFORE TAXES (9,728) (8,383)
INCOME TAX BENEFIT (3,599) (3,102)
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NET LOSS $ (6,129) $ (5,281)
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LOSS PER COMMON SHARE:
PRIMARY $ (0.31) $ (0.26)
FULLY DILUTED $ (0.31) $ (0.26)
AVERAGE COMMON SHARES OUTSTANDING:
PRIMARY 19,992 20,552
FULLY DILUTED 19,992 20,552
</TABLE>
SEE NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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MYLEX CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS, NINE MONTHS ENDED
UNAUDITED
(IN $000'S)
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SEPT 26 SEPT 27
1998 1997
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CASH FLOWS FROM OPERATING ACTIVITIES:
NET LOSS $ (6,129) $ (5,281)
DEPRECIATION AND AMORTIZATION 2,673 1,738
TAX BENEFIT RELATED TO DISQUALIFYING DISPOSITION
OF STOCK OPTIONS 106 196
CHANGES IN OPERATING ASSETS AND LIABILITIES
ACCOUNTS RECEIVABLE, NET (4,013) 12,410
INVENTORIES 5,261 8,388
PREPAID EXPENSES (1,533) (555)
ACCOUNTS PAYABLE 3,105 (1,731)
ACCRUED LIABILITIES 4,095 (3,722)
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NET CASH PROVIDED BY OPERATING ACTIVITIES $ 3,565 $ 11,443
CASH FLOWS FROM INVESTING ACTIVITIES:
CAPITAL EXPENDITURES (3,634) (3,848)
MATURITIES OF SHORT-TERM INVESTMENTS 51,115 14,734
PURCHASE OF SHORT-TERM INVESTMENTS (58,034) (18,041)
DECREASE (INCREASE) IN OTHER ASSETS 18 (17)
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NET CASH USED IN INVESTING ACTIVITIES $(10,535) $ (7,172)
CASH FLOWS FROM FINANCING ACTIVITIES:
REPAYMENT OF CAPITAL LEASE OBLIGATIONS - (118)
PROCEEDS FROM EXERCISE OF STOCK OPTIONS 421 347
PROCEEDS FROM PURCHASES UNDER THE EMPLOYEE
STOCK PURCHASE PLAN 523 307
PAYMENTS TO ACQUIRE COMMON STOCK (4,711) (7,011)
NOTES RECEIVABLE FROM STOCKHOLDERS (187) -
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NET CASH USED IN FINANCING ACTIVITIES $ (3,954) $ (6,475)
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NET DECREASE IN CASH AND EQUIVALENTS $(10,924) $ (2,204)
CASH AND CASH EQUIVALENTS: AT BEGINNING OF PERIOD $ 21,521 $ 15,849
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CASH AND CASH EQUIVALENTS: AT END OF PERIOD $ 10,597 $ 13,645
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NON-CASH FINANCING AND INVESTMENT ACTIVITIES:
COMMON STOCK ISSUED FOR NOTES RECEIVABLE FROM
STOCKHOLDERS $ 183 $ 255
CASH PAID DURING THE PERIOD:
CASH PAID FOR INTEREST - $ 1
CASH PAID FOR INCOME TAXES $ 231 $ 1,136
</TABLE>
SEE NOTES TO UNAUDITED CONDENSED 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 condensed
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 nine months ended September 26, 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. For the three and nine months
ended September 26, 1998 and September 27, 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
September 26, 1998 and September 27, 1997, potential common shares consisted
of options to acquire 4,269,158 and 3,219,840 shares of common stock with
weighted-average exercise prices of $9.05 and $9.57, respectively.
NOTE B. INVENTORIES (in $000's)
<TABLE>
<CAPTION>
September 26, December 27,
1998 1997
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<S> <C> <C>
Raw Material $8,330 $14,976
Work-in-process 4,790 3,428
Finished Goods 7,485 7,462
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Total $20,605 $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.
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.
