<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QURTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly period ended October 3, 1998
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
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 November 10, 1998 was 28,477,650.
<PAGE> 2
MTI TECHNOLOGY CORPORATION
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of October 3, 1998
and April 4, 1998 3
Condensed Consolidated Statements of Income for the
Three Months Ended October 3, 1998 and October 4, 1997 4
Condensed Consolidated Statements of Income for the
Six Months Ended October 3, 1998 and October 4, 1997 5
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended October 3, 1998 and October 4, 1997 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 6. Exhibits and Reports on Form 8-K 16
</TABLE>
2
<PAGE> 3
MTI TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
OCTOBER 3, APRIL 4,
1998 1998
---------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,521 $ 7,768
Accounts receivable, net 49,089 44,260
Inventories 19,355 18,819
Deferred income tax benefit 4,277 4,277
Prepaid expenses and other receivables 5,255 4,425
--------- ---------
Total current assets 83,497 79,549
Property, plant and equipment, net 13,711 11,995
Goodwill, net 11,878 12,753
Other 728 794
--------- ---------
$ 109,814 $ 105,091
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 5,403 $ 7,898
Current maturities of long-term debt 6 6
Accounts payable 24,455 20,294
Accrued liabilities 17,641 18,199
Deferred income 12,893 16,441
--------- ---------
Total current liabilities 60,398 62,838
Other 694 107
--------- ---------
Total liabilities 61,092 62,945
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 29,097
and 28,821 shares at October 3, 1998 and April 4, 1998,
respectively 29 29
Additional paid-in capital 97,322 96,577
Accumulated deficit (45,116) (50,021)
Less cost of treasury stock (625 and 666 shares at
October 3, 1998 and April 4, 1998, respectively) (2,295) (2,452)
Accumulated other comprehensive loss (1,218) (1,987)
--------- ---------
Total stockholders' equity 48,722 42,146
--------- ---------
$ 109,814 $ 105,091
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 4
MTI TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------
OCTOBER 3, OCTOBER 4,
1998 1997
---------- ----------
<S> <C> <C>
Net product revenue $37,344 $37,983
Service revenue 10,630 8,813
------- -------
Total revenue 47,974 46,796
Product cost of revenue 26,497 24,998
Service cost of revenue 6,987 5,161
------- -------
Total cost of revenue 33,484 30,159
Gross profit 14,490 16,637
------- -------
Operating expenses:
Selling, general and administrative 11,186 9,762
Research and development 3,259 2,883
------- -------
Total operating expenses 14,445 12,645
------- -------
Operating income 45 3,992
Other income, net 946 605
------- -------
Income before income taxes 991 4,597
Income tax expense 163 508
------- -------
Net income $ 828 $ 4,089
======= =======
Net income per share:
Basic $ 0.03 $ 0.16
======= =======
Diluted $ 0.03 $ 0.14
======= =======
Weighted-average shares used in per share computation:
Basic 28,434 25,957
======= =======
Diluted 29,650 28,672
======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 5
MTI TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------------
OCTOBER 3, OCTOBER 4,
1998 1997
---------- ----------
<S> <C> <C>
Net product revenue $76,566 $73,241
Service revenue 20,824 17,330
------- -------
Total revenue 97,390 90,571
Product cost of revenue 51,627 48,003
Service cost of revenue 13,377 10,053
------- -------
Total cost of revenue 65,004 58,056
Gross profit 32,386 32,515
------- -------
Operating expenses:
Selling, general and administrative 21,780 19,461
Research and development 6,716 5,863
------- -------
Total operating expenses 28,496 25,324
------- -------
Operating income 3,890 7,191
Other income, net 1,905 1,164
------- -------
Income before income taxes 5,795 8,355
Income tax expense 890 1,172
------- -------
Net income $ 4,905 $ 7,183
======= =======
Net income per share:
Basic $ 0.17 $ 0.28
======= =======
Diluted $ 0.16 $ 0.25
======= =======
Weighted-average shares used in per share computation:
Basic 28,342 25,886
======= =======
Diluted 29,888 28,288
======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE> 6
MTI TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-------------------------
OCTOBER 3, OCTOBER 4,
1998 1997
