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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 January 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 ___________
Commission file number 0-23418
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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
--- ---
The number of shares outstanding of the issuer's common stock, $.001 par
value, as of February 10, 1997 was 25,741,014.
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MTI TECHNOLOGY CORPORATION
INDEX
<TABLE>
<CAPTION>
Page
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<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of January 4, 1997
and April 6, 1996 3
Condensed Consolidated Statements of Operations for
the Three Months Ended January 4, 1997 and
December 30, 1995 4
Condensed Consolidated Statements of Operations for
the Nine Months Ended January 4, 1997 and
December 30, 1995 5
Condensed Consolidated Statements of Cash Flows for
the Nine Months Ended January 4, 1997 and
December 30, 1995 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II. OTHER INFORMATION
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>
JANUARY 4, APRIL 6,
1997 1996
---------- --------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,359 $ 4,055
Accounts receivable, net 29,215 21,101
Inventories 14,162 21,499
Deferred income tax benefit 784 784
Prepaid expenses and other receivables 5,095 3,750
-------- --------
Total current assets 53,615 51,189
Property, plant and equipment, net 13,610 16,323
Intangible assets and goodwill, net 14,532 15,852
Other 503 659
-------- --------
$ 82,260 $ 84,023
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Short-term borrowings $ 27,666 $ 20,613
Current maturities of long-term debt 3,127 8,297
Accounts payable 11,445 14,580
Accrued liabilities 16,631 18,724
Deferred income 7,376 14,941
-------- --------
Total current liabilities 66,245 77,155
Long-term debt, less current maturities 1,025 5,966
Deferred income 235 550
Other 26 539
-------- --------
Total liabilities 67,531 84,210
-------- --------
Stockholders' equity (deficiency):
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 26,498 and 20,243
shares at January 4, 1997 and April 6, 1996, respectively 26 20
Additional paid-in capital 88,671 77,762
Accumulated deficit (70,227) (73,645)
Less cost of treasury stock (774 and 794 shares at
January 4, 1997 and April 6, 1996, respectively) (2,863) (2,938)
Cumulative foreign currency translation adjustments (878) (1,386)
-------- --------
Total stockholders' equity (deficiency) 14,729 (187)
-------- --------
$ 82,260 $ 84,023
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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MTI TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------
JANUARY 4, DECEMBER 30,
1997 1995
---------- ------------
<S> <C> <C>
Net product revenue $30,695 $26,351
Service revenue 8,213 8,726
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Total revenue 38,908 35,077
Product cost of revenue 21,095 18,738
Service cost of revenue 5,155 5,077
------- -------
Total cost of revenue 26,250 23,815
Gross profit 12,658 11,262
------- -------
Operating expenses:
Selling, general and administrative 8,572 10,488
Research and development 2,426 2,903
------- -------
Total operating expenses 10,998 13,391
Operating income (loss) 1,660 (2,129)
Other income (expense), net 257 (908)
------- -------
Income (loss) before income taxes 1,917 (3,037)
Income tax expense 150 201
------- -------
Net income (loss) $ 1,767 $(3,238)
======= =======
Income (loss) per common and common
equivalent share $ 0.07 $ (0.17)
======= =======
Weighted average common and common
equivalent shares 26,770 19,428
======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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MTI TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------------------
JANUARY 4, DECEMBER 30,
1997 1995
---------- ------------
<S> <C> <C>
Net product revenue $ 86,452 $ 76,856
Service revenue 25,144 26,118
-------- --------
Total revenue 111,596 102,974
Product cost of revenue 61,158 54,851
Service cost of revenue 15,057 15,276
-------- --------
Total cost of revenue 76,215 70,127
Gross profit 35,381 32,847
-------- --------
Operating expenses:
Selling, general and administrative 25,321 31,423
Research and development 7,093 9,112
-------- --------
Total operating expenses 32,414 40,535
Operating income (loss) 2,967 (7,688)
Other income (expense), net 788 (2,671)
-------- --------
Income (loss) before income taxes 3,755 (10,359)
Income tax expense 300 516
-------- --------
Net income (loss) $ 3,455 $(10,875)
======== ========
Income (loss) per common and common
equivalent share $ 0.13 $ (0.56)
