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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 October 4, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-23418
MTI TECHNOLOGY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 95-3601802
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4905 East La Palma Avenue
Anaheim, California 92807
(Address of principal executive offices, zip code)
Registrant's telephone number, including area code: (714) 970-0300
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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The number of shares outstanding of the issuer's common stock, $.001
par value, as of November 10, 1997 was 27,389,300.
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MTI TECHNOLOGY CORPORATION
--------------------------
INDEX
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<TABLE>
<CAPTION>
Page
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of October 4, 1997
and April 5, 1997 3
Condensed Consolidated Statements of Income for the Three Months
Ended October 4, 1997 and October 5, 1996 4
Condensed Consolidated Statements of Income for the Six Months Ended
October 4, 1997 and October 5, 1996 5
Condensed Consolidated Statement ofCash Flows for the Six Months Ended
October 4, 1997 and October 5, 1996 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 8
PART II. OTHER INFORMATION
Item 2. Changes in Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 6. Exhibits and Reports on Form 8-K 15
</TABLE>
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MTI TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
OCTOBER 4, APRIL 5,
1997 1997
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ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,341 $ 3,487
Short-term investments -- 850
Accounts receivable, net 35,233 31,899
Inventories 16,652 14,637
Deferred income tax benefit 960 960
Prepaid expenses and other receivables 4,194 2,862
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Total current assets 61,380 54,695
Property, plant and equipment, net 12,387 13,220
Intangible assets and goodwill, net 14,028 15,027
Other 881 650
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$88,676 $83,592
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $17,646 $22,102
Current maturities of long-term debt 1,399 1,851
Accounts payable 18,994 14,347
Accrued liabilities 16,066 15,622
Deferred income 10,692 13,040
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Total current liabilities 64,797 66,962
Long-term debt, less current maturities -- 6
Deferred income 114 242
Other 4 5
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Total liabilities 64,915 67,215
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Stockholders' equity:
Preferred stock, $.001 par value; authorized 5,000 shares; issued and
outstanding, none -- --
Common stock, $.001 par value; authorized 40,000 shares; issued
(including treasury shares) and outstanding 26,819 and 26,537
shares at October 4 and April 5, 1997, respectively 27 26
Additional paid-in capital 89,286 88,780
Accumulated deficit (60,847) (68,010)
Less cost of treasury stock (731 and 755 shares at
October 4 and April 5, 1997, respectively) (2,698) (2,788)
Cumulative foreign currency translation adjustments (2,007) (1,631)
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Total stockholders' equity 23,761 16,377
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$88,676 $83,592
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</TABLE>
See accompanying notes to condensed consolidated financial statements.
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MTI TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
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OCTOBER 4, OCTOBER 5,
1997 1996
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<S> <C> <C>
Net product revenue $37,983 $28,153
Service revenue 8,813 8,358
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Total revenue 46,796 36,511
Product cost of revenue 24,998 20,004
Service cost of revenue 5,161 4,910
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Total cost of revenue 30,159 24,914
Gross profit 16,637 11,597
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Operating expenses:
Selling, general and administrative 9,762 8,171
Research and development 2,883 2,376
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Total operating expenses 12,645 10,547
Operating income 3,992 1,050
Other income, net 605 331
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Income before income taxes 4,597 1,381
Income tax expense 508 150
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Net income $ 4,089 $ 1,231
======= =======
Net income per common and common equivalent share $ 0.14 $ 0.05
======= =======
Weighted average common and common equivalent shares 29,598 26,007
======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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MTI TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
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OCTOBER 4, OCTOBER 5,
1997 1996
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<S> <C> <C>
Net product revenue $73,241 $55,757
Service revenue 17,330 16,931
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Total revenue 90,571 72,688
Product cost of revenue 48,003 40,063
Service cost of revenue 10,053 9,902
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Total cost of revenue 58,056 49,965
Gross profit 32,515 22,723
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Operating expenses:
Selling, general and administrative 19,461 16,749
Research and development 5,863 4,667
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Total operating expenses 25,324 21,416
Operating income 7,191 1,307
Other income, net 1,164 531
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Income before income taxes 8,355 1,838
Income tax expense 1,172 150
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Net income $ 7,183 $ 1,688
