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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 July 5, 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
--- ---
The number of shares outstanding of the issuer's common stock, $.001 par
value, as of August 11, 1997 was 25,908,360.
1
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MTI TECHNOLOGY CORPORATION
INDEX
<TABLE>
<CAPTION>
Page
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of July 5, 1997 and
April 5, 1997 3
Condensed Consolidated Statements of Income for the Three
Months Ended July 5, 1997 and July 6, 1996 4
Condensed Consolidated Statements of Cash Flows for the Three
Months Ended July 5, 1997 and July 6, 1996 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 7
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 11
</TABLE>
2
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MTI TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
JULY 5, APRIL 5,
1997 1997
-------- --------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,733 $ 3,487
Short-term investments - 850
Accounts receivable, net 31,577 31,899
Inventories 16,502 14,637
Deferred income tax benefit 960 960
Prepaid expenses and other receivables 3,473 2,862
-------- --------
Total current assets 57,245 54,695
Property, plant and equipment, net 11,917 13,220
Intangible assets and goodwill, net 14,536 15,027
Other 698 650
-------- --------
$ 84,396 $ 83,592
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 17,587 $ 22,102
Current maturities of long-term debt 1,626 1,851
Accounts payable 15,754 14,347
Accrued liabilities 17,261 15,622
Deferred income 12,303 13,040
-------- --------
Total current liabilities 64,531 66,962
Long-term debt, less current maturities - 6
Deferred income 182 242
Other 5 5
-------- --------
Total liabilities 64,718 67,215
-------- --------
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 26,604 and 26,537
shares at July 5 and April 5, 1997, respectively 26 26
Additional paid-in capital 88,883 88,780
Accumulated deficit (64,913) (68,010)
Less cost of treasury stock (755 shares at July 5 and April 5, 1997) (2,788) (2,788)
Cumulative foreign currency translation adjustments (1,530) (1,631)
-------- --------
Total stockholders' equity 19,678 16,377
-------- --------
$ 84,396 $ 83,592
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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MTI TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JULY 5, JULY 6,
1997 1996
------- -------
<S> <C> <C>
Net product revenue $35,258 $27,604
Service revenue 8,517 8,573
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Total revenue 43,775 36,177
Product cost of revenue 23,005 20,059
Service cost of revenue 4,892 4,992
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Total cost of revenue 27,897 25,051
Gross profit 15,878 11,126
------ -------
Operating expenses:
Selling, general and administrative 9,699 8,578
Research and development 2,980 2,291
------- -------
Total operating expenses 12,679 10,869
Operating income 3,199 257
Other income, net 559 200
------- -------
Income before income taxes 3,758 457
Income tax expense 664 -
------- -------
Net income $ 3,094 $ 457
======= =======
Income per common and common equivalent share $ 0.11 $ 0.02
======= =======
Weighted average common and common equivalent shares 28,459 26,136
======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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MTI TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------
JULY 5, JULY 6,
1997 1996
-------- --------
<S> <C> <C>
Net cash provided by (used in) operating activities $ 6,141 $ (5,568)
-------- --------
Cash flows from investing activities:
Capital expenditures for property, plant
and equipment, net (1,048) (700)
Maturities of short-term investments 850 -
-------- --------
Net cash used in investing activities (198) (700)
-------- --------
Cash flows from financing activities:
Borrowings under notes payable, net of acquisitions 29,108 30,747
Proceeds from issuance of common stock and
exercise of options and warrants 96 142
Repayment of notes payable (33,855) (24,697)
-------- --------
Net cash provided by (used in) financing activities (4,651) 6,192
-------- --------
Effect of exchange rate changes on cash (46) (157)
-------- --------
Net increase (decrease) in cash and cash equivalents 1,246 (233)
Cash and cash equivalents at beginning of period 3,487 4,055
-------- --------
Cash and cash equivalents at end of period $ 4,733 $ 3,822
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 702 $ 763
Income taxes 89 77
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
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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 July 5, 1997, and the
condensed consolidated results of operations and cash flows for the three month
periods ended July 5, 1997 and July 6, 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>
JULY 5, APRIL 5,
1997 1997
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<S> <C> <C>
Raw Materials $ 6,163 $ 5,788
Work in Process 20 10
Finished Goods 10,319 8,839
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$16,502 $14,637
======= =======
</TABLE>
3. 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 income per share, except in those periods where such inclusion
would be antidilutive. The primary and fully dilutive income 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 product and service offerings for the Open Systems computing
environment and decrease its historic dependence on sales and service from
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 84% for the first 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 $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
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.