======== ========
Weighted average common and common
equivalent shares 26,451 19,387
======== ========
</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>
NINE MONTHS ENDED
-----------------------------
JANUARY 4, DECEMBER 30,
1997 1995
---------- ------------
<S> <C> <C>
Net cash used in operating activities $ (3,666) $(11,386)
-------- --------
Cash flows from investing activities:
Capital expenditures for property, plant
and equipment, net (2,467) (6,812)
Disposal of property, plant and equipment - 340
Acquisition of NPI assets and liabilities, net of cash
acquired - (2,608)
Other investment - (82)
-------- --------
Net cash used in investing activities (2,467) (9,162)
-------- --------
Cash flows from financing activities:
Borrowings under notes payable, net of acquisitions 86,399 96,589
Borrowings under notes payable to fund acquisition
of NPI - 2,608
Proceeds from issuance of common stock and
exercise of options and warrants 448 134
Repayment of notes payable (80,107) (81,616)
-------- --------
Net cash provided by financing activities 6,740 17,715
-------- --------
Effect of exchange rate changes on cash (303) 4
-------- --------
Net increase (decrease) in cash and cash equivalents 304 (2,829)
Cash and cash equivalents at beginning of period 4,055 5,562
-------- --------
Cash and cash equivalents at end of period $ 4,359 $ 2,733
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 1,619 $ 3,067
Income taxes 36 422
</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 6, 1996. 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 January 4, 1997, and the
condensed consolidated results of operations for the three month and nine month
periods ended January 4, 1997 and December 30, 1995, and the condensed
consolidated cash flows for the nine month periods ended January 4, 1997 and
December 30, 1995. 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>
JANUARY 4, APRIL 6,
1997 1996
---------- --------
<S> <C> <C>
Raw Materials $ 6,189 $13,090
Work in Process 1,195 2,106
Finished Goods 6,778 6,303
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$14,162 $21,499
======= =======
</TABLE>
3. During July 1994, the Company and certain directors and officers were
served with four purported stockholder class-action lawsuits alleging certain
improprieties surrounding the April 1994 initial public offering and subsequent
decrease in the Company's stock price. Subsequently, these four actions were
consolidated into a single case (In re MTI Technology Securities Litigation) in
the United States District Court, Central District of California. This
litigation was a class action complaint for alleged violation of the federal
securities laws. Plaintiffs sought compensatory damages and other relief as
permitted by applicable law. The claims related to the Company's initial
public offering in April 1994 and the Company's announcements for financial
results for the quarter ended July 2, 1994.
In March 1996, the Company agreed to settle with plaintiffs. A
Memorandum of Understanding was signed providing for a total settlement amount
of $5,500, and the Claims Receipt and Policy Release agreement became effective
March 29, 1996. The Company's unreimbursed portion of the aggregate settlement
was $1,655. Preliminary approval for the settlement was granted by the Court
on June 3, 1996, and final approval for the settlement was granted by the Court
on August 5, 1996.
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4. On July 19, 1995, the Company entered into an agreement (the
"Agreement"), whereby it received a loan of approximately $10,000 from NFT
Ventures II, LLC ("NFT V2"), an entity affiliated with the Company's major
stockholder and Chairman of the Board. Pursuant to the Agreement, the Company
issued a long-term, secured subordinated note ("Note") to NFT V2, which bore
annual interest of 10.75% and was repayable in two equal installments, the
first installment being due and payable in January 1997, the second in July
1997. Pursuant to the terms of the Agreement, the Note was convertible at the
lender's option into common stock of the Company 90 days after the date of the
Agreement at a price per common share equal to the then fair market value of
such stock. Proceeds from the loan were being used for working capital
purposes.
During the second quarter of fiscal 1996, the Company entered into an
agreement with NFT V2, whereby, pursuant to the terms of the agreement, the
Company licensed certain software products to NFT V2 for commercial use and
resale. As consideration for the licenses, the Company received a $650 credit
against amounts owing to NFT V2 under the Agreement and has access to certain
product enhancements to be developed by NFT V2.