NOTE D. RESTRUCTURING CHARGE
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 subsequently discontinued the development activities
of its Network Power & Light-TM- (NP&L-TM-) division. The pre-tax,
non-recurring charge for this restructuring was $4.3 million. This charge was
composed of $1.2 million for the write-off of NP&L-TM- inventory, which was
included in cost of sales, and the remaining $3.1 million restructuring cost,
which was charged to operating expenses consisted of the cost of severance
compensation, $1.6 million, facilities consolidation, $100 thousand and the
write-off of assets utilized in affected operations, $1.4 million. At
September 26, 1998, $2.0 million of cash charges had been paid, leaving $1.1
million in accrued expenses.
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 CONDITION 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.
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 97% of the Company's net sales
during the first nine 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 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
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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 nine 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 September 26, 1998, the Company had approximately 340 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 1998 the Company financed its operations
primarily from cash balances and cash generated from operations.
At September 26, 1998, the Company's working capital decreased to $72.6
million from $83.8 million at December 27, 1997. This decrease in working
capital was due to a decrease in current assets of $4.1 million and an
increase in current liabilities of $7.1 million. Decreases in current assets
resulted from a net reduction in combined cash and short-term marketable
investments of $4.2 million and a $5.3 million decrease in net inventories,
offset by a $4.0 million increase in accounts receivable and a $1.4 million
increase in prepaid expenses and other current assets. The increase in
accounts receivable was due to higher sales in the third 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
increased, due primarily to the accrual of income tax benefits. Net
inventories declined, due, in part, to the continuing improvements in
materials management and to a $1.2 million write-off of inventories related
to the discontinuation of the Company's NP&L(TM) product line. The increase
in accounts payable was attributed to the increase in sales volume in the
third quarter of 1998, versus the sales volume in the last quarter of 1997.
The increase in accrued liabilities are primarily due to the accrual of the
restructuring charge to operating expenses, $1.1 million, and to the timing
of payroll and related benefits expense accruals, $900 thousand.
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.
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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 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 September 26, 1998. At that date, the Company had no amounts
outstanding under the line.
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 $12.0 million, 1,400,400 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
RESTRUCTURING CHARGE: 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 subsequently discontinued the
development activities of its Network Power & Light-TM- (NP&L-TM-) division.
The pre-tax, non-recurring charge for this restructuring was $4.3 million.
This charge was composed of $1.2 million for the write-off of NP&L-TM-
inventory, which was included in cost of sales, and a remaining $3.1 million
restructuring cost charged to operating expenses consisting of the cost of
severance compensation, $1.6 million, facilities consolidation, $100 thousand
and the write-off of assets utilized in affected operations, $1.4 million. At
September 26, 1998, $2.0 million of cash charges had been paid to date,
leaving $1.1 million in accrued expenses.
SALES AND GROSS PROFITS. The Company's net sales for the three months ended
September 26, 1998, totaled $36.2 million, compared to $29.4 million for the
corresponding period of fiscal year 1997, an increase of approximately 23%.
This increase in sales was primarily due to increases in sales of the
Company's newer
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products, DAC960PG, DAC960PJ and DAC960SX, which amounted to $7.9 million,
$4.6 million and $2.9 million, respectively, in the third quarter of 1998.
These increases were offset by a decline in the Company's host bus adapter
sales to $891 thousand, as compared to $4.0 million in the third quarter of
1997.
For the nine month period ending September 26, 1998, the Company's net sales
were $96.6 million, a 5% increase over $92.3 million in net sales for the
first three quarters of 1997. The sales increase was attributable to the
market's acceptance of the Company's new products.
Gross profit for the three months ended September 26, 1998, was $12.2
million, or 34% of net sales, compared to $9.4 million, or 32% of net sales
for the same period in 1997. The cost of sales for the third quarter of 1998
includes a $1.2 million inventory reserve for the discontinuation of the
Company's NP&L product line. Excluding this reserve, the gross profit for the
third quarter of 1998 would have been $13.4 million, or 37% of net sales. The
improvement in the gross profit was attributable to a 23% increase in third
quarter 1998 sales volume, compared to the same quarter in 1997, and to a
product mix that contained a larger percentage of the Company's higher margin
new products, including DAC960PG, DAC960PJ and DAC960SX.