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Net Income per common and common equivalent share $ 0.25 $ 0.06
======= =======
Weighted average common and common equivalent shares 29,028 26,070
======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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MTI TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
------------------------
OCTOBER 4, OCTOBER 5,
1997 1996
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<S> <C> <C>
Net cash provided by (used in) operating activities $ 6,918 $ (254)
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Cash flows from investing activities:
Capital expenditures for property, plant
and equipment, net (2,636) (1,725)
Maturities of short-term investments 850 --
Payments received on note receivable 85 --
-------- --------
Net cash used in investing activities (1,701) (1,725)
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Cash flows from financing activities:
Borrowings under notes payable 64,031 56,194
Proceeds from issuance of common stock and
exercise of options and warrants 560 267
Repayment of notes payable (68,946) (53,380)
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Net cash provided by (used in) financing activities (4,355) 3,081
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Effect of exchange rate changes on cash (8) (219)
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Net increase in cash and cash equivalents 854 883
Cash and cash equivalents at beginning of period 3,487 4,055
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Cash and cash equivalents at end of period $ 4,341 $ 4,938
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 1,291 $ 866
Income taxes 250 22
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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MTI TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. The interim condensed consolidated financial statements included herein have
been prepared by MTI Technology Corporation (the "Company") without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission
(the "SEC"). Certain information and footnote disclosures, normally included in
the financial statements prepared in accordance with generally accepted
accounting principles, have been omitted pursuant to such SEC rules and
regulations; nevertheless, the management of the Company believes that the
disclosures herein are adequate to make the information presented not
misleading. These condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the fiscal year ended
April 5, 1997. In the opinion of management, the condensed consolidated
financial statements included herein reflect all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the condensed
consolidated financial position of the Company as of October 4, 1997, and the
condensed consolidated results of operations and cash flows for the three month
and six month periods ended October 4, 1997 and October 5, 1996. The results of
operations for the interim periods are not necessarily indicative of the results
of operations for the full year. References to amounts are in thousands, except
share and per share data, unless otherwise specified.
2. Inventories consist of the following:
<TABLE>
<CAPTION>
OCTOBER 4, APRIL 5,
1997 1997
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<S> <C> <C>
Raw Materials $ 6,138 $ 5,788
Work in Process 282 10
Finished Goods 10,232 8,839
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$16,652 $14,637
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</TABLE>
3. Net income per common and common equivalent share was computed based on the
weighted average number of common and common equivalent shares outstanding
during the periods presented. The Company has granted certain stock options
which have been treated as common equivalents in computing both primary and
fully diluted net income per share, except in those periods where such inclusion
would be antidilutive. The primary and fully dilutive net income per share
computations are approximately the same.
4. On October 21, 1997, warrants to purchase 500,000 shares of the Company's
common stock at a price of $2.00 per share were exercised by an entity
affiliated with the Company's major stockholder and Chairman of the Board.
On October 21, 1997, warrants to purchase 508,824 shares of the
Company's common stock at a price of $2.25 per share were exercised by an entity
affiliated with the Company's major stockholder and Chairman of the Board.
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On October 15, 1997, 161,830 shares of the Company's common stock were
issued to AXENT Technologies, Inc. (formally Raxco, Inc.), in exchange for the
surrender of warrants to purchase 250,000 shares of the Company's common stock
at a price of $6.00 per share. Pursuant to the terms of the warrants, in lieu of
exercising the warrants for cash, the holder elected to have withheld from the
number of shares otherwise deliverable, shares having a fair market value equal
to the aggregate warrant exercise price.
PART 1 - ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
- ---------------------
OVERVIEW
MTI's historic revenues have been achieved through introductions of new
or updated products, expansion of the Company's international operations, and
through acquisitions. The Company has attempted to increase its focus on
expanding its product and service offerings for the Open Systems computing
environment and decrease its historic dependence on sales and service from the
Digital Equipment Corporation ("DEC") computing environment. Product revenue
from the Open Systems marketplace (as compared to DEC) increased from
approximately 21% for fiscal 1995, to approximately 76% for fiscal 1997, and to
approximately 92% for the second quarter of fiscal 1998, reflecting the
Company's commitment to its strategy of expanding the revenue contribution from
sales to the Open Systems data storage market.
