<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(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 2, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
--------------- ----------------
Commission file number 0-23418
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 February 8, 1999 was 28,610,042.
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MTI TECHNOLOGY CORPORATION
INDEX
<TABLE>
<CAPTION>
Page
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of January 2, 1999
and April 4, 1998 3
Condensed Consolidated Statements of Income for the Three
and Nine Months Ended January 2, 1999 and January 3, 1998 4
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended January 2, 1999 and January 3, 1998 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 6. Exhibits and Reports on Form 8-K 14
</TABLE>
2
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MTI TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
JANUARY 2, APRIL 4,
1999 1998
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,933 $ 7,768
Accounts receivable, net 49,420 44,260
Inventories 26,534 18,819
Deferred income tax benefit 4,277 4,277
Prepaid expenses and other receivables 5,158 4,425
--------- ---------
Total current assets 89,322 79,549
Property, plant and equipment, net 13,376 11,995
Goodwill, net 11,398 12,753
Other 693 794
--------- ---------
$ 114,789 $ 105,091
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 11,561 $ 7,898
Current maturities of long-term debt -- 6
Accounts payable 22,961 20,294
Accrued liabilities 16,711 18,199
Deferred income 12,579 16,441
--------- ---------
Total current liabilities 63,812 62,838
Other 1,241 107
--------- ---------
Total liabilities 65,053 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 29,169
and 28,821 shares at January 2, 1999 and April 4, 1998,
respectively 29 29
Additional paid-in capital 97,425 96,577
Accumulated deficit (43,642) (50,021)
Less cost of treasury stock (625 and 666 shares at
January 2, 1999 and April 4, 1998, respectively) (2,295) (2,452)
Accumulated other comprehensive loss (1,781) (1,987)
--------- ---------
Total stockholders' equity 49,736 42,146
--------- ---------
$ 114,789 $ 105,091
========= =========
</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 NINE MONTHS ENDED
------------------------ ------------------------
JANUARY 2, JANUARY 3, JANUARY 2, JANUARY 3,
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net product revenue $ 36,191 $ 44,773 $112,757 $118,014
Service revenue 11,468 9,216 32,292 26,546
-------- -------- -------- --------
Total revenue 47,659 53,989 145,049 144,560
Product cost of revenue 24,732 29,691 76,359 77,694
Service cost of revenue 7,133 5,684 20,510 15,737
-------- -------- -------- --------
Total cost of revenue 31,865 35,375 96,869 93,431
Gross profit 15,794 18,614 48,180 51,129
-------- -------- -------- --------
Operating expenses:
Selling, general and administrative 11,699 10,489 33,479 29,950
Research and development 3,158 3,144 9,874 9,007
-------- -------- -------- --------
Total operating expenses 14,857 13,633 43,353 38,957
-------- -------- -------- --------
Operating income 937 4,981 4,827 12,172
Other income, net 851 626 2,756 1,790
-------- -------- -------- --------
Income before income taxes 1,788 5,607 7,583 13,962
Income tax expense 314 528 1,204 1,700
-------- -------- -------- --------
Net income $ 1,474 $ 5,079 $ 6,379 $ 12,262
======== ======== ======== ========
Net income per share:
Basic $ 0.05 $ 0.19 $ 0.22 $ 0.47
======== ======== ======== ========
Diluted $ 0.05 $ 0.17 $ 0.21 $ 0.42
======== ======== ======== ========
Weighted-average shares used in
per share computations:
Basic 28,502 27,199 28,395 26,323
======== ======== ======== ========
Diluted 29,350 30,508 29,732 29,126
======== ======== ======== ========
</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>
NINE MONTHS ENDED
--------------------------
JANUARY 2, JANUARY 3,
1999 1998
---------- ----------
<S> <C> <C>
Net cash provided by (used in) operating activities $ (2,443) $ 4,064
--------- ---------
Cash flows from investing activities:
Capital expenditures for property, plant
and equipment, net (6,080) (5,391)
Maturities of short-term investments -- 850
Payments received on notes receivable -- 135
--------- ---------
Net cash used in investing activities (6,080) (4,406)
--------- ---------
Cash flows from financing activities:
Borrowings under notes payable 82,268 108,627
Proceeds from issuance of common stock and
exercise of options and warrants 1,005 3,092
Repayment of notes payable (78,611) (109,615)
--------- ---------
Net cash provided by financing activities 4,662 2,104
--------- ---------
Effect of exchange rate changes on cash 26 (48)
--------- ---------
Net increase (decrease) in cash and cash equivalents (3,835) 1,714
Cash and cash equivalents at beginning of period 7,768 3,487
--------- ---------
Cash and cash equivalents at end of period $ 3,933 $ 5,201
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 866 $ 1,871
Income taxes 1,613 661
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
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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 January 2, 1999, and the condensed consolidated results of operations
and cash flows for the three and nine month periods ended January 2, 1999
and January 3, 1998. 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>
JANUARY 2, APRIL 4,
1999 1998
---------- --------
<S> <C> <C>
Raw Materials $15,588 $10,822
Work in Process 296 318
Finished Goods 10,650 7,679
------- -------
$26,534 $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%.