On April 11, 1996, NFT V2 exercised its right to convert current principal
and accrued interest outstanding of $10,113, under the Note, into 5,992,665
common shares of the Company.
5. Effective April 7, 1996, the Company entered into an agreement with NFT
Ventures, Inc. ("NFT"), an entity affiliated with the Company's major
stockholder and Chairman of the Board, whereby NFT agreed to provide the
Company with up to $2,400 of non-refundable research and development funding
based on actual research and development expenses incurred in connection with
new and enhanced Backup-UNET software products, the RLM Software Products Group
and the Open Media Products Group. The Company has received $1,178 under this
agreement and has submitted a statement of incurred expenses to receive an
additional $450. The Company does not anticipate any additional funding under
this agreement. The consideration NFT received for the funding commitment
included: (a) an irrevocable, worldwide, nonexclusive license to develop,
market and sell certain defined new or substantially enhanced software products
developed by the Company; (b) the right to royalty payments based on the
revenue recognized by the Company from sale of the defined software products
that are sold within four years of the effective date of the agreement; and (c)
warrants to purchase up to 750,000 shares of the Company's common stock with an
exercise price of $2.25 per share. The warrants expire on June 27, 2001.
Based on the total of $1,628 of NRE funding received or to be received,
warrants to purchase up to 508,824 shares of the Company's common stock has
been or will be issued.
6. In August 1996, the Company agreed with NFT to enter into a joint venture
in the form of a limited liability corporation (the "LLC") at some future date
to be determined. The initial business purpose of the LLC was proposed to be
the design and development of RAID-based data storage systems that work across
multiple operating environments. On January 16, 1997, the Company and NFT
mutually agreed to forgo entering into the joint venture, and the agreement was
terminated.
7. Net income (loss) 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 stock equivalents in computing
both primary and fully diluted income (loss) per share, except in those periods
where such inclusion would be antidilutive. The primary and fully dilutive
income (loss) per share computations are approximately the same.
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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 software, systems 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. Revenue
from product sales to the Open Systems marketplace increased from less than 10%
for fiscal 1994, to approximately 21% for fiscal 1995, to approximately 43% for
fiscal 1996, and to approximately 74% for the third quarter of fiscal 1997.
In January 1995, the Company acquired certain assets, including
intellectual properties and source code rights, of the UNIX and Open VMS
storage management software product lines of Raxco, Inc. ("Raxco"). The
purchase price of the acquired assets consisted of $1.0 million in cash, notes
in the amount of $2.5 million, assumption of $1.9 million of certain
liabilities, primarily deferred service maintenance contracts, and the issuance
of warrants to purchase 250,000 shares of the Company's common stock at a price
of $6.00 per share. The warrants will expire on December 31, 1999. As part of
the transaction the Company also acquired software development and technical
support teams located domestically and in the United Kingdom. In addition, the
Company acquired access to the existing Raxco storage management software
customer base.
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. Subsequent to the
close of the third quarter, fiscal 1997, the Board of Directors approved the
payout of the contingent $1.0 million payment during the fourth quarter, 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 Raxco and NPI acquisitions are part of the Company's strategy to
expand its product lines and increase revenue from the non-DEC marketplace, and
to heighten emphasis on the Company's software product development efforts.
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 payment was received in January 1997, and the remaining payments are
to be received beginning January 1998 and in each of the subsequent three
years; 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. In addition, the Company also
received an
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irrevocable, non-cancelable, perpetual and royalty-free license to exploit,
market and sell the technology protected under the 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.