Effective April 2, 1995, the Company acquired National Peripherals,
Inc. ("NPI"), a privately-held provider of cross-platform RAID based storage
solutions for the Open Systems computing environment. Consideration paid in the
NPI acquisition included: (a) payments of $2.6 million in cash to NPI and its
stockholders, (b) promissory notes in the aggregate amount of $2.0 million
bearing 6% interest per annum and payable in two equal annual installments
beginning April 1996, (c) guaranteed earnout payments in the aggregate amount of
$3.0 million and payable in three equal annual installments beginning in April
1996, and (d) acquisition costs of $0.4 million. In addition, the acquisition
agreement provides for contingent payments of up to $1.0 million payable in
April 1998 based on certain performance criteria. The Board of Directors
approved the payment of the contingent $1.0 million payment during the fourth
quarter of fiscal 1997. The accelerated timing of the payment was based on the
over-achievement of the performance criteria as set forth in the amended NPI
stock purchase agreement. As a result of the NPI acquisition, MTI increased its
presence in the Open Systems marketplace by adding approximately 18 salespeople
at the time of acquisition who were exclusively focused on Open Systems sales
opportunities. The NPI acquisition was part of the Company's strategy to expand
its product lines and increase revenue from the non-DEC marketplace.
Effective February 9, 1996, the Company entered into an agreement with
EMC Corporation ("EMC"), whereby the Company sold to EMC substantially all of
the Company's existing patents, patent applications and rights thereof. The
consideration the Company will receive for these rights includes: (a) $30.0
million to be received in six equal annual installments of $5.0 million, the
first of which was received upon closing of the agreement on February 9, 1996,
the second of which was received January 1997, and the remaining payments to be
received in each of the subsequent three years beginning January 1998; and (b)
royalty payments in the aggregate of up to a maximum of $30.0 million over the
term of the agreement, of which a minimum of $10.0 million will be received in
five annual installments, beginning within thirty days of the first anniversary
of the effective date of the agreement, and within thirty days of each
subsequent anniversary thereof. The first annual installment of minimum royalty
payments equal to $2.0 million was received in March 1997. In addition, the
Company also received an irrevocable, non-cancelable, perpetual and royalty-free
license to exploit, market and sell
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the technology protected under the aforementioned patents. Pursuant to the terms
and conditions of the agreement, this license will terminate in the event of a
change of control of the Company involving certain identified acquirers. As part
of the agreement, the Company and EMC granted to each other the license to
exploit, market and sell the technology associated with each of their respective
existing and future patents arising from any patent applications in existence as
of the effective date of the agreement for a period of five years.
The Company's primary reasons for entering into this agreement with EMC
were to realize a guaranteed minimum return on its historical research and
development investment, and to do so in such a manner as to provide the Company
with a predictable stream of both revenue and cash over several years. Pursuant
to the terms and conditions of this agreement, the Company will record a
quarterly benefit to income of $1.8 million, and will receive a minimum of $7.0
million cash on an annual basis, which includes $2.0 million of royalty payments
and $5.0 million from the sale of patents and associated rights.
The Company has experienced significant quarterly fluctuations in
operating results and anticipates that these fluctuations may continue in the
future. These fluctuations have been and may continue to be caused by a number
of factors, including competitive pricing pressures, the timing of customer
orders (a large majority of which have historically been placed in the last
month of each quarter), the introduction of new products and new versions of the
Company's products, shifts in product mix and the timing of sales and marketing
and research and development expenditures. Future operating results may
fluctuate as a result of these and other factors, including the Company's
ability to continue to develop innovative products, the introduction of new
products by the Company's competitors and decreases in gross profit margin for
mature products. There can be no assurance that the Company will be profitable
on a quarter-to-quarter or annual basis.