---------- ----------
<S> <C> <C>
Net cash provided by operating activities $ 4,235 $ 6,918
-------- --------
Cash flows from investing activities:
Capital expenditures for property, plant
and equipment, net (4,829) (2,636)
Maturities of short-term investments -- 850
Payments received on notes receivable -- 85
-------- --------
Net cash used in investing activities (4,829) (1,701)
-------- --------
Cash flows from financing activities:
Borrowings under notes payable 65,140 64,031
Proceeds from issuance of common stock and
exercise of options and warrants 902 560
Repayment of notes payable (67,635) (68,946)
-------- --------
Net cash used in financing activities (1,593) (4,355)
-------- --------
Effect of exchange rate changes on cash (60) (8)
-------- --------
Net increase (decrease) in cash and cash equivalents (2,247) 854
Cash and cash equivalents at beginning of period 7,768 3,487
-------- --------
Cash and cash equivalents at end of period $ 5,521 $ 4,341
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 663 $ 1,291
Income taxes 66 250
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE> 7
MTI TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Overview
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 4, 1998. 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 3, 1998, and the condensed consolidated results of operations
and cash flows for the three month and six month periods ended October 3,
1998 and October 4, 1997. 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 per share data, unless
otherwise specified.
2. Inventory
Inventories consist of the following:
<TABLE>
<CAPTION>
OCTOBER 3, APRIL 4,
1998 1998
---------- -------
<S> <C> <C>
Raw Materials $10,220 $10,822
Work in Process 27 318
Finished Goods 9,108 7,679
------- -------
$19,355 $18,819
======= =======
</TABLE>
3. Debt
Credit Agreement and Lines of Credit
Effective July 31, 1998, the Company entered into an agreement with Silicon
Valley Bank and General Electric Capital Corporation whereby under an asset
secured domestic line of credit, the Company may borrow up to $30,000,
limited by the value of pledged collateral. The agreement allows the
Company to borrow at a rate equal to prime rate. The initial term of the
agreement is for one year.
The above agreement replaced an existing agreement whereby the Company had
an asset secured line of credit up to $30,000 with Greyrock Business Credit
which allowed the Company to borrow at a blended rate of prime rate plus
1.67%.
7
<PAGE> 8
4. Net Income per Share
The Company adopted Statement of Financial Accounting Standards No.
("Statement") 128, "Earnings Per Share" in the fourth quarter of fiscal
1998. In accordance with Statement 128, primary earnings per share have
been replaced with basic earnings per share and fully diluted earnings per
share have been replaced with diluted earnings per share which includes
potentially dilutive securities such as outstanding options and warrants.
Prior periods have been restated to conform to Statement 128.
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------- ----------------------
OCTOBER 3, OCTOBER 4, OCTOBER 3, OCTOBER 4,
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Numerator:
Net income $ 828 $ 4,089 $ 4,905 $ 7,183
======= ======= ======= =======
Denominator:
Denominator for net income
per share, basic -
weighted-average shares
outstanding 28,434 25,957 28,342 25,886
------- ------- ------- -------
Effect of dilutive securities:
Dilutive options outstanding 1,216 1,921 1,546 1,736
Dilutive warrants outstanding -- 794 -- 666
------- ------- ------- -------
Dilutive potential common
shares 1,216 2,715 1,546 2,402
------- ------- ------- -------
Denominator for net income per
share, diluted - adjusted
weighted-average shares 29,650 28,672 29,888 28,288
======= ======= ======= =======
Net income per share, basic $ 0.03 $ 0.16 $ 0.17 $ 0.28
======= ======= ======= =======
Net income per share, diluted $ 0.03 $ 0.14 $ 0.16 $ 0.25
======= ======= ======= =======
</TABLE>
Options to purchase 1,369 shares of common stock at prices in excess of
$6.16 per share were outstanding at October 4, 1997, but were not included
in the computation of diluted earnings per share for the three and six
months ended October 4, 1997, because the options' exercise price was
greater than the average market price of the common shares during the
period, and therefore, the effect would be antidilutive.