6
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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 NINE MONTHS ENDED
---------------------- -----------------------
JANUARY 2, JANUARY 3, JANUARY 2, JANUARY 3,
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Numerator:
Net income $ 1,474 $ 5,079 $ 6,379 $12,262
======= ======= ======= =======
Denominator:
Denominator for net income
per share, basic --
weighted-average shares
outstanding 28,502 27,199 28,395 26,323
------- ------- ------- -------
Effect of dilutive securities:
Dilutive options outstanding 848 3,138 1,321 2,221
Dilutive warrants outstanding -- 171 -- 582
------- ------- ------- -------
Dilutive potential common shares 848 3,309 1,321 2,803
------- ------- ------- -------
Denominator for net income per
share, diluted -- adjusted
weighted-average shares 29,350 30,508 29,732 29,126
======= ======= ======= =======
Net income per share, basic $ 0.05 $ 0.19 $ 0.22 $ 0.47
======= ======= ======= =======
Net income per share, diluted $ 0.05 $ 0.17 $ 0.21 $ 0.42
======= ======= ======= =======
</TABLE>
Options to purchase 1,063 shares of common stock at prices in excess of
$8.91 per share were outstanding at January 3, 1998, but were not included
in the computation of diluted earnings per share for the nine months ended
January 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 2,988 shares of common stock at prices in excess of
$8.18 per share were outstanding at January 2, 1999, but were not included
in the computation of diluted earnings per share for the three months ended
January 2, 1999 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 3,072 shares of common stock at prices in excess of
$4.45 per share were outstanding at January 2, 1999, but were not included
in the computation of diluted earnings per share for the nine months ended
January 2, 1999 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.
7
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5. COMMITMENTS AND CONTINGENCIES
LITIGATION
During September and October 1998, the Company and certain directors and
officers were served with two purported stockholder class-action lawsuits
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 21, 1998 through June 9, 1998.
Subsequently, these two actions were consolidated into a single case, In
re: MTI Technology Corp. Securities Litigation. The complaint, filed
February 2, 1999 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 this lawsuit is without merit and intends to
defend the suit 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 NINE MONTHS ENDED
-------------------------- --------------------------
JANUARY 2, JANUARY 3, JANUARY 2, JANUARY 3,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income $ 1,474 $ 5,079 $ 6,379 $ 12,262
Cumulative translation adjustment,
net of tax (464) 24 173 (307)
-------- -------- -------- --------
Total comprehensive income $ 1,010 $ 5,103 $ 6,552 $ 11,955
======== ======== ======== ========
</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.
SOP 98-9, "Modification of SOP 97-2, SOFTWARE REVENUE RECOGNITION, With
Respect to Certain Transactions" was issued in December 1998. SOP 98-9
addresses software revenue recognition as it applies to certain
multiple-element arrangements. SOP 98-9 also amends SOP 98-4, "Deferral of
the Effective Date of a Provision of SOP 97-2", to extend the deferral of
application of certain passages of SOP 97-2 through fiscal years beginning
on or before March 15, 1999. All other provisions of SOP 98-9 are effective
for transactions entered into in fiscal years beginning after March 15,
1999. Application of SOP 98-9 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.
8
<PAGE> 9
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.
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 liquidity and capital resources, royalty payments from EMC,
international sales, year 2000 compliance 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.