The Company has operated historically without a significant backlog of
orders and, as a result, net product revenue in any quarter is dependent on
orders booked and products shipped during that quarter. A significant portion of
the Company's operating expenses are relatively fixed in nature and planned
expenditures are based primarily on sales forecasts. If revenue does not meet
the Company's expectations in any given quarter, the adverse impact on the
Company's liquidity position and net income may be magnified by the Company's
inability to reduce expenditures quickly enough to compensate for the revenue
shortfall. Further, as is common in the computer industry, the Company
historically has experienced an increase in the number of orders and shipments
in the latter part of each quarter and the Company expects this pattern to
continue in the future. The Company's failure to receive anticipated orders or
to complete shipments in the latter part of a quarter could have a material
adverse effect on the Company's results of operations for that quarter.
The non-historical information in this Form 10-Q includes forward-looking
statements which involve risks and uncertainties. The actual results for the
Company may differ materially from those described in any forward-looking
statement. Factors that might cause such a difference include, but are not
limited to, those discussed in this Form 10-Q including those described in the
preceding two paragraphs. Additional information on potential factors that could
affect the Company's financial results are included in the Company's Annual
Report on Form 10-K for the year ended April 5, 1997.
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RESULTS OF OPERATIONS
The following table sets forth selected items from the Condensed
Consolidated Statements of Income as a percentage of net revenues for the
periods indicated, except for product gross profit and service gross profit,
which are expressed as a percentage of the related revenue. This information
should be read in conjunction with the Condensed Consolidated Financial
Statements included elsewhere herein:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
-------------------------- ---------------------------
OCTOBER 4, OCTOBER 5, OCTOBER 4, OCTOBER 5,
1997 1996 1997 1996
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Net product revenue 81.2% 77.1% 80.9% 76.7%
Service revenue 18.8 22.9 19.1 23.3
----- ----- ----- -----
Total revenue 100.0 100.0 100.0 100.0
Product gross profit 34.2 28.9 34.5 28.1
Service gross profit 41.4 41.3 42.0 41.5
----- ----- ----- -----
Gross profit 35.6 31.8 35.9 31.3
Selling, general and administrative 20.9 22.4 21.5 23.1
Research and development 6.2 6.5 6.5 6.4
----- ----- ----- -----
Operating income 8.5 2.9 7.9 1.8
Other income, net 1.3 0.9 1.3 0.7
Income tax expense 1.1 0.4 1.3 0.2
----- ----- ----- -----
Net income 8.7% 3.4% 7.9% 2.3%
===== ===== ===== =====
</TABLE>
Net Product Revenue: Net product revenue for the second quarter of fiscal 1998
increased $9.8 million, or 34.9% over the same quarter of the prior year. This
increase was primarily due to increased revenue of $8.7 million from
optical/tape products, primarily the mid-range 1500 series of automated DLT tape
libraries. In addition, software revenue and server revenue increased $1.0
million and $0.1 million, respectively, over the same period of the prior year.
Net product revenue for the first six months of fiscal 1998 increased $17.5
million, or 31.4% over the comparable period of the prior year. This increase
was primarily due to increased revenue of $13.0 million from optical/tape
products, primarily the mid-range 1500 series of automated DLT tape libraries.
In addition, software revenue and server revenue increased $3.2 million and $1.3
million, respectively, over the same period of the prior year.
Service Revenue: Service revenue for the second quarter of fiscal 1998 increased
$0.5 million, or 5.4% over the same quarter of the prior year. Service revenue
increased $0.4 million, or 2.4% for the first six months of fiscal 1998 over the
comparable period of the prior year. These increases are primarily due to the
increased volume on service contracts.
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Product Gross Profit: Product gross profit was $13.0 million for the second
quarter of fiscal 1998, an increase of $4.8 million, or 59.3% over the same
quarter of the preceding year, and the gross profit percentage of net product
sales was 34.2% for the second quarter of fiscal 1998 as compared to 28.9% for
the same period of the prior year. Product gross profit was $25.2 million for
the first six months of fiscal 1998, an increase of $9.5 million, or 60.8% over
the comparable period of the previous year, and the gross profit percentage of
net product sales was 34.5% for the first six months of fiscal 1998 as compared
to 28.1% for the same period of the prior year. These increases in the product
gross profit percentage were primarily due to increased operating efficiencies
in the manufacturing process as a result of improved inventory management and
increased product throughput.
