<PAGE>
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 26, 1999 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
- ------------------------------------------- ---------
(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 19,719,918 SHARES
---------------------------- ----------------------------
Class Outstanding at June 26, 1999
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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>
JUN 26 DEC 26
1999 1998
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<S> <C> <C>
ASSETS
Current Assets:
Cash and Equivalents $ 3,836 $ 8,260
Short-Term Investments 26,340 34,739
Accounts Receivable, Net 21,293 20,124
Inventories 24,504 19,240
Prepaid Expenses & Other Current Assets 15,462 15,924
-------------------- ---------------------
Total Current Assets 91,435 98,287
Property, Plant and Equipment, net 13,611 10,837
Others Assets, Net 1,211 1,247
-------------------- ---------------------
Total Assets $ 106,257 $ 110,371
==================== =====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable $ 16,418 $ 13,809
Accrued Liabilities 7,430 14,318
-------------------- ---------------------
Total Current Liabilities 23,848 28,127
Stockholders' Equity:
Common Stock 215 212
Additional Paid-In Capital 57,589 55,350
Notes Receivable from Stockholders (888) (895)
Retained Earnings 25,493 27,577
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Total Stockholders' Equity 82,409 82,244
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Total Liabilities and Stockholders' Equity $ 106,257 $ 110,371
==================== =====================
</TABLE>
NOTE: CERTAIN AMOUNTS AS OF DECEMBER 26, 1998, HAVE BEEN RECLASSIFIED TO CONFORM
TO THE CURRENT YEAR'S PRESENTATION. 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 PER SHARE DATA)
<TABLE>
<CAPTION>
JUN 26 JUN 27
1999 1998
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<S> <C> <C>
NET SALES $ 34,449 $ 32,130
COST OF SALES 25,685 20,889
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GROSS PROFIT 8,764 11,241
OPERATING EXPENSES:
SELLING AND MARKETING 3,999 5,327
RESEARCH AND DEVELOPMENT 5,401 6,809
GENERAL AND ADMINISTRATION 2,561 2,889
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TOTAL OPERATING EXPENSES 11,961 15,025
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OPERATING LOSS (3,197) (3,784)
OTHER INCOME, NET 327 524
-------------------- ----------------------
LOSS BEFORE TAXES (2,870) (3,260)
INCOME TAX BENEFIT (1,062) (1,206)
-------------------- ----------------------
NET LOSS $ (1,808) $ (2,054)
==================== ======================
LOSS PER COMMON SHARE:
BASIC $ (0.09) $ (0.10)
DILUTED $ (0.09) $ (0.10)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
BASIC 19,788 20,005
DILUTED 19,788 20,005
</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 PER SHARE DATA)
<TABLE>
<CAPTION>
JUN 26 JUN 27
1999 1998
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<S> <C> <C>
NET SALES $ 70,739 $ 60,478
COST OF SALES 50,168 39,548
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GROSS PROFIT 20,571 20,930
OPERATING EXPENSES:
SELLING AND MARKETING 8,411 10,110
RESEARCH AND DEVELOPMENT 10,754 12,895
GENERAL AND ADMINISTRATION 5,371 5,069
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TOTAL OPERATING EXPENSES 24,536 28,074
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OPERATING LOSS (3,965) (7,144)
OTHER INCOME, NET 657 743
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LOSS BEFORE TAXES (3,308) (6,401)
INCOME TAX BENEFIT (1,224) (2,368)
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NET LOSS $ (2,084) $ (4,033)
===================== ======================
LOSS PER COMMON SHARE:
BASIC $ (0.10) $ (0.20)
DILUTED $ (0.10) $ (0.20)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
BASIC 19,858 20,095
DILUTED 19,858 20,095
</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)
<TABLE>
<CAPTION>
JUN 26 JUN 27
1999 1998
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET LOSS $ (2,084) $ (4,033)
DEPRECIATION AND AMORTIZATION 1,269 1,935
CHANGES IN OPERATING ASSETS AND LIABILITIES:
ACCOUNTS RECEIVABLE, NET (1,169) (2,329)
INVENTORIES (5,264) 966
PREPAID EXPENSES AND
OTHER CURRENT ASSETS 462 2,568
ACCOUNTS PAYABLE 2,609 2,391
ACCRUED LIABILITIES (4,483) (1,502)
---------------------- ----------------------