9
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RESULTS OF OPERATIONS
The following table sets forth selected items from the Condensed Consolidated
Statements of Income as a percentage of net revenues for the periods indicated,
except for product gross profit and service gross profit, which are expressed as
a percentage of the related revenue. This information should be read in
conjunction with the Condensed Consolidated Financial Statements included
elsewhere herein:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
-------------------------- -------------------------
JANUARY 2, JANUARY 3, JANUARY 2, JANUARY 3,
1999 1998 1999 1998
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Net product revenue 75.9% 82.9% 77.7% 81.6%
Service revenue 24.1 17.1 22.3 18.4
----- ----- ----- -----
Total revenue 100.0 100.0 100.0 100.0
Product gross profit 31.7 33.7 32.3 34.2
Service gross profit 37.8 38.3 36.5 40.7
----- ----- ----- -----
Gross profit 33.1 34.5 33.2 35.4
Selling, general and administrative 24.5 19.5 23.1 20.7
Research and development 6.6 5.8 6.8 6.2
----- ----- ----- -----
Operating income 2.0 9.2 3.3 8.5
Other income, net 1.8 1.2 1.9 1.2
Income tax expense 0.7 1.0 .8 1.2
----- ----- ----- -----
Net income 3.1% 9.4% 4.4% 8.5%
===== ===== ===== =====
</TABLE>
NET PRODUCT REVENUE: Net product revenue for the third quarter of fiscal 1999
decreased $8.6 million, or 19.2% from the same quarter of the prior year. This
decrease was primarily due to decreased revenue of $7.1 million from server
products and decreased revenue from tape libraries of $1.5 million.
Net product revenue for the first nine months of fiscal 1999 decreased $5.3
million, or 4.5% from the comparable period of the prior year. This decrease was
primarily due to decreased revenue of $6.4 million from server revenue. This
decrease was partially offset by an increase in tape products revenue, primarily
the large capacity Infinity series of tape libraries, and software revenue of
$0.6 million and $0.5 million, respectively, over the same period of the prior
year.
SERVICE REVENUE: Service revenue for the third quarter of fiscal 1999 increased
$2.3 million, or 24.4% over the same quarter of the prior year. Service revenue
increased $5.7 million, or 21.6% for the first nine months of fiscal 1999 over
the comparable period of the prior year. These increases were primarily due to
increased volume on service contracts attributable to an increase in the
installed base.
PRODUCT GROSS PROFIT: Product gross profit was $11.5 million for the third
quarter of fiscal 1999, a decrease of $3.6 million, or 24.0% from the same
quarter of the preceding year, and the gross profit percentage of net product
sales was 31.7% for the third quarter of fiscal 1999 as compared to 33.7% for
the same period of the prior year. Product gross profit was $36.4 million for
the first nine months of fiscal 1999, a decrease of $3.9 million, or 9.7% from
the comparable period of the previous year, and the gross profit percentage of
net product sales was 32.3% for the first nine months of fiscal 1999 as compared
to 34.2% 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.
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<PAGE> 11
SERVICE GROSS PROFIT: Service gross profit was $4.3 million for the third
quarter of fiscal 1999, an increase of $0.8 million, or 22.7% over the same
period of the previous year. The gross profit percentage of service revenue
decreased to 37.8% in the third quarter of fiscal 1999 as compared to 38.3% in
the same quarter of the preceding year. Service gross profit was $11.8 million
for the first nine months of fiscal 1999, an increase of $1.0 million, or 9.0%
over the same period of the previous year. The gross profit percentage of
service revenue decreased to 36.5% for the first nine months of fiscal 1999 as
compared to 40.7% 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 third quarter of fiscal 1999 increased $1.2 million, or 11.5%
from the same quarter of the preceding year. Selling, general and administrative
expenses for the first nine months of fiscal 1999 increased $3.5 million, or
11.8% from the same period of the preceding year. These increases were primarily
due to increased compensation-related sales costs resulting from increased
staff.
RESEARCH AND DEVELOPMENT: Research and development expenses for the third
quarter of fiscal 1999 were $3.2 million, essentially unchanged from the same
quarter of the preceding year. Research and development expenses for the first
nine months of fiscal 1999 increased $0.9 million, or 9.6% from the comparable
period of the preceding year. This increase was primarily due to increased
project costs incurred in new product development .
