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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark One)
[x] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934. For the Quarterly Period ended MARCH 27, 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
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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 19,926,763 shares
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Class Outstanding at March 26, 1999
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PART I. FINANCIAL INFORMATION
Item 1. Unaudited Condensed Consolidated Financial Statements
MYLEX CORPORATION
BALANCE SHEETS
UNAUDITED
(IN THOUSANDS)
<TABLE>
<CAPTION>
MAR 27 DEC 26
1999 1998
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<S> <C> <C>
ASSETS
Current Assets:
Cash and Equivalents $ 3,714 $ 8,260
Short-Term Investments 35,710 34,739
Accounts Receivable, Net 21,727 20,124
Inventories 23,678 19,240
Prepaid Expenses and other current assets 17,571 15,924
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Total Current Assets 102,400 98,287
Property, Plant and Equipment, net 11,823 10,837
Others Assets, Net 1,262 1,247
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Total Assets $ 115,485 $ 110,371
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable $ 19,491 $ 13,809
Accrued Liabilities 10,109 14,318
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Total Current Liabilities 29,600 28,127
Stockholders' Equity
Common Stock 214 212
Additional Paid-In Capital 59,259 55,350
Notes Receivable from Shareholders (888) (895)
Retained Earnings 27,300 27,577
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Total Stockholders' Equity 85,885 82,244
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Total Liabilities and Stockholders' Equity $ 115,485 $ 110,371
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</TABLE>
NOTE: CERTAIN AMOUNTS AS OF DECEMBER 26, 1998 HAVE BEEN RECLASSIFIED TO
CONFORM TO THE CURRENT YEAR'S PRESENTATION. SEE NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
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MYLEX CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS, THREE MONTHS ENDED
UNAUDITED
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
MAR 27 MAR 28
1999 1998
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<S> <C> <C>
NET SALES $ 36,290 $ 28,348
COST OF SALES 24,483 18,659
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GROSS PROFIT 11,807 9,689
OPERATING EXPENSES:
SELLING AND MARKETING 4,412 4,782
RESEARCH AND DEVELOPMENT 5,353 6,087
GENERAL AND ADMINISTRATION 2,810 2,180
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TOTAL OPERATING EXPENSES 12,575 13,049
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OPERATING LOSS (768) (3,360)
OTHER INCOME, NET 330 219
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LOSS BEFORE TAXES (438) (3,141)
INCOME TAX BENEFIT (162) (1,162)
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NET LOSS $ (276) $ (1,979)
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LOSS PER COMMON SHARE:
BASIC $ (0.01) $ (0.10)
DILUTED $ (0.01) $ (0.10)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
BASIC 19,927 20,182
DILUTED 19,927 20,182
</TABLE>
SEE NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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MYLEX CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS, THREE MONTHS ENDED
UNAUDITED
(IN THOUSANDS)
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MAR 27 MAR 28
1999 1998
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
NET LOSS $ (276) $ (1,979)
DEPRECIATION AND AMORTIZATION 454 619
CHANGES IN OPERATING ASSETS AND LIABILITIES
ACCOUNTS RECEIVABLE, NET (1,603) (1,255)
INVENTORIES (4,438) 1,318
PREPAID EXPENSES AND
OTHER CURRENT ASSETS (1,647) 444
ACCOUNTS PAYABLE 5,682 4,061
ACCRUED LIABILITIES (1,804) 105
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NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ (3,632) $ 3,313
CASH FLOWS FROM INVESTING ACTIVITIES:
CAPITAL EXPENDITURES (1,429) (666)
MATURITIES OF SHORT-TERM INVESTMENTS 17,301 11,750
PURCHASE OF SHORT-TERM MARKETABLE INVESTMENTS (18,283) (23,501)
DECREASE(INCREASE) IN OTHER ASSETS (15) 19
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NET CASH USED IN INVESTING ACTIVITIES $ (2,426) $(12,398)
CASH FLOWS FROM FINANCING ACTIVITIES:
PROCEEDS FROM EXERCISE OF STOCK OPTIONS 1,505 178
TREASURY STOCK - (924)
NOTES RECEIVABLE FROM SHAREHOLDERS 7 (146)
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NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES $ 1,512 $ (892)
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NET DECREASE IN CASH AND EQUIVALENTS $ (4,546) $ (9,977)
CASH AND CASH EQUIVALENTS: AT BEGINNING OF PERIOD $ 8,260 $ 21,521
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CASH AND CASH EQUIVALENTS: AT END OF PERIOD $ 3,714 $ 11,544
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NON-CASH FINANCING AND INVESTMENT ACTIVITIES:
TAX BENEFIT RELATED TO DISQUALIFYING DISPOSITION
OF STOCK OPTIONS $ 228 $ 62
STOCK WARRANTS ISSUED 2,177 -
CASH PAID DURING THE PERIOD:
CASH PAID FOR INTEREST - -
CASH PAID FOR INCOME TAXES - -
</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 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 26, 1998. The results of
operations for the three months ended March 27, 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 months
ended March 27, 1999 and March 28 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 March 27, 1999
and March 28, 1998, potential common shares consisted of options and warrants to
acquire 5,240,189 and 4,244,084 shares of common stock with weighted-average
exercise prices of $7.90 and $9.32, respectively.