Options to purchase 3,026 shares of common stock at prices in excess of
$6.79 per share were outstanding at October 3, 1998, but were not included
in the computation of diluted earnings per share for the three months ended
October 3, 1998 because the options' exercise price was greater than the
average market price of the common shares during the period, and therefore,
the effect would be antidilutive.
Options to purchase 1,424 shares of common stock at prices in excess of
$10.04 per share were outstanding at October 3, 1998, but were not included
in the computation of diluted earnings per share for the six months ended
October 3, 1998 because the options' exercise price was greater than the
average market price of the common shares during the period, and therefore,
the effect would be antidilutive.
8
<PAGE> 9
5. Commitments and Contingencies
Litigation
In September 1998, the Company and certain officers were served with a
purported stockholder class-action lawsuit alleging violations of
provisions of the Securities and Exchange Act of 1934 and rules promulgated
thereunder in connection with certain statements made during the period
from May 12, 1998 through June 9, 1998 in RE WEI XIN, ET AL V. MTI
TECHNOLOGY CORPORATION, ET AL. The complaint, filed August 26, 1998, in the
United States District Court for the Central District of California,
alleges that the defendants were aware of certain adverse information which
they failed to disclose. The complaint does not specify the amount of
damages being sought.
In October 1998, the Company and certain officers were served with a
purported stockholder class-action lawsuit alleging violations of
provisions of the Securities and Exchange Act of 1934 and rules promulgated
thereunder in connection with certain statements made during the period
from May 12, 1998 through June 9, 1998 in RE KENNETH BERNARD FLYNN, ET AL
V. MTI TECHNOLOGY CORPORATION, ET AL. The complaint, filed October 30,
1998, in the United States District Court for the Central District of
California, alleges that the defendants were aware of certain adverse
information which they failed to disclose. The complaint does not specify
the amount of damages being sought.
The Company believes that these lawsuits are without merit and intends to
defend the suits vigorously.
6. Comprehensive Income
The Company has adopted Statement 130, "Reporting Comprehensive Income."
Statement 130 establishes standards for reporting and displaying
comprehensive income and its components. The adoption of Statement 130
required additional disclosure but did not have a material effect on the
Company's financial position or results of operations.
The components of comprehensive income are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------- -----------------------
OCTOBER 3, OCTOBER 4, OCTOBER 3, OCTOBER 4,
1998 1997 1998 1997
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net income $ 828 $4,089 $4,905 $7,183
Cumulative translation
adjustment, net of tax 699 (425) 654 (323)
------ ------ ------ ------
Total comprehensive income $1,527 $3,664 $5,559 $6,860
====== ====== ====== ======
</TABLE>
7. New Accounting Standards
The Company has adopted Statement of Position ("SOP") 97-2, "Software
Revenue Recognition." Among other things, SOP 97-2 eliminates the
distinction between significant and insignificant vendor obligations
promulgated by SOP 91-1 and requires each element of a software arrangement
to meet certain criteria in order to recognize revenue allocated to that
element. Additionally, SOP 97-2 requires that total fees under an
arrangement be allocated to each element in the arrangement based upon
vendor specific objective evidence, as defined. Adoption of SOP 97-2 had no
material impact on the Company's financial position or results of
operations.
9
<PAGE> 10
In June 1997, the FASB issued Statement of Financial Accounting Standard
No. 131 "Disclosure about Segments of an Enterprise and Related
Information" ("Statement 131"). Statement 131 is effective for fiscal years
beginning after December 15, 1997. Statement 131 establishes standards for
reporting financial and descriptive information about an enterprise's
operating segments in its annual financial statements and selected segment
information in interim financial reports. Reclassification or restatement
of comparative financial statements or financial information for earlier
periods is required upon adoption of Statement 131. Application of the
Statement's requirements is not expected to have a material impact on the
Company's consolidated financial position, results of operations or net
income per share data.