Effective April 7, 1996, the Company entered into an agreement with NFT
Ventures, Inc. ("NFT"), an entity affiliated with the Company's major
stockholder and Chairman of the Board, whereby NFT agreed to provide the
Company with up to $2.4 million of non-refundable research and development
funding based on actual research and development expenses incurred in
connection with new and enhanced Backup-UNET software products, the RLM
Software Products Group and the Open Media Products Group. The Company has
received $1.2 million under this agreement and has submitted a statement of
incurred expenses to receive an additional $0.4 million. The Company does not
anticipate any additional funding under this agreement. The consideration NFT
received for the funding commitment included: (a) an irrevocable, worldwide,
nonexclusive license to develop, market and sell certain defined new or
substantially enhanced software products developed by the Company; (b) the
right to royalty payments based on the revenue recognized by the Company from
sale of the defined software products that are sold within four years of the
effective date of the agreement; and (c) warrants to purchase up to 750,000
shares of the Company's common stock with an exercise price of $2.25 per share.
The warrants expire on June 27, 2001. Based on the total of $1.6 million of
NRE funding received or to be received, warrants to purchase up to 508,824
shares of the Company's common stock has been or will be issued.
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 versions of the Company's
products, 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, but not limited to, the Company's ability to continue
to develop innovative products, the introduction of new products by the
Company's competitors, decreases in gross profit margin for mature products,
the ability to obtain certain key components used in the manufacture of the
Company's products, and the ability to retain and attract key personnel. 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.
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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. 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
6, 1996.
RESULTS OF OPERATIONS
The following table sets forth selected items from the Condensed
Consolidated Statements of Operations 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 NINE MONTHS ENDED
------------------------------- -------------------------
JANUARY 4, DECEMBER 30, JANUARY 4, DECEMBER 30,
1997 1995 1997 1995
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Net product revenue 78.9% 75.1% 77.5% 74.6%
Service revenue 21.1 24.9 22.5 25.4
----- ----- ----- -----
Total revenue 100.0 100.0 100.0 100.0
Product gross profit 31.3 28.9 29.3 28.6
Service gross profit 37.2 41.8 40.1 41.5
----- ----- ----- -----
Gross profit 32.5 32.1 31.7 31.9
Selling, general and
administrative 22.1 29.9 22.6 30.5
Research and development 6.2 8.3 6.4 8.9
----- ----- ----- -----
Operating income (loss) 4.2 (6.1) 2.7 (7.5)
Other income (expense), net 0.7 (2.6) 0.7 (2.6)
Income tax expense 0.4 0.5 0.3 0.5
----- ----- ----- -----
Net income (loss) 4.5% (9.2)% 3.1% (10.6)%
===== ===== ===== =====
</TABLE>
Net Product Revenue: Net product revenue increased $4.3 million, or 16.5% over
the same quarter of the prior year. This increase was primarily due to
increased revenue of $3.0 million from optical/tape products, primarily the
mid-range 1500 series of automated DLT tape libraries, and increased server
revenue of $1.9 million over the same period of the prior year. These
increases were partially offset by a $0.1 million decrease in software revenue
and a $0.5 million decrease in sales to Boeing Information Services, Inc.
relating to Boeing's RCAS contract with the federal government. The RCAS
program has ended.
Net product revenue increased $9.6 million, or 12.5% for the first nine months
of fiscal 1997 as compared to the same period of the prior year. This increase
was primarily due to increased revenue of $7.9 million from optical/tape
products, primarily the mid-range 1500 series of automated DLT tape libraries.
In addition, software revenue and server revenue increased $0.8 million and
$2.6 million, respectively, over the same period of the prior year. These
increases were partially offset by decreased sales of $1.7 million to Boeing
Information Services, Inc. relating to Boeing's RCAS contract with the federal
government.
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Service Revenue: Service revenue decreased $0.5 million, or 5.9% from the same
quarter of the prior year. Service revenue decreased $1.0 million, or 3.7% for
the first nine months of fiscal 1997 from the comparable period of the prior
year. These decreases are primarily due to fewer post-warranty service
contracts sold as a result of lower product revenues from the DEC market from
the same periods of the prior year.