NET CASH USED IN OPERATING ACTIVITIES $ (8,660) $ (4)
CASH FLOWS FROM INVESTING ACTIVITIES:
CAPITAL EXPENDITURES (4,041) (1,426)
MATURITIES OF SHORT-TERM INVESTMENTS 26,680 35,420
PURCHASE OF SHORT-TERM MARKETABLE INVESTMENTS (18,283) (47,983)
DECREASE(INCREASE) IN OTHER ASSETS 36 19
---------------------- ----------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES $ 4,392 $(13,970)
CASH FLOWS FROM FINANCING ACTIVITIES:
PROCEEDS FROM EXERCISE OF STOCK OPTIONS 1,505 315
PROCEEDS FROM PURCHASES UNDER THE
EMPLOYEE STOCK PURCHASE PLAN 485 523
TREASURY STOCK (2,153) (3,872)
NOTES RECEIVABLE FROM STOCKHOLDERS - (148)
REPAYMENT OF NOTES RECEIVABLE FROM STOCKHOLDERS 7 -
---------------------- ----------------------
NET CASH USED IN FINANCING ACTIVITIES $ (156) $ (3,182)
---------------------- ----------------------
NET DECREASE IN CASH AND EQUIVALENTS $ (4,424) $(17,156)
CASH AND CASH EQUIVALENTS: AT BEGINNING OF PERIOD $ 8,260 $ 21,521
====================== ======================
CASH AND CASH EQUIVALENTS: AT END OF PERIOD $ 3,836 $ 4,365
====================== ======================
NON-CASH FINANCING AND INVESTING ACTIVITIES:
STOCK WARRANTS ISSUED $ 2,177 $ -
TAX BENEFIT RELATED TO DISQUALIFYING DISPOSITION
OF STOCK OPTIONS $ 228 $ 91
COMMON STOCK ISSUED FOR NOTES RECEIVABLE FROM
STOCKHOLDERS $ - $ 144
CASH PAID DURING THE PERIOD:
CASH PAID FOR INTEREST $ - $ -
CASH PAID FOR INCOME TAXES $ - $ 10
</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 26, 1998. The results of operations for the three and six months
ended June 26, 1999, 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 and
six months ended June 26, 1999 and June 27, 1998, 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 26, 1999 and June 27, 1998, potential common shares consisted of options
and warrants to acquire 5,152,685 and 4,214,985 shares of common stock with
weighted-average exercise prices of $7.82 and $9.24, respectively.
NOTE B. INVENTORIES (in $000's)
<TABLE>
<CAPTION>
June 26, December 26,
1999 1998
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<S> <C> <C>
Raw Material $ 5,812 $ 7,535
Work-in-process 578 3,903
Finished Goods 18,114 7,802
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Total $24,504 $19,240
</TABLE>
NOTE C. CONTINGENCIES
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In mid-1998, Pioneer Standard of Maryland, Inc. filed a complaint against the
Company in the Superior Court in Santa Clara County, California, alleging
breach of a purchase agreement with respect to the Company's failure to
purchase from Pioneer Standard excess inventory at the termination of the
term of the agreement. The complaint seeks damages of approximately
$1,000,000 plus interest. The Company has filed an answer denying Pioneer
Standard's claims and a cross-complaint, alleging overcharging by Pioneer.
The Company intends to vigorously defend Pioneer's claims and pursue its
claims against Pioneer.
NOTE D. 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 based 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.
NOTE E. ACQUISITION OF COMPANY
On July 27, 1999, the Company entered into an agreement with IBM Corporation
("IBM") pursuant to which IBM would acquire all of the outstanding shares of
the Company at a purchase price of $12 per share. Upon completion of the
acquisition, which is subject to regulatory approval and approval of the
Company's stockholders, the Company would become a wholly-owned subsidiary of
IBM. It is presently expected that the acquisition will be consummated in
October 1999.
NOTE F. SEGMENT INFORMATION
The Company has one operating segment, mass storage system.
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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 Compaq, 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 six months of 1999.
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 six months
of 1999. 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 segment of the 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 PCI market space, allowing an offering of
product solutions for desktop PC's to large networked systems.
As of June 26, 1999, the Company had approximately 320 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 1999 the Company financed its operations
primarily from cash balances.