In June 1998, the Financial Accounting Standards Board issued Statement
133, "Accounting for Derivative Instruments and Hedging Activities." The
new statement is effective for both interim and annual periods beginning
after June 15, 1999. The Company has not yet determined the impact of
adopting this new standard on the consolidated financial statements.
10
<PAGE> 11
PART 1
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain statements set forth below constitute "forward-looking statements"
involving known and unknown risks, uncertainties and other factors that may
cause the actual results, performance or achievements of the Company to be
materially different from any future results, performance or achievements,
expressed or implied, by such forward-looking statements, including statements
about the Company's dependence on new products, management of growth,
competition, international sales, dependence on suppliers and quarterly
fluctuations. Given these uncertainties, investors in the Company's common stock
are cautioned not to rely on such forward-looking statements. 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 4, 1998.
Overview
MTI Technology Corporation is an international provider of high-performance data
storage solutions for the Open Systems and Digital markets. MTI designs,
manufactures, sells and services a fully integrated hierarchy of data storage
solutions including fault tolerant RAID disk arrays, solid state disk systems,
tape libraries and storage management software. In addition, the Company
provides a full line of customer services and support offerings. The Company's
integrated solutions are compatible with most Open System computing platforms,
including those of Sun Microsystems, Hewlett Packard ("HP"), Silicon Graphics,
IBM, Digital Equipment ("DEC") and NT-based computing systems. The Company's
cross-platform capability allows its customers to implement a standardized
storage and data management solution across heterogeneous (multi-vendor)
computing environments, thus simplifying the management of their on and off-line
data. The typical MTI customer operates a data center, where rapid,
uninterrupted access to on-line information is critical to the customer's
business operations. Historically, this information was centrally managed and
maintained. Today many of these customers are in the process of migrating to a
distributed client/server computing environment with its application software
spread over multiple, cross-platform systems. MTI provides data storage and
management solutions that help customers shift from proprietary, single source
computing solutions to distributed multi-vendor client/server based computing.
11
<PAGE> 12
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 3, OCTOBER 4, OCTOBER 3, OCTOBER 4,
1998 1997 1998 1997
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Net product revenue 77.8% 81.2% 78.6% 80.9%
Service revenue 22.2 18.8 21.4 19.1
----- ----- ----- -----
Total revenue 100.0 100.0 100.0 100.0
Product gross profit 29.0 34.2 32.6 34.5
Service gross profit 34.3 41.4 35.8 42.0
----- ----- ----- -----
Gross profit 30.2 35.6 33.3 35.9
Selling, general and
administrative 23.3 20.9 22.5 21.5
Research and development 6.8 6.2 6.9 6.5
----- ----- ----- -----
Operating income 0.1 8.5 3.9 7.9
Other income, net 2.0 1.3 2.0 1.3
Income tax expense 0.4 1.1 .9 1.3
----- ----- ----- -----
Net income 1.7% 8.7% 5.0% 7.9%
===== ===== ===== =====
</TABLE>
NET PRODUCT REVENUE: Net product revenue for the second quarter of fiscal 1999
decreased $0.6 million, or 1.7% from the same quarter of the prior year. This
decrease was primarily due to decreased revenue of $1.8 million from server
products and decreased revenue from tape libraries of $0.4 million, partially
offset by increased revenue of $1.5 million from software products.
Net product revenue for the first six months of fiscal 1999 increased $3.3
million, or 4.5% over the comparable period of the prior year. This increase was
primarily due to increased revenue of $2.1 million from tape products, primarily
the large capacity Infinity series of tape libraries. In addition, server
revenue and software revenue increased $0.7 million and $0.5 million,
respectively, over the same period of the prior year.