Product Gross Profit: Product gross profit was $9.6 million for the third
quarter of fiscal 1997, an increase of $2.0 million, or 26.1% over the same
quarter of the preceding year, and the gross profit percentage of net product
sales was 31.3% for the third quarter of fiscal 1997 as compared to 28.9% for
the same period of the prior year. The increase in the gross profit percentage
was primarily due to the inclusion of $0.5 million of royalty revenue related
to the February 1996 sale of substantially all of the Company's existing
patents, patent applications and rights thereof to EMC Corporation ("EMC").
Product gross profit was $25.3 million for the first nine months of fiscal
1997, an increase of $3.3 million, or 14.9% over the same quarter of the
preceding year, and the gross profit percentage of net product sales was 29.3%
for the first nine months of fiscal 1997 as compared to 28.6% for the same
period of the prior year. The increase in the gross profit percentage was
primarily due to inclusion of $1.5 million of royalty revenue related to the
February 1996 sale to EMC of substantially all of the Company's existing
patents, patent applications and rights thereof, partially offset by the higher
mix of Open Systems product revenues, which carry a lower margin percentage.
Service Gross Profit: Service gross profit was $3.1 million for the third
quarter of fiscal 1997, a decrease of $0.6 million from the same period of the
previous year. The gross profit percentage of service revenue decreased to
37.2% in the third quarter of fiscal 1997 down from 41.8% in the same quarter
of the preceding year. The decrease in the gross profit percentage was
primarily a result of reduced service revenue supported by substantially the
same cost structure.
Service gross profit was $10.1 million for the first nine months of fiscal
1997, a decrease of $0.8 million, or 7.0% from the comparable period of the
prior year. The gross profit percentage of service revenue decreased to 40.1%
in the first nine months of fiscal 1997 down from 41.5% in the comparable
period of the preceding year. The decrease in the gross profit percentage was
primarily a result of reduced service revenue supported by substantially the
same cost structure.
Selling, General and Administrative: Selling, general and administrative
expenses for the third quarter of fiscal 1997 decreased $1.9 million, or 18.3%
from the same quarter of the preceding year. This decrease was primarily due
to reduced payroll and related expenses of approximately $0.6 million as a
result of restructuring actions begun in the fourth quarter of fiscal 1996 and
completed in the first quarter of fiscal 1997, decreased goodwill amortization
of $0.6 million due to the write-off of goodwill in the fourth quarter of
fiscal 1996, decreased supplies and services of approximately $0.2 million
primarily due to restructuring actions noted above, and reductions in other
expense categories of $0.5 million.
For the first nine months of fiscal 1997, selling, general and administrative
expenses decreased $6.1 million, or 19.4% from the comparable period of the
prior year. This decrease was primarily due to reduced payroll and related
expenses of approximately $2.4 million as a result of restructuring actions
begun in the fourth quarter of fiscal 1996 and completed in the first quarter
of fiscal 1997, decreased goodwill amortization of $1.4 million due to the
write-off of goodwill in the fourth quarter of fiscal 1996, decreased
depreciation expense of $0.7 million due to the write-off of certain assets in
the fourth quarter of fiscal 1996, decreased travel expenses, supplies and
services of $0.6 million due to restructuring actions noted above, decreased
legal expense of $0.3 million, primarily as a result of the settlement of
shareholder litigation, and reductions in other expense categories of $0.7
million.
12
<PAGE> 13
Research and Development: Research and development expenses for the third
quarter of fiscal 1997 decreased $0.5 million, or 16.4% from the same quarter
of the preceding year. This decrease was primarily due reduced payroll and
related expenses of approximately $0.2 million as a result of restructuring
actions begun in the fourth quarter of fiscal 1996 and completed in the first
quarter of fiscal 1997, and non- refundable research and development funding
from NFT of $0.3 million.
Research and development expenses for the first nine months of fiscal 1997
decreased $2.0 million, or 22.2% from the comparable period of the preceding
year. This decrease was primarily due to reduced payroll and related expenses
of approximately $1.0 million as a result of restructuring actions begun in the
fourth quarter of fiscal 1996 and completed in the first quarter of fiscal
1997, and non-refundable research and development funding from NFT of $1.2
million, partially offset by increases in other expense categories of $0.2
million.