Service Gross Profit: Service gross profit was $3.7 million for the second
quarter of fiscal 1998, an increase of $0.2 million, or 5.9% over the same
period of the previous year. The gross profit percentage of service revenue
increased to 41.4% in the second quarter of fiscal 1998 over 41.3% in the same
quarter of the preceding year.
Service gross profit was $7.3 million for the first six months of fiscal 1998,
an increase of $0.2 million, or 3.5% over the same period of the previous year.
The gross profit percentage of service revenue increased to 42.0% for the first
six months of fiscal 1998 over 41.5% for the comparable period of the preceding
year.
Selling, General and Administrative: Selling, general and administrative
expenses for the second quarter of fiscal 1998 increased $1.6 million, or 19.5%
from the same quarter of the preceding year, although as a percentage of
revenue, selling, general and administrative expenses decreased. Selling,
general and administrative expenses for the first six months of fiscal 1998
increased $2.7 million, or 16.2% from the same period of the preceding year,
although as a percentage of revenue, selling, general and administrative
expenses decreased. These increases were primarily due to increased
compensation-related sales costs resulting from increased staff and increased
revenues.
Research and Development: Research and development expenses for the second
quarter of fiscal 1998 increased $0.5 million, or 21.3% from the same quarter of
the preceding year, although as a percentage of revenue, research and
development expenses decreased. This increase was primarily due to
non-refundable research and development funding of $0.5 million received in the
second quarter of fiscal 1997.
Research and development expenses for the first six months of fiscal 1998
increased $1.2 million, or 25.6% from the comparable period of the preceding
year. This increase was primarily due to non-refundable research and development
funding of $0.9 million received in the first six months of fiscal 1997 and an
increase in other expenses of $0.3 million.
Other Income, Net: Other income, net, for the second quarter of fiscal 1998
increased $0.3 million, or 82.8% over the same period of the prior year. Other
income, net, for the first six months of fiscal 1998 increased $0.6 million, or
119.2% over the comparable period of the prior year. These increases were
primarily due to reduced interest expense in the second quarter and the first
six months of fiscal 1998 as compared to the same periods of the prior year as a
result of decreased credit line balances and debt repayment.
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NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. ("Statement") 128,
"Earnings Per Share". Statement 128 specifies new standards designed to improve
the earnings per share ("EPS") information provided in financial statements by
simplifying the existing computational guidelines, revising the disclosure
requirements and increasing the comparability of EPS data on an international
basis. Some of the changes made to simplify the EPS computations include: (a)
eliminating the presentation of primary EPS and replacing it with basic EPS,
with the principal difference being that the common stock equivalents are not
considered in computing basic EPS, (b) eliminating the modified treasury stock
method and the three percent materiality provision, and (c) revising the
contingent share provisions and the supplemental EPS data requirements.
Statement 128 also makes a number of changes to existing disclosure
requirements. Statement 128 is effective for financial statements issued for
periods ending after December 15, 1997, including interim periods. When adopted
by the Company, during the quarter ending January 3, 1998, basic earnings per
share is expected to increase slightly from primary earnings per share and
diluted earnings per share is expected to approximate fully diluted earnings per
share.
In June 1997, the FASB issued Statement 130, "Reporting Comprehensive
Income". The new statement is effective for both interim and annual periods
beginning after December 15, 1997. The Company has not yet determined the impact
of adopting this new standard on the consolidated financial statements.