SERVICE REVENUE: Service revenue for the second quarter of fiscal 1999 increased
$1.8 million, or 20.6% over the same quarter of the prior year. Service revenue
increased $3.5 million, or 20.2% for the first six months of fiscal 1999 over
the comparable period of the prior year. These increases were primarily due to
increased volume on service contracts.
PRODUCT GROSS PROFIT: Product gross profit was $10.8 million for the second
quarter of fiscal 1999, a decrease of $2.1 million, or 16.5% from the same
quarter of the preceding year, and the gross profit percentage of net product
sales was 29.0% for the second quarter of fiscal 1999 as compared to 34.2% for
the same period of the prior year. Product gross profit was $24.9 million for
the first six months of fiscal 1999, a decrease of $0.3 million, or 1.2% over
the comparable period of the previous year, and the gross profit percentage of
net product sales was 32.6% for the first six months of fiscal 1999 as compared
to 34.5% for the same period of the prior year. These decreases in the product
gross profit percentage were primarily due to reduced margins on tape products.
12
<PAGE> 13
SERVICE GROSS PROFIT: Service gross profit was $3.6 million for the second
quarter of fiscal 1999, essentially unchanged from the same period of the
previous year. The gross profit percentage of service revenue decreased to 34.3%
in the second quarter of fiscal 1999 as compared to 41.4% in the same quarter of
the preceding year. Service gross profit was $7.4 million for the first six
months of fiscal 1999, an increase of $0.2 million, or 2.3% over the same period
of the previous year. The gross profit percentage of service revenue decreased
to 35.8% for the first six months of fiscal 1999 as compared to 42.0% for the
comparable period of the preceding year. These decreases in the gross profit
percentage were primarily attributable to a higher mix of service contract
revenue for tape products which historically have a lower margin.
SELLING, GENERAL AND ADMINISTRATIVE: Selling, general and administrative
expenses for the second quarter of fiscal 1999 increased $1.4 million, or 14.6%
from the same quarter of the preceding year. This increase was primarily due to
increased compensation-related sales costs resulting from increased staff.
Selling, general and administrative expenses for the first six months of fiscal
1999 increased $2.3 million, or 11.9% from the same period of the preceding
year. This increase was 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 1999 increased $0.4 million, or 13.0% over the same quarter of
the preceding year. Research and development expenses for the first six months
of fiscal 1999 increased $0.9 million, or 14.5% from the comparable period of
the preceding year. These increases were primarily due to increased project
costs incurred in new product development .
OTHER INCOME, NET: Other income, net, for the second quarter of fiscal 1999
increased $0.3 million, or 56.4% over the same period of the prior year. Other
income, net, for the first six months of fiscal 1999 increased $0.7 million, or
63.7% over the comparable period of the prior year. These increases were
primarily due to reduced interest expense in the second quarter of fiscal 1999
and the first six months of fiscal 1999 as compared to the same periods of the
prior year as a result of decreased credit line balances.
Liquidity and Capital Resources
Cash and cash equivalents were $5.5 million at October 3, 1998, a decrease of
$2.2 million as compared to April 4, 1998, the prior fiscal year end. Net
operating activities provided cash of $4.2 million for the first six months of
fiscal 1999, primarily due to net income adjusted for non-cash items of $7.6
million and increased accounts payable of $4.2 million. These increases were
partially offset by increased accounts receivable of $4.5 million as a result of
increased days sales outstanding and increased inventories of $1.8 million. Cash
used in financing activities was $1.6 million, primarily due to a net paydown on
the line of credit.
At October 3, 1998, the Company's days sales outstanding were 93 days, as
compared to 80 days at April 4, 1998. The Company's average days sales
outstanding is impacted by the high percentage of sales occurring within the
last month of each quarter and the large percentage of international sales,
which historically have slower payment patterns. The increase is primarily due
to a higher percentage of sales occurring within the last month of the second
quarter of fiscal year 1999 than the percentage of sales occurring within the
last month of the fourth quarter of fiscal year 1998.