At June 26, 1999, the Company's working capital decreased to $67.6 million
from $70.2 million at December 26, 1998. This decrease in working capital was
due to a decrease in current assets of $6.9 million offset by a smaller
decrease in current liabilities of $4.3 million. Decreases in current assets
resulted primarily from a net reduction in combined cash and short-term
marketable investments of $12.8 million offset by increases of $5.3 million
in net inventories and $1.2 million in accounts receivable. Beside the
increases in net inventories and account receivables, both increases
utilizing cash and short-term investments assets, the Company purchased $4.0
million in capital expenditures. These capital expenditures are primarily
related to the Company's purchase and implementation of an Enterprise
Resource Planning (ERP) System, which was turned-on in the second quarter of
1999. The increase in net inventories was the result of an increase in
finished goods inventory, attributable to lower than expected sales in the
second quarter of 1999 due principally to delayed OEM qualification of the
Company's newer products, in particular the extremeRAID 1100 and the DACFL.
The increase in accounts receivable was due to a high percentage of the
second quarter's sales occurring in the last month of the quarter, as
compared to the last quarter of 1998. Current liabilities decreased by a net
$4.3 million. The increase in accounts payable of $2.6 million was attributed
to the Company's material purchases, being weighted more heavily towards the
latter part of the quarter and to the change in the Company's procurement
strategy that results in delayed invoicing of material through the Company's
turnkey manufacturer. This increase in accounts payable was
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offset by a decrease of $6.9 million in accrued liabilities, resulting from
the fulfillment of the $4.2 million obligation related to a legal settlement
that the Company negotiated with its former CEO in January 1999 and the
accrued tax benefit, which offset tax liabilities, resulting from the
Company's losses-to-date.
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 2000. 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
operations for the quarter ended June 26, 1999.
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 $14.2 million, 1,810,400 shares of the
Company's Common Stock. Management's decision as to whether to repurchase
shares in the future will be based on the Company's cash needs, the price of
the Company's stock 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 26, 1999, totaled $34.4 million, compared to $32.1 million for the
corresponding period of fiscal year 1998, an increase of approximately 7%.
This increase in sales was primarily due to increases in sales of the
Company's newer products, ExtremeRAID 1100, AcceleRaid250, AcceleRaid150 and
DACFF, which amounted to $6.4 million, $5.4 million, $1.8 million and $1.1
million, respectively, or $14.7 million in the aggregate. These increases
were offset by a decline in sales of the Company's older PCI RAID products, a
combined $13.9 million reduction, as compared to the second quarter of 1998.
For the six month period ending June 26, 1999, the Company's net sales were
$70.7 million, compared to $60.5 million for the first two quarters of 1998.
The sales increase
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was attributable to higher external RAID sales, in particular the DACSX and a
custom external RAID product designed for Hewlett Packard (HP). The DACSX and
custom HP product sales were $6.6 million and $4.3 million, respectively.
Gross profit for the three months ended June 26, 1999, was $8.8 million or
25% of net sales, compared to $11.2 million, or 35% of net sales, for the
same period in 1998, representing a 22% decrease of $2.4 million. The erosion
in the gross profit was primarily attributable to a higher percentage of low
margin RAID product making up the second quarter's sales mix and the
Company's sales being subject to royalty payments under the EMC royalty
agreement, which became effective at the end of December 1998.
The Company's largest customer during the second quarter of 1999 was Siemens,
which accounted for $5.8 million, or 17%, of the Company's net sales during
that period. The Company's second and third largest customers during the
quarter were NEC and Compaq, which accounted for $4.0 million, or 12%, of net
sales and $3.5 million, or 10%, of net sales, respectively.
For the first two quarters of 1999, Siemens was the Company's largest
customer with $9.2 million, or 13%, of the Company's net sales. The Company's
next three largest customers during the first half of 1999 were Fujitsu, NEC
and Compaq, which accounted for $8.0 million, or 11%, $6.8 million, or 10%,
and $6.5 million, or 9%, 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 26, 1999, totaled $10.0 million, as compared
to $14.9 million at the end of the second quarter in 1998. The decrease in
the backlog is primarily attributable to reduction in orders from 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 $10.0
million backlog at June 26, 1999, all but a small percentage of the orders
making up that backlog would have been scheduled for delivery within the
three months ending September 25, 1999, unless the orders were canceled or
rescheduled by the respective customer.
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YEAR 2000
Many computers, software and other control devices utilizing microprocessors
use only two digits to identify the year in a date field. As the year 2000
approaches, a critical technology issue has emerged for all organizations,
including the Company, with respect to the ability of computer hardware and
software systems, including application software and operating systems, and
embedded systems to accurately process date-based transactions for the year
2000 and thereafter.
During 1998, the Company compiled a list of the critical information
technology related computer software and hardware systems and software tools
it uses to monitor its business. It then engaged in a review, completed
during the fourth quarter of 1998, of such systems and tools to determine
whether they can process such transactions (i.e. they are "year 2000
compliant"). As a result of such review, the Company has modified many of its
critical application software programs.