Other Income (Expense), Net: Other income, net, for the third quarter of
fiscal 1997 increased $1.2 million, or 128.3% over the same period of the prior
year. Other income, net, for the first nine months of fiscal 1997 increased
$3.5 million, or 129.5% over the comparable period of the previous year. These
increases were primarily due to income recognized on the sale of substantially
all of the Company's existing patents, patent applications and rights thereof
to EMC in February 1996.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $4.4 million at January 4, 1997, an
increase of $0.3 million as compared to April 6, 1996, the prior fiscal year
end. Net operating activities used $3.7 million during the first nine months
of fiscal 1997, primarily due to an increase in accounts receivable of $8.1
million, primarily as a result of increased revenues, and a decrease in
accounts payable and accrued liabilities of $5.2 million, primarily due to
reduced trade purchases. This was partially offset by decreased inventories of
$7.3 million and net income of $3.5 million. Cash provided by financing
activities was $6.7 million, primarily resulting from increased bank line
borrowings.
The Company's average days outstanding were 69 days at the end of the
third quarter of fiscal 1997, as compared to 88 days at the end of the same
quarter of fiscal 1996.
Stockholders' equity at the end of the third quarter of fiscal 1997 was
$14.7 million as compared to $(0.2) million at the end of fiscal 1996. The
increase was primarily due to the conversion on April 11, 1996, of $10.1
million of outstanding debt principal and accrued interest into approximately
6.0 million shares of common stock pursuant to the terms and conditions of a
loan agreement between the Company and the lender, an entity affiliated with
the Company's major stockholder and Chairman of the Board, and net income of
$3.5 million.
On March 31, 1995, the Company entered in to an agreement whereby the
Company had available asset secured bank lines of credit of up to $20.0
million, limited by the value of the pledged collateral which consists of the
Company's accounts receivable and inventories. In May 1996, the agreement was
amended to increase the line of credit to $30.0 million as a result of a
collateralized guarantee made to the bank by an affiliate of NFT, an entity
affiliated with the Company's major stockholder and Chairman of the Board. At
January 4, 1997, borrowings outstanding under this agreement were $27.7
million. At February 10, 1997, the outstanding balance under this line was
approximately $23.4 million. The bank line of credit contains certain
restrictive covenants. At January 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
13
<PAGE> 14
closing of the agreement on February 9, 1996. The second payment was received
in January 1997, and the remaining payments are to be received beginning
January 1998 and in each of the subsequent three years; 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.
Effective April 7, 1996, the Company entered into an agreement with NFT
whereby NFT agreed to provide the Company with up to $2.4 million of
non-refundable research and development funding based on actual research and
development expenses incurred in connection with new and enhanced Backup-UNET
software products, RLM Software Products Group, and the Open Media Products
Group. The Company has received $1.2 million under this agreement and has
submitted a statement of incurred expenses to receive an additional $0.4
million. The Company does not anticipate any additional funding under this
agreement.
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, will be on terms favorable to the Company.
14
<PAGE> 15
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27 Financial Data Schedule
(b) Reports on Form 8-K:
None
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 13th day of February, 1997.
MTI TECHNOLOGY CORPORATION
By: /s/ DALE R. BOYD
------------------------------
Dale R. Boyd
Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
16
<PAGE> 17
EXHIBIT INDEX
-------------
Exhibit Number Description Page
- -------------- ----------- ----
27 Financial Data Schedule 18
17
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> APR-05-1997
<PERIOD-START> OCT-06-1996
<PERIOD-END> JAN-04-1997
<CASH> 4,359
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 14,162
<CURRENT-ASSETS> 53,615
<PP&E> 35,390
<DEPRECIATION> 21,780
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<BONDS> 0
0
0
<COMMON> 26
<OTHER-SE> 14,703
<TOTAL-LIABILITY-AND-EQUITY> 82,260
<SALES> 30,695
<TOTAL-REVENUES> 38,908
<CGS> 21,095
<TOTAL-COSTS> 26,250
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<INTEREST-EXPENSE> 804
<INCOME-PRETAX> 1,917
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