In June 1997, the FASB issued Statement 131, "Disclosure about Segments
of an Enterprise and Related Information". The new statement is effective for
fiscal years beginning after December 15, 1997. The Company has not yet
determined the impact of adopting this new standard on the consolidated
financial statements.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $4.3 million at October 4, 1997, an
increase of $0.9 million as compared to April 5, 1997, the prior fiscal year
end. Net operating activities provided $7.0 million for the first six months of
fiscal 1998, primarily due to net income adjusted for non-cash items of $10.6
million and increased accounts payable and accrued liabilities of $5.1 million
primarily due to increased trade purchases, partially offset by increased
inventories of $2.0 million and increased accounts receivable of $3.3 million
primarily due to increased volume. Cash used in financing activities was $4.4
million, primarily as a result of payments made on the bank line borrowings and
notes payable.
The Company's average days sales outstanding were 69 days at the end of
the second quarter of fiscal 1998, as compared to 59 days at the end of the same
quarter of fiscal 1997. The increase was primarily due to increased volume
resulting from increased revenue. The Company's average days sales outstanding
at October 4, 1997 decreased from 76 days at April 5, 1997, the prior fiscal
year end.
Stockholders' equity at the end of the second quarter of fiscal 1998
was $23.8 million as compared to $16.4 million at the end of fiscal 1997. The
increase was primarily due to net income of $7.2 million.
On October 21, 1997, warrants to purchase 500,000 shares of the
Company's common stock at a price of $2.00 per share and warrants to purchase
508,824 shares of the Company's common stock at a price of $2.25 per share were
exercised by an entity affiliated with the Company's major stockholder and
Chairman of the Board. As a result, the Company received $2.1 million.
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Effective June 12, 1997, the Company entered into an agreement with
Greyrock Business Credit whereby under an asset secured domestic line of credit,
the Company may borrow up to $30.0 million limited by the value of pledged
collateral. The agreement allows the Company to borrow at a blended rate of
prime rate plus 1.67%. The initial term of the agreement is for one year and
automatically and continuously renews for a subsequent year, unless terminated
by either party pursuant to the agreement. Borrowings outstanding under this
agreement were $17.6 million and $18.1 million at October 4, 1997 and November
10, 1997, respectively. The bank line of credit contains certain restrictive
covenants. At October 4, 1997, the Company was in compliance with all such
covenants.
Effective February 9, 1996, the Company entered into an agreement with
EMC, whereby the Company sold to EMC substantially all of the Company's existing
patents, patent applications and rights thereof. The consideration the Company
will receive for these rights include: (a) $30.0 million to be received in six
equal annual installments of $5.0 million each, the first of which was received
upon closing of the agreement on February 9, 1996, the second of which was
received January 1997, and the remaining payments to be received in each of the
subsequent three years beginning January 1998; and (b) royalty payments in the
aggregate of up to a maximum of $30.0 million over the term of the agreement, of
which a minimum of $10.0 million will be received in five annual installments,
beginning within thirty days of the first anniversary of the effective date of
the agreement, and within thirty days of each subsequent anniversary thereof.
The first annual installment of minimum royalty payments equal to $2.0 million
was received in March 1997.
Management believes that the Company's working capital, bank lines of
credit and cash flow from operating activities will be sufficient to meet the
Company's operating and capital expenditure requirements for the next twelve
months; however, in the longer term, the Company may require additional funds to
support its working capital requirements including financing of accounts
receivable and inventory, or for other purposes, and may seek to raise such
funds through public or private equity financing, bank lines of credit or from
other sources. No assurance can be given that additional financing will be
available or that, if available, such financing will be on terms favorable to
the Company.
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PART II - OTHER INFORMATION
---------------------------
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
- --------------------------------------------------
On October 21, 1997, warrants to purchase 500,000 shares of the
Company's common stock at a price of $2.00 per share were exercised by NFT
Ventures, Inc. ("NFT"), an entity affiliated with the Company's major
stockholder and Chairman of the Board for aggregate proceeds to the Company of
$1.0 million. These shares were issued in reliance on an exemption from the
registration requirements of the Securities Act of 1933 (the "Act") under
section 4(2) of the Act .
On October 21, 1997, warrants to purchase 508,824 shares of the
Company's common stock at a price of $2.25 per share were exercised by NFT, an
entity affiliated with the Company's major stockholder and Chairman of the Board
for aggregate proceeds of $1.1 million. These shares were issued in reliance on
an exemption from the registration requirements of the Act under section 4(2) of
the Act .