7
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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 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 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
--------------------------
JULY 5, JULY 6,
1997 1996
------- -------
<S> <C> <C>
Net product revenue 80.5% 76.3%
Service revenue 19.5 23.7
----- -----
Total revenue 100.0 100.0
Product gross profit 34.8 27.3
Service gross profit 42.6 41.8
----- -----
Gross profit 36.3 30.8
Selling, general and administrative 22.2 23.8
Research and development 6.8 6.3
----- -----
Operating income 7.3 0.7
Other income, net 1.3 0.6
Income tax expense 1.5 -
----- -----
Net income 7.1% 1.3%
===== =====
</TABLE>
Net Product Revenue: Net product revenue increased $7.7 million, or 27.7% over
the same quarter of the prior year. This increase was primarily due to increased
revenue of $4.3 million from optical/tape products, primarily the mid-range 1500
series of automated DLT tape libraries. In addition, software revenue and server
revenue increased $2.2 million and $1.2 million, respectively, over the same
period of the prior year.
Service Revenue: Service revenue was $8.5 million for the first quarter fiscal
1998, essentially the same as the first quarter of the prior year.
Product Gross Profit: Product gross profit was $12.3 million for the first
quarter of fiscal 1998, an increase of $4.7 million, or 62.4% over the same
quarter of the preceding year, and the gross profit percentage of net product
sales was 35% for the first quarter of fiscal 1998 as compared to 27% for the
same period of the prior year. The increase in the product gross profit
percentage was 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 $3.6 million for the first
quarter of fiscal 1997 and the first quarter of fiscal 1998. The gross profit
percentage of service revenue increased to 42.6% in the first quarter of fiscal
1997 from 41.8% in the same quarter of the preceding year.
Selling, General and Administrative: Selling, general and administrative
expenses for the first quarter of fiscal 1998 increased $1.1 million, or 13.1%
from the same quarter of the preceding year. This increase was primarily due to
an increase in compensation-related sales costs due to increased staff and
increased revenues.
9
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Research and Development: Research and development expenses for the first
quarter of fiscal 1998 increased $0.7 million, or 30.1% from the same quarter of
the preceding year. This increase was primarily due to non-refundable research
and development funding of $0.5 million received in the first quarter of fiscal
1997 and an increase in other expenses of $0.2 million.
Other Income, Net: Other income, net, increased $0.4 million, or 179.5% over the
same period of the prior year. This increase was primarily due to reduced
interest expense in the first quarter of fiscal 1998 as compared to the same
period of the prior year as a result of decreased credit line balances and debt
repayment.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $4.7 million at July 5, 1997, an increase
of $1.2 million as compared to April 5, 1997, the prior fiscal year end. Net
operating activities provided $6.1 million in the first quarter of fiscal 1998,
primarily due to $6.3 million of net income adjusted for non-cash items and
increased A/P and accrued liabilities of $3.1 million primarily due to increased
trade purchases, partially offset by increased inventories of $2.8 million. Cash
used in financing activities was $4.7 million, primarily as a result of payments
made on the bank line borrowings and notes payable.
The Company's average days sales outstanding were 66 days at the end of
the first quarter of fiscal 1998, as compared to 61 days at the end of the same
quarter of fiscal 1997. The increase is primarily due to increased volume
resulting from increased revenue. The Company's average days sales outstanding
at July 5, 1997 decreased from 76 days at April 5, 1997, the prior fiscal year
end. The Company continues its efforts to reduce the average days sales
outstanding.
Stockholders' equity at the end of the first quarter of fiscal 1998 was
$19.7 million as compared to $16.4 million at the end of fiscal 1997. The
increase was primarily due to net income of $3.1 million.
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 $19.9 at July 5, 1997 and August 14, 1997,
respectively. The bank line of credit contains certain restrictive covenants. At
July 5, 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 $2.0 million was received in March 1997.
10
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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.
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27 Financial Data Schedule
(b) Reports on Form 8-K:
None.
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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 15th day of August 1997.
MTI TECHNOLOGY CORPORATION
By: /s/ Dale R. Boyd
------------------------------------------
Dale R. Boyd
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
12
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EXHIBIT INDEX
Exhibit Number Description Page
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27 Financial Data Schedule 16
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> APR-04-1998
<PERIOD-START> APR-06-1997
<PERIOD-END> JUL-05-1997
<CASH> 4,733
<SECURITIES> 0
<RECEIVABLES> 41,783
<ALLOWANCES> 10,206
<INVENTORY> 16,502
<CURRENT-ASSETS> 57,245
<PP&E> 35,083
<DEPRECIATION> 23,166
<TOTAL-ASSETS> 84,396
<CURRENT-LIABILITIES> 64,531
<BONDS> 0
26
0
<COMMON> 0
<OTHER-SE> 19,652
<TOTAL-LIABILITY-AND-EQUITY> 84,396
<SALES> 35,258
<TOTAL-REVENUES> 43,775
<CGS> 23,005
<TOTAL-COSTS> 27,897
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 283
<INTEREST-EXPENSE> 795
<INCOME-PRETAX> 3,758
<INCOME-TAX> 664
<INCOME-CONTINUING> 3,094
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,094
<EPS-PRIMARY> 0.11
<EPS-DILUTED> 0.11
</TABLE>
