<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 July 3, 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 August 10, 1999 was 30,006,407.
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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 July 3,
1999 and April 3, 1999 3
Condensed Consolidated Statements of Income for the
Three Months Ended July 3, 1999 and July 4, 1998 4
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended July 3, 1999 and July 4, 1998 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 14
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>
JULY 3, APRIL 3,
1999 1999
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,046 $ 7,213
Accounts receivable, net 57,804 53,005
Inventories 23,046 16,987
Deferred income tax benefit 3,960 3,960
Prepaid expenses and other receivables 7,703 7,312
--------- ---------
Total current assets 98,559 88,477
Property, plant and equipment, net 12,176 13,802
Goodwill, net 10,399 10,890
Other 684 609
--------- ---------
$ 121,818 $ 113,778
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 5,188 $ 5,824
Accounts payable 22,188 18,632
Accrued liabilities 19,838 16,043
Deferred income 15,499 17,981
--------- ---------
Total current liabilities 62,713 58,480
Other 1,380 1,157
--------- ---------
Total liabilities 64,093 59,637
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
29,494 and 29,212 shares at July 3, 1999 and April 3,
1999, respectively 29 29
Additional paid-in capital 99,126 98,539
Accumulated deficit (36,371) (39,929)
Less cost of treasury stock (575 shares at July 3, 1999
and April 3, 1999) (2,108) (2,108)
Accumulated other comprehensive loss (2,951) (2,390)
--------- ---------
Total stockholders' equity 57,725 54,141
--------- ---------
$ 121,818 $ 113,778
========= =========
</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 3, JULY 4,
1999 1998
------- -------
<S> <C> <C>
Net product revenue $41,369 $39,222
Service revenue 11,871 10,194
------- -------
Total revenue 53,240 49,416
------- -------
Product cost of revenue 26,630 25,130
Service cost of revenue 7,401 6,390
------- -------
Total cost of revenue 34,031 31,520
------- -------
Gross profit 19,209 17,896
------- -------
Operating expenses:
Selling, general and administrative 12,442 10,594
Research and development 3,516 3,457
------- -------
Total operating expenses 15,958 14,051
------- -------
Operating income 3,251 3,845
Other income, net 1,036 959
------- -------
Income before income taxes 4,287 4,804
Income tax expense 729 727
------- -------
Net income $ 3,558 $ 4,077
======= =======
Net income per share:
Basic $ 0.12 $ 0.14
======= =======
Diluted $ 0.12 $ 0.14
======= =======
Weighted-average shares used in per share computation:
Basic 28,762 28,249
======= =======
Diluted 30,438 29,899
======= =======
</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 3, JULY 4,
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,558 $ 4,077
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,254 2,055
Provision for sales returns and losses on accounts
receivable, net 175 138
Provision for inventory obsolescence 856 540
Loss on disposal of fixed assets 194 22
Deferred income (2,259) (1,937)
Changes in assets and liabilities:
Accounts receivable (5,241) (2,969)
Inventories (6,993) 1,542
Prepaid expenses, other receivables and other assets (323) 290
Accounts payable 3,516 (2,354)
Accrued and other liabilities 3,594 (799)
-------- --------
Net cash provided by (used in) operating activities (669) 605
-------- --------
Cash flows from investing activities:
Capital expenditures for property, plant
and equipment, net (503) (3,231)
-------- --------
Net cash used in investing activities (503) (3,231)
-------- --------
Cash flows from financing activities:
Borrowings under notes payable 16,239 36,042
Proceeds from issuance of common stock and
exercise of options and warrants 587 445
Repayment of notes payable (16,875) (37,847)
-------- --------
Net cash used in financing activities (49) (1,360)
-------- --------
Effect of exchange rate changes on cash 54 12
-------- --------
Net decrease in cash and cash equivalents (1,167) (3,974)
Cash and cash equivalents at beginning of period 7,213 7,768
-------- --------
Cash and cash equivalents at end of period $ 6,046 $ 3,794
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 92 $ 342
Income taxes 31 65
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE> 6
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 3,
1999. 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 3, 1999, and the
condensed consolidated results of operations and cash flows for the three
month periods ended July 3, 1999 and July 4, 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>
JULY 3, APRIL 3,
1999 1999
------- -------
<S> <C> <C>
Raw Materials $10,013 $ 8,262
Work in Process 580 367
Finished Goods 12,453 8,358
------- -------
$23,046 $16,987
======= =======
</TABLE>
3. Line of Credit
Effective July 22, 1999, the Company renewed its 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 term of the
agreement is for one year.