NOTE B. INVENTORIES (in $000's)
<TABLE>
<CAPTION>
March 27, December 26,
1999 1998
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<S> <C> <C>
Raw Material $ 9,384 $ 7,535
Work-in-process 1,919 3,903
Finished Goods 12,375 7,802
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Total $23,678 $19,240
</TABLE>
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NOTE C. CONTINGENCIES
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 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 Siemens, Fujitsu, and NEC,
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 three 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 RAID controller product sales in the first three
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 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 March 27, 1999, the Company had approximately 315 employees. None of
the employees are represented by a labor union or employed under any
collective bargaining agreement.
LIQUIDITY AND CAPITAL RESOURCES
During the first quarter of 1999 the Company financed its operations
primarily from cash balances and cash generated from operations.
At March 27, 1999, the Company's working capital increased to $72.8 million
from $70.2 million at December 26, 1998. This increase in working capital was
due to a increase in current assets of $4.1 million with an offsetting
increase in current liabilities of $1.5 million. Increases in current assets
of $4.1 million resulted from an increase in net inventories of $4.5 million,
a $1.6 million increase in accounts receivable and a $1.6 million increase in
prepaid expense and other current assets offset by a $3.6 million decrease in
combined cash and short term investments. The net increase in inventories
resulted primarily from a delay in the expected sale of a material portion of
the Company's inventory to its turnkey manufacturer and a delay in shipping
orders received in the last week of the quarter for which parts had been
purchased. The increase in accounts receivable was the result of shipping a
larger amount of the first quarter's sales in the latter part of the last
month of the quarter than was the case in the fourth quarter of 1998. Prepaid
expenses and other current assets increased due to an increase in outstanding
receivables from a non-revenue generating transfer of inventory to the
Company's turnkey manufacturer. Current liabilities increased by a net $1.5
million. The increase in accounts payable of $5.7 million was attributed to
the Company's sales, and accordingly its 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 offset by a decrease of $4.2 million in accrued liabilities, resulting
from the fulfillment of the $4.2 million obligation
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related to a legal settlement that the Company negotiated with its former CEO
in January 1999.
The Company's agreement with Comerica Bank for a $20 million unsecured
revolving line of credit will expire 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 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 March 27, 1999. At that date, the Company had no amounts outstanding
under the line. Although no assurances can be given, the Company expects that
the line of credit will be extended for an additional year.
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 by March 27, 1999, 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
SALES AND GROSS PROFITS. The Company's net sales for the three months ended
March 27, 1999, totaled $36.3 million, compared to $28.3 million for the
corresponding period of fiscal year 1998, an increase of approximately 28%.
This increase in sales was primarily due to increases in sales of the
Company's newer products, DAC960PG, a custom product for HP, AcceleRAID 250,
eXtremeRAID 1100 and DAC960SX, which amounted to $7.7 million, $3.8 million,
$3.7 million, $3.5 million and $3.0 million, respectively, in the first
quarter of 1999. These increases were offset by a decline, from quarter to
quarter, in the Company's older PCI products and host bus adapters of $15.9
million.
Gross profit for the three months ended March 27, 1999, was $11.8 million, or
33% of net sales, compared to $9.7 million, or 34% of net sales for the same
period in 1998. The sales in the first quarter of 1999 were subject to
royalty payments under the EMC
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royalty agreement, which became effective at the end of December 1998. The
royalties payable under this agreement had an adverse effect on the Company's
gross margins in the first quarter of 1999, as compared to the same period a
year ago.