On October 15, 1997, 161,830 shares of the Company's common stock were
issued to AXENT Technologies, Inc. (formally Raxco, Inc.), in exchange for the
surrender of warrants to purchase 250,000 shares of the Company's common stock
at a price of $6.00 per share. Pursuant to the terms of the warrants, in lieu of
exercising the warrants for cash, the holder elected to have withheld from the
number of shares otherwise deliverable, shares having a fair market value equal
to the aggregate warrant exercise price, and thus, there were no cash proceeds
to the Company. These shares were issued in reliance on an exemption from the
registration requirements of the Act under section 4(2) of the Act .
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
The annual meeting of the stockholders of the Company was held on
September 25, 1997. David Proctor was elected to the Company's Board of
Directors to hold office for the ensuing year. The number of shares voted in
favor was 24,575,228. The number of shares voted withheld was 29,745. Raymond J.
Noorda, Earl Pearlman, Steven Hamerslag and Val Kreidel remain members of the
Board of Directors.
The stockholders of the Company voted in favor of the ratification of
selection of KPMG Peat Marwick LLP as the Company's independent public
accountants for fiscal year 1998. The number of shares voted for ratification
was 24,566,217. The number of shares voted against ratification was 33,200. The
number of shares abstaining was 5,556.
The stockholders of the Company voted in favor of the approval of the
restatement of the 1996 Stock Incentive Plan. The number of shares voted for
approval was 23,855,464. The number of shares voted against approval was
562,713. The number of shares abstaining was 102,607.
14
<PAGE> 15
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) Exhibits:
10.49 Restated 1996 Stock Incentive Plan (1)
10.50 Employment Agreement dated August 1, 1997, between
Chuck Sitzman and Registrant.
27 Financial Data Schedule
(b) Reports on Form 8-K:
None.
- -------------------------
(1) Incorporated by reference to the Appendix of the Company's Proxy Statement.
15
<PAGE> 16
SIGNATURES
Pursuant to the requirements 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, on the 12th day of November, 1997.
MTI TECHNOLOGY CORPORATION
By: /s/ Dale R. Boyd
------------------------------------------
Dale R. Boyd
Vice President and Chief Financial Officer
(Principal Financial Officer)
By: /s/ Stephanie M. Braun
------------------------------------------
Stephanie M. Braun
Corporate Controller, Chief
Accounting Officer
(Principal Accounting Officer)
16
<PAGE> 17
EXHIBIT INDEX
-------------
Exhibit Number Description
- -------------- -----------
10.50 Employment Agreement dated August 1, 1997,
between Chuck Sitzman and Registrant.
27 Financial Data Schedule
17
<PAGE> 1
August 1, 1997
Chuck Sitzman
21247 West Silktree Circle
Plainfield,, Illinois 60544
Dear Mr. Sitzman:
CONGRATULATIONS! This letter is to confirm our offer to you (and your
acceptance) of employment with MTI Technology Corporation, in the exempt
position of Senior Vice President of Service at our Corporate Headquarters
located in Anaheim, California.
You are scheduled to begin full-time on August 18, 1997, and will report to Earl
Pearlman. Your bi-weekly salary will be $5769.23. Additionally, we are pleased
to include the following terms and conditions as part of your employment
package:
* You are eligible to participate in a discretionary bonus program for the
Fiscal Year 1998, under which you will be eligible to receive 25% of your
annual base salary. This bonus is guaranteed for your first year. This
bonus will be contingent on meeting our worldwide revenue goal and
contribution goal as a company. The goals are set at the beginning of each
Fiscal Year, and our goal for Fiscal Year 1998 is $189 million. You will
also be eligible to receive a one-time discretionary bonus of 25% of your
annual base salary in the event the Company achieves its worldwide revenue
goal of $200 million for Fiscal Year 1998. We will review your bonus
program and establish new objectives at the start of Fiscal Year 1999.
* Within 30 days after commencement of your employment with MTI, MTI will
pay you a one-time bonus in the amount of $60,000. This bonus is contingent
on your commencing employment with MTI on or before August 18, 1997.