6
<PAGE> 7
4. Net Income per Share
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------
JULY 3, JULY 4,
1999 1998
------- -------
<S> <C> <C>
Numerator:
Net income $ 3,558 $ 4,077
======= =======
Denominator:
Denominator for net income per share, basic -
weighted-average shares outstanding 28,762 28,249
Effect of dilutive securities:
Dilutive options outstanding 1,676 1,650
------- -------
Denominator for net income per share, diluted -
adjusted weighted-average shares 30,438 29,899
======= =======
Net income per share, basic $ 0.12 $ 0.14
======= =======
Net income per share, diluted $ 0.12 $ 0.14
======= =======
</TABLE>
Options to purchase 1,384 shares of common stock at prices in excess of
$8.51 per share were outstanding at July 3, 1999, but were not included in
the computation of diluted earnings per share for the three months ended
July 3, 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 39 shares of common stock at prices in excess of
$13.28 per share were outstanding at July 4, 1998, but were not included
in the computation of diluted earnings per share for the three months
ended July 4, 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.
5. 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 consolidated
complaint, filed February 2, 1999 in the United States District Court for
the Central District of California, alleged that the defendants were aware
of certain adverse information which they failed to disclose.
In May 1999, the Company agreed to settle with plaintiffs. A Stipulation
of Settlement was signed providing for a total settlement amount of $900.
The Company's unreimbursed portion of the aggregate settlement was $100.
An order, preliminarily approving the settlement was signed by the court
on May 17, 1999.
7
<PAGE> 8
6. Business Segment Information
The Company is engaged in the design, manufacture, sale and service of
high-performance storage systems, software and related products. The
Company's reportable business segments are based on geographic areas. The
Company's operations are structured to achieve consolidated objectives. As
a result, significant interdependence and overlap exists among the
Company's geographic areas. Accordingly, revenue, operating income and
identifiable assets shown for each geographic area may not be indicative
of the amount which would have been reported if the geographic areas were
independent of one another.
Revenue and transfers between geographic areas are generally priced to
recover cost plus an appropriate mark-up for profit. Operating income is
revenue less cost of revenues and direct operating expenses.
A summary of the Company's operations by geographic area is presented
below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------
JULY 3, JULY 4,
1999 1998
--------- ---------
<S> <C> <C>
Revenue:
United States $ 40,274 $ 37,832
Europe 16,253 15,443
Transfers between areas (3,287) (3,859)
--------- ---------
Total revenue $ 53,240 $ 49,416
========= =========
Operating income:
United States $ 1,707 $ 1,124
Europe 1,544 2,721
--------- ---------
Total operating income $ 3,251 $ 3,845
========= =========
<CAPTION>
THREE MONTHS ENDED
-----------------------
JULY 3, APRIL 3,
1999 1999
--------- ---------
<S> <C> <C>
Identifiable assets:
United States $ 83,139 $ 75,830
Europe 38,679 37,948
--------- ---------
Total assets $ 121,818 $ 113,778
========= =========
</TABLE>
The Company's revenues by product type are summarized below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------
JULY 3, JULY 4,
1999 1998
--------- ---------
<S> <C> <C>
Server $ 27,172 $ 25,007
Tape 11,219 11,603
Software 2,978 2,612
Service 11,871 10,194
--------- ---------
$ 53,240 $ 49,416
========= =========
</TABLE>
8
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7. Comprehensive Income
The Company has adopted Statement of Financial Accounting Standards No.
("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
-------------------
JULY 3, JULY 4,
1999 1998
------- -------
<S> <C> <C>
Net income $ 3,558 $ 4,077
Foreign currency translation adjustment (561) (54)
------- -------
Total comprehensive income $ 2,997 $ 4,023
======= =======
</TABLE>
7. New Accounting Standards
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, 2000. The Company does not expect the adoption of Statement
133 to have a material impact on the Company's consolidated financial
statements.
8. Subsequent Event
In August 1999, the Company purchased 5,333 shares of Caldera Systems Inc.
("Caldera") for $6,000, representing approximately 25% of the outstanding
capital stock of Caldera upon completion of the purchase. The investment
will be accounted for under the equity method.
The Canopy Group, Inc., a major stockholder of the Company, owned all of
the issued and outstanding shares of Caldera prior to this transaction.
Raymond J. Noorda, Chairman of the Board of Directors of the Company, is
the Chairman of the Board of Directors of The Canopy Group, Inc.
The Company has also entered into a distribution and license agreement
with Caldera that allows the Company to market and distribute the full
range of Caldera's products and services.