The Company's largest customer during the first quarter of 1999 was Fujitsu,
which accounted for $5.9 million, or 16%, of the Company's net sales during
that period. The Company's next four largest customers during the quarter
were Hewlett Packard, Octel, which each accounted for $3.8 million, or 11%,
of net sales, and Siemens and Compaq which accounted for $3.4 million, or 9%,
of net sales and $2.9 million, or 8%, of net sales, respectively. Due to
Compaq's acquisition of DEC in February 1998, there has been product
consolidation between the two companies that has had an impact on the
Company's revenues from the combined companies. Consequently, the sales to
Compaq in the first quarter of 1999 declined by 69%, when compared to the
same period one year ago. The product sales in the first quarter of 1999 to
Hewlett Packard were of a RAID controller, designed by the Company,
specifically for Hewlett Packard. Due to the custom nature of the Hewlett
Packard RAID controller, there can be no assurance that the Company will
continue to sell this product in the future at the same level of sales in the
first quarter of 1999. As a result, sales to the Company's OEM customers as a
group, and to any individual OEM customer, in any particular period cannot be
relied upon as an indicator of the level of future sales to that group or
that customer.
While the Company has in place OEM agreements with some of the Company's
largest customers that define the terms of the Company's sales and support
services, these agreements do not include specific quantity commitments. The
Company sells products to its customers on a purchase order basis. As a
result, historical sales cannot be relied upon as an accurate indicator of
future sales.
The Company's backlog as of March 27, 1999, totaled $14.7 million, as
compared to $11.5 million as of the end of the first quarter in 1998. 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 $14.7
million backlog at March 27, 1999, all but a small percentage of the orders
making up that backlog would have been scheduled for delivery within the
three months ending June 26, 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
expects to complete 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
June 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 expects 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 will begin 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 will conduct 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
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 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.
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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, 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.
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. In comparison to the comparable 1998 period, the Company's
sales of HBA's were significantly reduced, primarily as a result of the
distribution channels experiencing weakened product sales.
14
<PAGE>
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 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 March 27, 1999,
totaled $4.4 million, a decrease of $370 thousand, or 8%, from the
corresponding period in 1998. Sales and marketing expenses represented 12% of
net sales for the three months ended March 27, 1999, as compared to 17% in
the comparable 1998 quarter. This decrease in sales and marketing expenses
resulted primarily from reduced expenses related to decreases in sales and
marketing headcount.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses for the three months ended March 27, 1999,
totaled $5.4 million, a decrease of 12% from the $6.1 million incurred during
the corresponding period in 1998. Research and development expenses
represented 15% of net sales for the three months ended March 27, 1999, as
compared to 22% in the comparable quarter of 1998. Research and development
expenses decreased during the first quarter of 1999 due primarily to the
closure of the Company's NP&L-TM- division in July of 1998. The Company
continued its investment in research and development activities during the
first quarter of 1999 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 March 27, 1999,
totaled $2.8 million, an increase of $630 thousand from the corresponding period
of 1998. The increase in expenses was primarily due to higher compensation,
higher legal costs related to the litigation against the Company's former CEO,
which was
15
<PAGE>
settled in the first quarter of 1999. General and administrative expenses
were 8% of net sales for the three months ended March 27, 1999, the
percentage for the period one year ago.
INCOME TAXES AND INTEREST EXPENSES
The Company's effective tax rate for the first quarter of 1999 was 37%, the
same rate as the first quarter of 1998. The Company recorded interest expense
of $32 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; 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, specifically its 10-K filing for the
period ended December 26, 1998. These forward-looking statements speak only
as of the date hereof, and the Company disclaims any intent or obligation to
update such statements.
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.
16
<PAGE>
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.
In addition to the matter discussed above, the Company is a party to routine
suits and claims arising in the ordinary course of its business which the
Company does not believe will have a material adverse effect on its business.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, in Fremont,
California, on the 11th day of May 1999.
MYLEX CORPORATION
By /s/ Colleen Gray
---------------------------------------
Colleen Gray
Vice President of Finance and
Chief Financial Officer
18
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