In the second quarter of 1998, the Company initiated the implementation of
Enterprise Resource Planning (ERP) software to replace its core management
information systems that support manufacturing, sales, customer service and
finance and accounting. The Company has obtained the assurances of the
providers of such ERP software that it is year 2000 compliant. The Company
completed the implementation of the ERP software during the second quarter of
1999. The ERP software was implemented to enable the Company to enhance its
business processes and to more rapidly report information and not because of
year 2000 compliance issues.
The Company presently expects to complete, by September 30, 1999, remediation
efforts, including substantial testing, validation and implementation
(through a combination of upgrades, custom modifications and replacements),
of all of the information technology software, systems and tools it uses to
monitor its business. As appropriate, the Company will also attempt to obtain
written certification from each of the providers of such systems and tools to
the effect that such systems and tools are year 2000 compliant. Based upon
its review to date, the Company does not currently believe any year 2000
compliance issues with respect to such software, systems or tools will
materially adversely affect the Company or its operations.
The Company has completed its review and development of remediation plans
related to its critical non-information technology related systems, and
expects to complete any necessary remediation efforts for those systems by
September 30, 1999.
The Company's RAID and host bus adapter products do not contain specific
calendar year functions. However, the Company has, in recent months, provided
warranties to many of its customers that its present products are year 2000
compliant.
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During the first quarter of 1999, the Company tested and analyzed certain of
its present products for year 2000 compliance. As a result of that testing
and analysis, the Company has verified that it does not expect to encounter
year 2000 compliance issues with those products. If, for any reason, any of
the Company's present products or old products (which have not been tested)
are found not to be year 2000 compliant, the Company may be exposed to
damages or other claims that could have a material adverse effect on the
Company. However, although no assurances can be given, because the Company's
RAID and host adapter products, both present and past, do not contain
specific calendar year functions, and its motherboard products, last sold in
1996, are no longer under warranty, the Company does not presently believe
that any such claims are likely to be made or, if made, to be successful.
The Company is currently assessing year 2000 compliance issues with respect
to major customers and suppliers and other essential service providers. In
the first quarter of 1999, the Company received detailed year 2000 readiness
feedback from its primary manufacturer. During the second quarter of 1999,
the Company began to send to its significant customers, suppliers and service
providers a questionnaire seeking information about the year 2000 compliance
status of those third parties. During the same quarter, the Company began the
testing and validation phase with those third party suppliers and service
providers it has identified as essential. Additionally, during July 1999, the
Company and an outside consultant conducted a year 2000 compliance review of
its principal and most critical supplier. The Company expects to complete
these third party review processes by September 30, 1999. However, there can
be no assurance that the software or systems of third parties on which the
Company relies will be year 2000 compliant or that it will be able to obtain
the information from such third parties necessary for it to determine whether
it may be materially adversely affected by any such software or systems.
Management believes that the most reasonably likely worst case scenario
related to year 2000 compliance that the Company may experience would be a
delay or inability to procure components from suppliers or an interruption of
orders from key customers due to their failure to successfully remediate year
2000 related issues. Such scenarios, if they were to develop, could
materially adversely affect the Company and its operations. The Company does
not yet have in place contingency plans to respond to any such scenario. The
Company has identified general contingency plans, such as replacement of
suppliers, stockpiling of critical components and the purchase of generators.
Upon completing its review of third party year 2000 compliance issues,
presently scheduled for September 30, 1999, it intends to develop and
implement, by December 1999, any necessary contingency plans.
The Company does not consider the cost of implementing its ERP systems
software to be a cost related to year 2000 compliance because the project was
initiated independently of the year 2000 issue and was not accelerated in
order to achieve year
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2000 compliance. The total cost to the Company of year 2000 compliance has
not been, and is not anticipated to be, material to its financial position or
results of operations. To date, costs to the Company of year 2000 compliance
have consisted primarily of internal labor and payments to consultants.
Future costs related to the year 2000 compliance issue will consist of
internal labor, payments to consultants, and, as necessary, software and
hardware upgrades.
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 allowed the Company to broaden its
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 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.
14
<PAGE>
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 150, 200 and 250. These
controllers are for the entry level and mid range server applications. The
Mylex external disk array controllers, DAC960FF, DAC960FL 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.