For the first nine months of 1998, gross profits were $33.1 million, compared
to $24.0 million for the corresponding period in 1997. The lower gross profit
in the first nine months of 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 Siemens,
which accounted for $8.8 million or 24% of the Company's net sales during
that period. The Company's second and third largest customers during the
quarter were Digital Equipment Corporation (DEC) and NEC, which accounted for
$7.9 million or 22% of net sales and $3.1 million or 9% of net sales,
respectively. Due to Compaq's acquisition of DEC in February 1998, there has
been product consolidation between the two companies that will have an impact
on the Company's future revenues of the combined companies. Although the full
impact of these product line consolidations is not known at this time, the
Company presently estimates that its future business with Compaq will be
reduced from its recent levels and may be reduced by 30% to 40%.
For the first nine months of 1998, DEC was the Company's largest customer
with $28.0 million or 29% of the Company's net sales. The Company's second
and third largest customers during the first nine months of 1998 were Siemens
and NEC, which accounted for $18.0 million or 19% of net sales and $7.8
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
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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 26, 1998, totaled $14.4 million, as
compared to $11.3 million as of the end of the third 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 $14.4
million backlog at September 26, 1998, all but a small percentage of the
orders making up that backlog would have been scheduled for delivery within
the three months ending December 26, 1998, unless the orders were canceled or
rescheduled by the respective customer.
YEAR 2000
As the year 2000 approaches, a critical issue has emerged for all companies,
including the Company, with respect to whether application software programs
and operating systems utilized by a company and the marketplace only
accommodate a two-digit date position which represents the year (e.g., "95"
is stored on the system and represents the year 1995). As a result, the year
1999 (i.e., "99") could be the maximum date value these products would be
able to process accurately,
The Company has, for several months, been engaged in a review of the software
and systems it uses in an effort to determine whether it or its operations
may be materially adversely affected by this so-called "Year 2000"
conversion. The Company expects to complete that review by the end of its
fourth quarter, 1998. In that review, the Company has identified certain
software applications as being "critical applications" used in daily
operations. The Company is in the process of inquiring of, and obtained the
assurances of, the providers of such software with respect to it being Year
2000 compliant. To date, all inquires have shown that the software is
compliant or may be easily patched so that it is compliant. Based on its
review, which is not yet complete, the Company does not presently believe
that Year 2000 compliance issues with respect to its software and systems
will materially adversely affect the Company or its operations. However, no
assurance can be given that such review, once completed, will not uncover
potential adverse effect of the Year 2000 conversion with any of such
software or systems.
The Company will check its inventory for Year 2000 compliance during the
fourth quarter of 1998. Although no assurances can be given, it does not
expect to encounter Year 2000 compliance issues with its inventory that would
materially adversely affect its use or value.
The Company is in the process of initiating a review of whether the software
and systems of its vendors, customers, or distributors or other parties with
which it deals may, as a result of the Year 2000 conversion, have a material
adverse effect on the Company or its operations. The Company expects to
complete that review by the end of the first quarter of 1999. Accordingly,
the Company is not yet in a position to be able to predict whether such
software or systems of such parties, whose dealings with the Company are
material to the Company or its operations, that such party does not and will
not utilize software or systems that may interface with the Company, or are
or will be important to the operations of such party, that may cause problems
to such party or the Company as a result of the Year 2000 conversion.
However, no assurances can be given that the Company will be able to obtain
such assurances from each of such parties or that it will be able to obtain
the information from such parties necessary for the Company to determine
whether it may be material adversely affected by the software or systems of
such parties.
Test to ensure the Year 2000 compliance of all critical software and systems
are expected to be completed in the first quarter of 1999. A formal plan for
such testing is expected to be completed by the end of the Company's fourth
quarter of 1998.
The Company will maintain an ongoing effort to recognize and evaluate
potential exposures relating to the Year 2000 conversion arising from its use
of software supplied by other parties or its dealings with other parties. At
present, the Company cannot adequately estimate the total cost to it of
recognizing, evaluating and addressing any such exposures. It does expect,
however, to be able to estimate and budget those costs by the end of the
first quarter of 1999.