Stockholders' equity at the end of the second quarter of fiscal 1999 was $48.7
million as compared to $42.1 million at the end of fiscal 1998. The increase was
primarily due to net income of $4.9 million and net proceeds from the exercise
of options of $0.9 million.
13
<PAGE> 14
Effective July 31, 1998, the Company entered into an agreement with Silicon
Valley Bank and General Electric Capital Corporation 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 rate equal to prime rate. Borrowings under the line of credit are
subject to certain financial and operating covenants, including, without
limitation, various financial covenants requiring the Company to maintain a
minimum current ratio, debt-net worth ratio, tangible net worth and
profitability and restricts the Company from paying any dividends. The initial
term of the agreement is for one year. Borrowings outstanding under this
agreement at November 10, 1998 were $7.3 million.
The above agreement replaced an existing agreement whereby the Company had an
asset secured line of credit up to $30.0 million with Greyrock Business Credit
which allowed the Company to borrow at a blended rate of prime rate plus 1.67%.
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 three of which were
received in February 1996, January 1997 and January 1998. The remaining payments
are to be received in each of the subsequent three years beginning January 1999;
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 two annual installments were
received in March 1997 and March 1998.
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.
The Company's current line of credit agreement will expire in July 1999. Even
though the Company has not yet begun negotiations for a renewal or new credit
facility, Management believes the Company will be able to secure similar
financing. 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.
Upgrade of Existing Computer Infrastructure; Year 2000 Issue
In the past, many computer software programs were written using two digits
rather than four digits to define the applicable year. As a result,
date-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This situation is generally referred to as the "Year 2000
Issue." If such a situation occurs, the potential exists for system failures or
miscalculations, which could disrupt operations.
The Company is in the process of upgrading its existing computer infrastructure
and replacing all of its manufacturing, accounting, customer service and other
management information software with an enterprise-wide business system which it
believes is Year 2000 compliant. Although the Company expects that the new
computer hardware and enterprise-wide business system will be installed by the
end of fiscal year 1999, there can be no assurance that the Company will be able
to achieve this installation on time or that unexpected compliance issues will
not arise. Further, the Company has never undertaken such a
14
<PAGE> 15
significant modification to its information management systems and, accordingly,
there can be no assurance that the Company will not experience significant
delays and/or compatibility issues in the installation and testing of the
enterprise-wide business system. The new enterprise-wide business system will
also require extensive training across all departments. Any delays or
significant issues with respect to installation or training could materially
adversely effect the Company's business, results of operation and results of
operation.
In addition, the Company has implemented a review program to address Year 2000
issues as they relate to the Company's products sold to third parties, the
Company's key suppliers and the Company's non-IT systems. Under this program,
the Company has initiated, and substantially completed, processes to a) obtain
representations from suppliers as to Year 2000 compliance; b) review the
Company's products for compliance and c) review non-IT systems for compliance.
During fiscal 1999, the Company will document the work completed through a
comprehensive remediation plan for the Year 2000 issue that includes the
assessment, rectification, testing and reporting of product compliance, the
receipt and review of third party representations of Year 2000 compliance and
assessment, and rectification and testing of all non-IT systems. During calendar
1999, the Company will develop a comprehensive contingency plan in the event any
non-compliant critical systems remain by January 1, 2000.
The Company does not consider the cost of upgrading its existing computer
infrastructure and replacing all of its manufacturing, accounting, customer
service and other management information software with an enterprise-wide
business system to be a cost relating to Year 2000 compliance, because the
project was initiated independent of the Year 2000 issue and the project
completion date has not been accelerated in order to achieve compliance. As of
October 3, 1998, the Company has incurred Year 2000 costs consisting primarily
of internal labor costs and has not tracked these costs, because the Company
believes these costs to be immaterial. The Company anticipates that costs to
complete Year 2000 compliance will continue to consist primarily of internal
labor costs and be immaterial, but there can be no assurance that unanticipated
costs will not be incurred.