* MTI will reimburse you for actual and reasonable moving expenses incurred
by you to relocate to Anaheim, California, not to exceed $50,000.00. MTI
will also reimburse you for actual and reasonable rental expenses incurred
by you while searching for housing in Southern California, not to exceed
$27,000 over the next 12 months. Additionally, MTI will pay the Realtor fee
on the sale of your primary residence in Plainfield, Illinois. All expenses
must be fully documented and submitted to me for approval on or before
September 1, 1998. Should you voluntarily terminate employment with MTI
prior to completing 12 months of service, you agree to reimburse MTI upon
demand for all relocation expenses paid to you by MTI.
* You will be included in the Company's Executive Benefit Program, which
provides payment of unreimbursed expenses excluded from MTI's benefit plan
description and IRS rules. I have attached a copy of a summary of our
benefits for your review. Please contact Rozena Kirby at (714) 693-2309 to
schedule your benefit orientation.
<PAGE> 2
* MTI will provide you with a life insurance policy in the amount of $1
million.
* You will have a $750.00 car allowance.
* Upon approval by the Compensation Committee of the Board of Directors, you
will be granted an option to purchase 50,000 shares of MTI stock at fair
market value on the date of grant. Options will vest over a four-year
period with 25% vesting per year. Upon approval by the compensation
committee you will receive additional option to purchase a minimum of
10,000 of MTI stock per year over the next 3 years at fair market value on
the date of grant.. You will receive additional options to purchase shares
of MTI stock in accordance with the Compensation Committee's determination
from time to time. Options will be granted in accordance with the terms of
the MTI Technology Corporation Stock Incentive Plan.
* This letter agreement shall be governed by and interpreted in accordance
with the laws of the State of California, including all matters of
construction, validity, performance, and enforcement, without giving effect
to principles of conflict of laws. Any dispute, action, litigation, or
other proceeding concerning this agreement, and Mr. Sitzman's employment
with MTI, shall be instituted, maintained, heard, and decided in Orange
County, California.
We certainly hope that your employment with MTI is a long-standing relationship.
All employment at MTI is "at will." This means that both employees and the
Company have the right to terminate employment at any time, with or without
advance notice, and with or without cause. Employees also may be demoted or
disciplined and the terms of their employment may be altered at any time, with
or without cause, at the discretion of the Company. No one other than an officer
of the company has the authority to alter this arrangement, to enter into an
agreement for employment for a specified period of time, or to make any
agreement contrary to this policy, and such agreement must be in writing and
must be signed by an officer of the Company and by the affected employee.
We are looking forward to your employment with us. If you have any questions
please give me a call (714) 693-2310.
Sincerely,
Kathie Nichols
Human Resources, Sr. Manager
PLEASE SIGN AND RETURN THIS LETTER WITH THE COMPLETED AND SIGNED APPLICATION AS
NOTIFICATION OF ACCEPTANCE OF THIS OFFER.
- ------------------------------------ -------------------------
CHUCK SITZMAN DATE
HRKN:kan
Attachment
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> APR-04-1998
<PERIOD-START> JUL-06-1998
<PERIOD-END> OCT-04-1997
<CASH> 4,341
<SECURITIES> 0
<RECEIVABLES> 45,047
<ALLOWANCES> 9,814
<INVENTORY> 16,652
<CURRENT-ASSETS> 61,380
<PP&E> 36,552
<DEPRECIATION> 24,165
<TOTAL-ASSETS> 88,676
<CURRENT-LIABILITIES> 64,797
<BONDS> 0
0
0
<COMMON> 27
<OTHER-SE> 23,761
<TOTAL-LIABILITY-AND-EQUITY> 88,676
<SALES> 37,983
<TOTAL-REVENUES> 46,796
<CGS> 24,998
<TOTAL-COSTS> 30,159
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 300
<INTEREST-EXPENSE> 760
<INCOME-PRETAX> 4,597
<INCOME-TAX> 508
<INCOME-CONTINUING> 4,089
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,089
<EPS-PRIMARY> .14
<EPS-DILUTED> .14
</TABLE>