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
Company offers 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 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 processor. If another company develops a processor for
RAID applications which renders the i960 or Strong Arm processor
noncompetitive, whether as a result of cost, specifications or other
advantages of the new processor, or if Intel ceases to produce the
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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 4 to 256 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, and DAC960PU provide high
performance, fault tolerant data storage solutions for the PCI bus platforms.
The eXtremeRAID 1100 high performance controller is the Company's first
product based on the Strong Arm, a 64-bit RISC processor. In addition, the
Company has recently introduced a new family of high performance, cost
effective RAID controllers called the AcceleRAID 200 and 250. These
controllers are for the entry level and mid range server applications. The
Mylex external disk array controllers, DAC960FL, 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. There
can be no assurance that the Company will be able to continue to design
products that are compatible with the commonly used operating systems found
in the server environment in the future.
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, products
allowing for 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.
13
<PAGE>
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 third quarter of 1998, the Company's sales of HBA's
were significantly reduced, primarily as a result of the distribution
channels experiencing weakened product 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 September 26, 1998,
totaled $4.4 million, an increase of $260 thousand or 6% from the
corresponding period in 1997. Sales and marketing expenses represented 12% of
net sales for the three months ended September 26, 1998, as compared to 14%
in 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 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 September 26,
1998, totaled $5.6 million, an increase of 8% from the $5.2 million incurred
during the corresponding period in 1997. Research and development expenses
represented 16% of net sales for the three months ended September 26, 1998,
as compared to 18% in the comparable quarter of 1997. Research and
development expenses increased during the third quarter of 1998 due primarily
to expenses incurred for increased engineering staffing of the Company's R&D
facility in Boulder, Colorado and prototype
14
<PAGE>
expenses related to the Company's new products. The Company continued its
investment in research and development activities during the third quarter of
1998 in an effort to implement its strategy 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 new product
offerings on a timely basis.
GENERAL AND ADMINISTRATIVE
General and administrative expenses for the three months ended September 26,
1998, totaled $2.9 million, an increase of $713 thousand from the
corresponding period of 1997. The increase in expenses was primarily due to
higher legal costs related to on-going litigation, of approximately $480
thousand, and consulting expense related to the Company's implementation of
an "Enterprise Resource Planning" (ERP) system, of approximately $160
thousand. The anticipated total cost of the Company's ERP system
implementation, which includes software licenses, computer hardware, training
and consulting, is $5.2 million, most of this cost will be capitalized. The
Company expects to incur general and administrative expenses, related to the
ERP implementation, in Q4 of 1998, of approximately $250 thousand and in
1999, of approximately $500 thousand. General and administrative expenses
were 8% of net sales for the three months ended September 26, 1998, as
compared to 7% of net sales for the third quarter of 1997.
INCOME TAXES AND INTEREST EXPENSES
The Company's effective tax rate for the third quarter of 1998 was 37%, the
same rate as the third quarter of 1997. The Company recorded interest expense
of $38 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 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; unanticipated costs of, and
delays in, the Company's Year 2000 compliance
15
<PAGE>
program or its ERP system implementation; 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.
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. 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's
complaint sought damages in the sum of approximately $1,150,000 plus
interest. Recent submissions by Pioneer, however, suggest that it has reduced
its damages claim to approximately $964,000 plus interest. In August 1998,
the Court denied Pioneer's motion for a writ of attachment. The Company has
filed an answer denying Pioneer's claims and has filed a cross-complaint
alleging overcharging by Pioneer. The case currently is in the discovery
phase.
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 substantially in the quarters immediately prior to
and during the trial.
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 5. OTHER INFORMATION
Any stockholder proposal that is intended to be presented by such stockholder
at the Company's 1999 Annual Meeting must be received by the Company no later
than January 21, 1999, in order to be considered for inclusion in the proxy
statement and form of proxy relating to that meeting.
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 10th day of November 1998.
MYLEX CORPORATION
By /s/ Colleen Gray
-----------------------------
Colleen Gray
Vice President of Finance and
Chief Financial Officer
18
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