The Company expects Year 2000 compliance during calendar year 1999. However,
there can be no assurances that the Company or third parties will not experience
delays or obstacles in becoming Year 2000 compliant and any delay or failure by
the Company or third parties in achieving Year 2000 compliance could materially
adversely effect the Company's business, results of operations and financial
condition.
15
<PAGE> 16
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
In September 1998, the Company and certain officers were served with a purported
stockholder class-action lawsuit alleging violations of provisions of the
Securities and Exchange Act of 1934 and rules promulgated thereunder in
connection with certain statements made during the period from May 12, 1998
through June 9, 1998 in RE WEI XIN, ET AL V. MTI TECHNOLOGY CORPORATION, ET AL.
The complaint, filed August 26, 1998, in the United States District Court for
the Central District of California, alleges that the defendants were aware of
certain adverse information which they failed to disclose. The complaint does
not specify the amount of damages being sought.
In October 1998, the Company and certain officers were served with a purported
stockholder class-action lawsuit alleging violations of provisions of the
Securities and Exchange Act of 1934 and rules promulgated thereunder in
connection with certain statements made during the period from May 12, 1998
through June 9, 1998 in RE KENNETH BERNARD FLYNN, ET AL V. MTI TECHNOLOGY
CORPORATION, ET AL. The complaint, filed October 30, 1998, in the United States
District Court for the Central District of California, alleges that the
defendants were aware of certain adverse information which they failed to
disclose. The complaint does not specify the amount of damages being sought.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of the stockholders of the Company was held on September 10,
1998. Raymond J. Noorda was elected to the Company's Board of Directors to hold
office for the ensuing three years. The number of shares voted in favor was
26,425,716. The number of shares voted against was 68,096. Earl Pearlman, Val
Kreidel, John Repp 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 1999. The number of shares voted for ratification was 26,450,711.
The number of shares voted against ratification was 24,851. The number of shares
abstaining was 18,250.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27.1 Financial Data Schedule
27.2 Financial Data Schedule
(b) Reports on Form 8-K:
Form 8-K, dated September 14, 1998, regarding a purported shareholder
class-action lawsuit filed against the Company and certain officers.
16
<PAGE> 17
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, 1998.
MTI TECHNOLOGY CORPORATION
By: /s/ DALE R. BOYD
----------------------------------
Dale R. Boyd
Senior Vice President, Finance and
Administration and Chief
Financial Officer
(Principal Financial Officer)
By: /s/ STEPHANIE M. BRAUN
----------------------------------
Stephanie M. Braun
Corporate Controller, Chief
Accounting Officer
(Principal Accounting Officer)
17
<PAGE> 18
EXHIBIT INDEX
Exhibit Number Description
- - -------------- -----------
27.1 Financial Data Schedule
27.2 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> APR-03-1999
<PERIOD-START> JUL-05-1998
<PERIOD-END> OCT-03-1998
<CASH> 5,521
<SECURITIES> 0
<RECEIVABLES> 52,585
<ALLOWANCES> 3,496
<INVENTORY> 19,355
<CURRENT-ASSETS> 83,497
<PP&E> 42,429
<DEPRECIATION> 28,718
<TOTAL-ASSETS> 109,814
<CURRENT-LIABILITIES> 60,398
<BONDS> 0
0
0
<COMMON> 29
<OTHER-SE> 48,693
<TOTAL-LIABILITY-AND-EQUITY> 109,814
<SALES> 37,344
<TOTAL-REVENUES> 47,974
<CGS> 26,497
<TOTAL-COSTS> 33,484
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 95
<INTEREST-EXPENSE> 213
<INCOME-PRETAX> 991
<INCOME-TAX> 163
<INCOME-CONTINUING> 828
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 828
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<RESTATED>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> APR-04-1998
<PERIOD-START> JUL-06-1997
<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> .16
<EPS-DILUTED> .14
</TABLE>