9
<PAGE> 10
PART 1 - ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain statements set forth below are not historical or based on historical
facts and 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, or industry results, 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, year 2000 compliance
and quarterly fluctuations. Given these uncertainties, investors in the
Company's common stock are cautioned not to place undue reliance 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 3, 1999.
Overview
MTI Technology Corporation is an international provider of high-performance data
storage solutions for the Open Systems market. 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 and Digital
Equipment ("DEC"), and Linux-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.
10
<PAGE> 11
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 3, JULY 4,
1999 1998
------ ------
<S> <C> <C>
Net product revenue 77.7% 79.4%
Service revenue 22.3 20.6
------ ------
Total revenue 100.0 100.0
Product gross profit 35.6 35.9
Service gross profit 37.7 37.3
------ ------
Gross profit 36.1 36.2
Selling, general and administrative 23.3 21.4
Research and development 6.6 7.0
------ ------
Operating income 6.2 7.8
Other income, net 1.9 1.9
Income tax expense 1.4 1.4
------ ------
Net income 6.7% 8.3%
====== ======
</TABLE>
Net Product Revenue: Net product revenue for the first quarter of fiscal 2000
increased $2.1 million, or 5.5% from the same quarter of the prior year. This
increase was primarily due to increased revenue from server products resulting
from an increase in fibre channel product revenue offset by a reduction in SCSI
product revenue.
Service Revenue: Service revenue for the first quarter of fiscal 2000 increased
$1.7 million, or 16.5% over the same quarter of the prior year. This increase
was primarily due to increased revenue from maintenance contracts.
Product Gross Profit: Product gross profit was $14.7 million for the first
quarter of fiscal 2000, an increase of $0.6 million, or 4.6% over the same
quarter of the preceding year, and the gross profit percentage of net product
sales was 35.6% for the first quarter of fiscal 2000 as compared to 35.9% for
the same period of the prior year.
Service Gross Profit: Service gross profit was $4.5 million for the first
quarter of fiscal 2000, an increase of $0.7 million, or 17.5% over the same
period of the previous year. The gross profit percentage of service revenue
increased to 37.7% in the first quarter of fiscal 2000 as compared to 37.3% in
the same quarter of the preceding year.
Selling, General and Administrative: Selling, general and administrative
expenses for the first quarter of fiscal 2000 increased $1.8 million, or 17.4%
from the same quarter of the preceding year. This increase was primarily due to
increased marketing efforts of $0.4 million, foreign exchange losses of $0.4
million, increased compensation-related sales costs resulting from increased
staff of $0.5 million and increases in other expenses of $0.5 million. The
Company expects to continue increasing its direct sales force and anticipates
that selling, general and administrative costs will increase in absolute dollars
and as a percentage of total revenue until the additional sales staff are at
full productivity levels.
11
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Research and Development: Research and development expenses for the first
quarter of fiscal 2000 were $3.5 million, essentially unchanged from the same
quarter of the preceding year.
Other Income, Net: Other income, net, for the first quarter of fiscal 2000
increased $0.1 million, or 8.0% over the same period of the prior year. Other
income, net was 1.9% of total revenue for the first quarter of both fiscal 2000
and fiscal 1999.
Income Tax Expense: Income tax expense for the first quarter of fiscal 2000 was
17.0% of income before income taxes as compared with 15.1% for the same period
last year. The effective tax rate is less than statutory rates due to the
percentage of pre-tax profit from foreign subsidiaries and the utilization of
net operating losses.
Liquidity and Capital Resources
Cash and cash equivalents were $6.0 million at July 3, 1999, a decrease of $1.2
million as compared to April 3, 1999, the prior fiscal year end. Net operating
activities used cash of $0.7 million for the first three months of fiscal 2000,
primarily due to increased accounts receivable of $5.2 million as a result of
increased days sales outstanding and to increased gross inventories of $7.0
million. The inventory increase resulted primarily from increased trade
inventories caused by 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 $4.8 million and a combined increase in accounts
payable and accrued and other liabilities of $7.1 million.
At July 3, 1999, the Company's days sales outstanding were 99 days, as compared
to 96 days at April 3, 1999. 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 first quarter of fiscal year 2000
than the percentage of sales occurring within the last month of the fourth
quarter of fiscal year 1999.
Effective July 22, 1999, the Company renewed its agreement with Silicon Valley
Bank and General Electric Capital Corporation. 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 various financial covenants
requiring the Company to maintain a minimum current ratio, debt-net worth ratio,
tangible net worth and level of profitability. The agreement restricts the
Company from paying any dividends. The term of the agreement is for one year.