These external RAID controllers were designed with versatile interfaces,
fibre-to-fibre, fibre-to-SCSI and SCSI-to-SCSI. 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
environments of 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,
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 1999,
15
<PAGE>
the Company's sales of HBA's were reduced from those in the second quarter of
1998, 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 June 26, 1999,
totaled $4.0 million, a decrease of $1.3 million or 25% from the
corresponding period in 1998. Sales and marketing expenses represented 12% of
net sales for the three months ended June 26, 1999, or 5% less than the
comparable period in 1998. This differential in sales and marketing expenses
resulted primarily from expense reductions related to a Company initiated
decrease in sales and marketing headcount, and the resulting decrease in
compensation expense, and to decreased advertising and trade show related
activities.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses for the three months ended June 26, 1999,
totaled $5.4 million, a decrease of $1.4 million, or 21%, from the $6.8
million incurred during the corresponding period in 1998. Research and
development expenses represented 16% of net sales for the three months ended
June 26, 1999, as compared to 21% in the comparable 1998 quarter. Research
and development expenses decreased between the two quarters, due primarily to
the closure of the Company's NP&L-TM- division in July 1998. R&D expenditures
relating to NP&L-TM- were approximately $1.5 million in the second quarter of
1998. The Company continued its investment in research and development
activities during the second quarter of 1999 in an effort to implement its
strategies of maintaining leadership in the RAID segment of the 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.
16
<PAGE>
GENERAL AND ADMINISTRATIVE
General and administrative expenses for the three months ended June 26, 1999,
totaled $2.6 million, a decrease of $328 thousand, or 11%, from the
corresponding period of 1998. The decrease in expenses was primarily due to
lower consulting expenses, related to the selection of the ERP system, and
the timing of the Company's annual report and proxy expense, which were
required to be accrued one quarter earlier than in 1998. General and
administrative expenses were 7% of net sales for the three months ended June
26, 1999, as compared to 9% of net sales for the second quarter of 1998.
INCOME TAXES AND INTEREST EXPENSES
The Company's effective tax rate for the second quarter of 1999 was 37%, the
same rate as the second quarter of 1998.
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; delays in customer qualification of new
products; inability of vendors to timely design and provide custom components
for the company's products; ability of the company to improve its operations
processes; component availability; the mix of product sold; 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; 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; the risk of utilizing a sole source, third party
manufacturer; the risk that any of its systems or products, or vendors,
suppliers or customers, may not be Year 2000 compliant; and other risks and
uncertainties detailed in the company's filings with the Securities and
Exchange Commission, including, without limitation, its 10-K filing for the
period ended December 26, 1998 and its 10-Q filing for the period ended March
27, 1999. These forward-looking statements speak only as of the date hereof,
and the company disclaims any intent or obligation to update such statements.
17
<PAGE>
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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 expects to incur substantial legal expenses with respect to the
Pioneer suit and other litigation matters in which it is involved. Those
expenses may fluctuate from quarter to quarter and are likely to increase in
the quarters immediately prior to and during any trial.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The 1999 Annual Meeting of Stockholders was held on May 17,1999. The results
of the shareholder vote on the matters presented at the meeting are listed
below.
Election of Directors:
Mr. Ismael Dudhia vote for 14,965,854
vote withheld 3,382,920
Dr. M. Yaqub Mirza vote for 14,967,977
vote withheld 3,380,797
Dr. Inder M. Singh vote for 17,584,377
vote withheld 764,397
Mr. Al Montross vote for 17,580,045
vote withheld 768,729
Mr. Stephen McKenzie vote for 17,580,102
vote withheld 768,672
18
<PAGE>
Mr. Walter Wilson vote for 17,586,725
vote withheld 762,049
Proposal to approve adoption of the Company's 1998 Stock Option and Incentive
Plan and the reservation of 2,000,0000 shares of the Company's Common Stock
for issuance thereunder - votes for 9,271,425, votes against 4,128,945 and
votes abstaining 70,026.
Proposal to approve adoption of the Company's 1998 Employee Stock Purchase
Plan and the reservation of 500,0000 shares of the Company's Common Stock for
issuance thereunder - votes for 10,089,811, votes against 3,316,004 and votes
abstaining 64,581.
Proposal to ratify the appointment of KPMG LLP as independent public
accountants of the Company for the fiscal year ending December 25, 1999 -
votes for 17,955,684, votes against 366,030 and votes abstaining 27,060.
19
<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 August 1999.
MYLEX CORPORATION
By /S/ Colleen Gray
------------------------------
Colleen Gray
Vice President of Finance and
Chief Financial Officer
20
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