OTHER INCOME, NET: Other income, net, for the third quarter of fiscal 1999
increased $0.2 million, or 35.9% over the same period of the prior year. Other
income, net, for the first nine months of fiscal 1999 increased $1.0 million, or
54.0% over the comparable period of the prior year. These increases were
primarily due to reduced interest expense in the third quarter of fiscal 1999
and the first nine 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 $3.9 million at January 2, 1999, a decrease of
$3.9 million as compared to April 4, 1998, the prior fiscal year end. Net
operating activities used cash of $2.4 million for the first nine months of
fiscal 1999, primarily due to increased accounts receivable of $5.3 million as a
result of increased days sales outstanding and to increased gross inventories of
$9.6 million primarily as a result of increased trade inventories due to a shift
in the mix of products sold as compared to the mix of inventory purchased. These
uses of cash were partially offset by net income adjusted for non-cash items of
$12.1 million and a combined increase in accounts payable and accrued
liabilities of $1.2 million. Cash provided by financing activities was $4.7
million, primarily due to increased borrowings against the line of credit.
At January 2, 1999, the Company's days sales outstanding were 94 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 third
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 third quarter of fiscal 1999 was $49.7
million as compared to $42.1 million at the end of fiscal 1998. The increase was
primarily due to net income of $6.4 million and net proceeds from the exercise
of options of $1.0 million.
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Effective July 31, 1998, the Company entered into an agreement with Silicon
Valley Bank and General Electric Capital Corporation whereby the Company may
borrow up to $30.0 million under an asset secured domestic line of credit,
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 February 8, 1999 were $6.8 million.
The above agreement replaced 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 four of which were
received in February 1996, January 1997, January 1998 and January 1999. The
remaining payments are to be received in each of the subsequent two years
beginning January 2000; 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
future cash flow from operating activities will be sufficient to meet the
Company's operating and capital expenditure requirements for at least 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 of its existing credit facility or a new credit facility, Management
believes the Company will be able to secure comparable financing prior to the
expiration of the existing credit facility. 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
12
<PAGE> 13
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 operations and financial
condition.
The Company has committed personnel 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 internal IT and non-IT systems. 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 internal IT and non-IT systems for compliance. The Company is in the
process of completing 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 internal IT and
non-IT systems. The Company anticipates that remediation will be complete by
July 1999. As a part of the remediation plan, the Company will evaluate the need
for, and complete if necessary, a contingency plan in the event any
non-compliant critical systems remain by January 1, 2000.
Management believes that the most reasonable likely worst case scenario related
to Year 2000 that the Company may experience, would be the delay or inability to
procure inventory components from suppliers or delays in receiving orders or
payments from customers due to Year 2000 issues experienced by third parties.
Such factors could materially adversely affect the Company's business, results
of operations and financial condition.
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
January 2, 1999, the Company has incurred Year 2000 costs consisting primarily
of internal labor costs but 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.
13
<PAGE> 14
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
During September and October 1998, the Company and certain directors and
officers were served with two purported stockholder class-action lawsuits
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 21, 1998 through June 9, 1998. Subsequently, these two
actions were consolidated into a single case, In re: MTI Technology Corp.
Securities Litigation. The complaint, filed February 2, 1999 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 this lawsuit is without merit and intends to defend
the suit vigorously.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27 Financial Data Schedule
(b) Reports on Form 8-K:
None.
14
<PAGE> 15
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 February, 1999.
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)
15
<PAGE> 16
EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------
27 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> OCT-04-1998
<PERIOD-END> JAN-02-1999
<CASH> 3,933
<SECURITIES> 0
<RECEIVABLES> 54,169
<ALLOWANCES> 4,749
<INVENTORY> 26,534
<CURRENT-ASSETS> 89,322
<PP&E> 43,352
<DEPRECIATION> 29,976
<TOTAL-ASSETS> 114,789
<CURRENT-LIABILITIES> 63,812
<BONDS> 0
0
0
<COMMON> 29
<OTHER-SE> 49,736
<TOTAL-LIABILITY-AND-EQUITY> 114,789
<SALES> 36,191
<TOTAL-REVENUES> 47,659
<CGS> 24,732
<TOTAL-COSTS> 31,865
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 228
<INTEREST-EXPENSE> 202
<INCOME-PRETAX> 1,788
<INCOME-TAX> 314
<INCOME-CONTINUING> 1,474
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,474
<EPS-PRIMARY> .05
<EPS-DILUTED> .05
</TABLE>