Borrowings outstanding under this agreement at August 10, 1999 were $6.9
million.
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 includes $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. The Company will also receive royalty payments in the aggregate of
up to a maximum of $30.0 million over the term of the agreement. As part of the
maximum $30.0 million of royalties, minimum royalties 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 three annual installments were
received in March 1997, March 1998 and March 1999. Also, as part of the maximum
$30.0 million of royalties, $10.0 million of royalties will be received in five
equal annual installments beginning March 2000 as a result of the announced
computer and technology agreement between EMC and IBM in March 1999.
12
<PAGE> 13
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. 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 based on representations of the manufacturers.
The manufacturing and accounting systems have been replaced. Although the
Company expects that remaining components of the enterprise-wide business system
installation will be completed by the end of 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 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 substantially completed 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 the middle of September 1999. As a part of the
remediation plan, the Company is developing a contingency plan that will address
any non-compliant critical systems that remain by January 1, 2000.
The Company has received representations on year 2000 compliance from the
majority of suppliers and is continuing to evaluate the adequacy of the
responses. The Company has identified certain suppliers that are critical to the
business and is in the process of performing site visits to better understand
the suppliers' status regarding year 2000 compliance. Evaluation of suppliers is
an ongoing process and this phase will continue through the end of calendar 1999
as the Company will continue to update and reevaluate the status of critical
suppliers.
The Company has tested the majority of its products for year 2000 compliance.
The results of these tests are published on the Company's website at
"www.mti.com/y2k." Testing on the remaining products is expected to continue
through the end of calendar 1999. The Company has initiated a plan notifying
customers of the information available on the website and to encourage them to
assess their own systems based on their operating environment and the
information provided by the Company.
The Company has completed the assessment of its critical internal IT and non-IT
systems. The assessment phase, including assessment of hardware and software not
supported by the Company's IT department, is expected to be complete by August
1999.
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<PAGE> 14
Management believes that the most reasonably likely worst case scenario related
to the Year 2000 Issue 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
June 21, 1999, the Company has incurred year 2000 costs consisting primarily of
internal labor costs. 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 critical third parties in achieving year 2000 compliance could
materially adversely affect the Company's business, results of operations and
financial condition.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company transacts in foreign currencies, primarily European, and may be
exposed to financial market risk resulting from fluctuations in foreign
currency exchange risks, particularly the British Pound sterling and the Euro.
The Company has and may continue to utilize hedging programs, currency forward
contracts, currency options and/or other derivative financial instruments
commonly used to reduce financial market risks.
The Company maintains a $30 million credit line. The interest rate applied to
any debt outstanding under this credit line is equal to the prime rate and is,
therefore, subject to a certain amount of risk arising from fluctuations in
these rates. However, a 10% increase in interest rates would not have a material
impact on the Company's results of operations.
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 consolidated 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.
In May 1999, the Company agreed to settle with plaintiffs. A Stipulation of
Settlement was signed providing for a total settlement amount of $900. The
Company's unreimbursed portion of the aggregate settlement was $100. An order,
preliminarily approving the settlement was signed by the court on May 17, 1999.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.28 Loan Modification Agreement between Company and Silicon Valley Bank
and General Electric Capital Corporation, as co-lenders.
27 Financial Data Schedule
14
<PAGE> 15
(b) Reports on Form 8-K:
Form 8-K, dated May 14, 1999, regarding the Company's right to receive an
additional $10 million under the Asset Purchase Agreement, dated February
9, 1996, between EMC Corporation and Registrant.
Form 8-K, dated May 24, 1999, regarding the preliminary approval of the
Company's settlement of its stockholders lawsuit.
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 11th day of August, 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
Vice President, Corporate
Controller and Chief Accounting
Officer
(Principal Accounting Officer)
15
<PAGE> 16
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Number Description
- -------------- -----------
<C> <S>
10.28 Loan Modification Agreement between Company and Silicon Valley
Bank and General Electric Capital Corporation, as co-lenders.
27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10.28
LOAN MODIFICATION AGREEMENT
This Loan Modification Agreement is entered into as of July 22, 1999, by
and among MTI TECHNOLOGY CORPORATION ("Borrower") and SILICON VALLEY BANK
("SVB") and GENERAL ELECTRIC CAPITAL CORPORATION ("GE Capital") as co-lenders,
and SVB as Servicing Agent for the Lenders. (SVB and GE Capital are sometimes
referred to therein, individually, as "Lender", and collectively as "Lenders").
SVB shall be referred to herein as "Lender".
1. DESCRIPTION OF EXISTING INDEBTEDNESS: Among other indebtedness which may
be owing by Borrower to Lenders, Borrower is indebted to Lenders pursuant to,
among other documents, a Loan and Security Agreement, dated July 22, 1998, as
may be amended from time to time (the "Loan Agreement"). The Loan Agreement
provided for, among other things, a Committed Revolving Line in the original
principal amount of Thirty Million Dollars ($30,000,000). Defined terms used but
not otherwise defined herein shall have the same meanings as in the Loan
Agreement.
Hereinafter, all indebtedness owing by Borrower to Lenders shall be referred to
as the "Indebtedness."
2. DESCRIPTION OF COLLATERAL AND GUARANTIES. Repayment of the Indebtedness
is secured by the Collateral as described in the Loan Agreement and an
Intellectual Property Security Agreement dated July 22, 1998.
Hereinafter, the above-described security documents and guaranties, together
with all other documents securing repayment of the Indebtedness shall be
referred to as the "Security Documents". Hereinafter, the Security Documents,
together with all other documents evidencing or securing the Indebtedness shall
be referred to as the "Existing Loan Documents".
3. DESCRIPTION OF CHANGE IN TERMS.
A. Modification(s) to Loan Agreement
1. The following term set forth in Section 1.1 entitled
"Definitions" is hereby amended as follows:
"Revolving Maturity Date" means July 22, 2000.
4. CONSISTENT CHANGES. The Existing Loan Documents are hereby amended
wherever necessary to reflect the changes described above.
5. PAYMENT OF FEE. Borrower shall pay to Lenders a fee in the amount of
Sixty Five Thousand Dollars ($65,000) (the "Loan Fee") plus all out-of-pocket
expenses.
6. NO DEFENSES OF BORROWER. Borrower (and each guarantor and pledgor
signing below) agrees that, as of the date hereof, it has no defenses against
the obligations to pay any amounts under the Indebtedness.
7. CONTINUING VALIDITY. Borrower (and each guarantor and pledgor signing
below) understands and agrees that in modifying the existing Indebtedness,
Lender is relying upon Borrower's representations, warranties, and agreements,
as set forth in the Existing Loan Documents. Except as expressly modified
pursuant to this Loan Modification Agreement, the terms of the Existing Loan
Documents remain unchanged and in full force and effect. Lender's agreement to
modifications to the existing Indebtedness pursuant to this Loan Modification
Agreement in no way shall obligate Lender to make any future modifications to
the Indebtedness. Nothing in this Loan Modification Agreement shall constitute a
satisfaction of the Indebtedness. It is the intention of Lender and Borrower to
retain as liable parties all makers and endorsers of Existing Loan Documents,
unless the party is expressly released by Lender in writing. No maker, endorser,
or guarantor will be released by virtue of this Loan Modification Agreement. The
terms of this paragraph apply not only to this Loan Modification Agreement, but
also to all subsequent loan modification agreements.
<PAGE> 2
8. CONDITIONS. The effectiveness of this Loan Modification Agreement is
conditioned upon Borrower's payment of the Loan Fee.
This Loan Modification Agreement is executed as of the date first written above.
BORROWER: LENDERS:
MTI TECHNOLOGY CORPORATION SILICON VALLEY BANK
By: By:
------------------------------- -------------------------------
Name: Name:
------------------------------ -----------------------------
Title: Title:
----------------------------- ----------------------------
GENERAL ELECTRIC CAPITAL
CORPORATION
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
SERVICING AGENT:
SILICON VALLEY BANK
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
2
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> APR-01-2000
<PERIOD-START> APR-04-1999
<PERIOD-END> JUL-03-1999
<CASH> 6,046
<SECURITIES> 0
<RECEIVABLES> 60,882
<ALLOWANCES> 3,078
<INVENTORY> 23,046
<CURRENT-ASSETS> 98,559
<PP&E> 44,362
<DEPRECIATION> 32,186
<TOTAL-ASSETS> 121,818
<CURRENT-LIABILITIES> 62,713
<BONDS> 0
0
0
<COMMON> 29
<OTHER-SE> 57,696
<TOTAL-LIABILITY-AND-EQUITY> 121,818
<SALES> 41,369
<TOTAL-REVENUES> 53,240
<CGS> 26,630
<TOTAL-COSTS> 34,031
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 175
<INTEREST-EXPENSE> 90
<INCOME-PRETAX> 4,287
<INCOME-TAX> 729
<INCOME-CONTINUING> 3,558
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,558
<EPS-BASIC> .12
<EPS-DILUTED> .12
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