<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 September 30, 2000
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 October 24, 2000 was 32,229,761.
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MTI TECHNOLOGY CORPORATION
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30,
2000 and April 1, 2000 3
Condensed Consolidated Statements of Operations for the Three
and Six Months Ended September 30, 2000 and October 2, 1999 4
Condensed Consolidated Statements of Cash Flows for the Six
Months Ended September 30, 2000 and October 2, 1999 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 4. Submission of Matter to a Vote of Security Holders 13
Item 6. Exhibits and Reports on Form 8-K 13
</TABLE>
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MTI TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, APRIL 1,
2000 2000
------------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 15,671 $ 8,791
Accounts receivable, net 43,394 74,289
Inventories 28,731 25,515
Deferred income tax benefit 1,020 1,020
Prepaid expenses and other receivables 7,807 6,407
--------- ---------
Total current assets 96,623 116,022
Property, plant and equipment, net 16,593 14,464
Deferred income tax benefit 30,620 26,715
Investment in affiliate 12,042 14,304
Goodwill, net 5,897 8,998
Other 474 444
--------- ---------
$ 162,249 $ 180,947
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable $ -- $ 1,500
Current portion of capital lease obligations 143 --
Accounts payable 21,263 22,008
Accrued liabilities 15,107 20,372
Deferred income 16,676 20,708
--------- ---------
Total current liabilities 53,189 64,588
Capital lease obligations 695 --
Other 3,833 2,864
--------- ---------
Total liabilities 57,717 67,452
Stockholders' equity:
Preferred stock, $.001 par value; authorized 5,000 shares; issued and
outstanding, none -- --
Common stock, $.001 par value; authorized 80,000 shares; issued
(including treasury shares) and outstanding 32,660 and 32,352
shares at September 30, 2000 and April 1, 2000, respectively 33 32
Additional paid-in capital 134,914 133,007
Accumulated deficit (25,474) (14,609)
Less cost of treasury stock (431 and 479 shares at September 30, 2000 and
April 1, 2000, respectively) (1,563) (1,745)
Accumulated other comprehensive loss (3,378) (3,190)
--------- ---------
Total stockholders' equity 104,532 113,495
--------- ---------
$ 162,249 $ 180,947
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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MTI TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------- ---------------------------
SEPTEMBER 30, OCTOBER 2, SEPTEMBER 30, OCTOBER 2,
2000 1999 2000 1999
------------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
Net product revenue $ 34,850 $ 41,921 $ 60,293 $ 83,290
Service revenue 12,739 12,404 25,206 24,275
-------- -------- -------- ---------
Total revenue 47,589 54,325 85,499 107,565
Product cost of revenue 21,438 24,499 38,585 51,129
Service cost of revenue 8,816 7,396 17,389 14,797
-------- -------- -------- ---------
Total cost of revenue 30,254 31,895 55,974 65,926
-------- -------- -------- ---------
Gross profit 17,335 22,430 29,525 41,639
-------- -------- -------- ---------
Operating expenses:
Selling, general and administrative 15,898 13,968 34,734 26,410
Research and development 4,371 4,065 9,556 7,581
-------- -------- -------- ---------
Total operating expenses 20,269 18,033 44,290 33,991
-------- -------- -------- ---------
Operating income (loss) (2,934) 4,397 (14,765) 7,648
Interest and other income, net 1,272 1,141 2,257 2,177
Equity in net loss of affiliate (1,168) (461) (2,262) (461)
-------- -------- -------- ---------
Income (loss) before income taxes (2,830) 5,077 (14,770) 9,364
Income tax expense (benefit) (705) -- (3,905) 729
-------- -------- -------- ---------
Net income (loss) $ (2,125) $ 5,077 $(10,865) $ 8,635
======== ======== ======== =========
Net income (loss) per share:
Basic $ (0.07) $ 0.17 $ (0.34) $ 0.29
======== ======== ======== =========
Diluted $ (0.07) $ 0.16 $ (0.34) $ 0.27
======== ======== ======== =========
Weighted-average shares used in
per share computations:
Basic 32,225 30,025 32,155 29,394
======== ======== ======== =========
Diluted 32,225 32,693 32,155 31,818
======== ======== ======== =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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MTI TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
--------------------------
SEPTEMBER 30, OCTOBER 2,
2000 1999
------------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(10,865) $ 8,635
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 6,012 4,011
Provision for sales returns and losses on accounts receivable, net 4,669 376
Equity in net loss of affiliate 2,262 461
Provision for inventory obsolescence 1,087 1,713
Loss on disposal of fixed assets 1,617 228
Deferred income tax benefit (3,905) --
Deferred income (3,062) (2,912)
Changes in assets and liabilities:
Accounts receivable 26,023 (9,266)
Inventories (4,370) (17,771)
Prepaid expenses, other receivables and other assets (1,150) (1,714)
Accounts payable (804) 8,180
Accrued and other liabilities (5,380) 3,725
-------- --------
Net cash provided by (used in) operating activities 12,134 (4,334)
-------- --------
Cash flows from investing activities:
Capital expenditures for property, plant
and equipment, net (6,067) (2,603)
Investment in affiliate -- (3,054)
-------- --------
Net cash used in investing activities (6,067) (5,657)
-------- --------
Cash flows from financing activities:
Borrowings under notes payable -- 39,990
Repayment of notes payable (1,500) (41,797)
Proceeds from issuance of common stock and
exercise of options and warrants 2,088 7,474
-------- --------
Net cash provided by financing activities 588 5,667
-------- --------
Effect of exchange rate changes on cash 225 (32)
-------- --------
Net increase (decrease) in cash and cash equivalents 6,880 (4,356)
Cash and cash equivalents at beginning of period 8,791 7,213
-------- --------
Cash and cash equivalents at end of period $ 15,671 $ 2,857
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 4 $ 241
Income taxes 62 56
Supplemental disclosure of non-cash investing activities:
Acquisition of leased equipment 838 --
Note issued in connection with investment in affiliate -- 3,000
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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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 financial statements prepared in
accordance with accounting principles generally accepted in the United
States of America, 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 1, 2000. 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 September 30, 2000 and April 1, 2000, and the condensed
consolidated results of operations for the three and six month periods
ended September 30, 2000 and October 2, 1999 and the condensed
consolidated statements of cash flows for the six month periods ended
September 30, 2000 and October 2, 1999. 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:
SEPTEMBER 30, APRIL 1,
2000 2000
------------- --------
Raw Materials $11,630 $13,408
Work in Process 985 595
Finished Goods 16,116 11,512
------- -------
$28,731 $25,515
======= =======
3. Line of Credit
The Company entered into a Loan and Security Agreement (the "Loan
Agreement") with Silicon Valley Bank and General Electric Capital
Corporation as of July 22, 1998, and amended July 22, 1999, 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. As of July 1,
2000, the Company was in technical default under the Loan Agreement for
failing to comply with a covenant containing certain profitability
requirements, which was subsequently waived pursuant to a Loan
Modification Agreement (the "Loan Modification Agreement") entered into
among the Company, Silicon Valley Bank and General Electric Capital
Corporation as of July 22, 2000. The Loan Modification Agreement provided
for a two month extension of the Loan Agreement. Effective September 22,
2000, the Company renewed its agreement with Silicon Valley Bank and
General Electric Capital Corporation. The agreement allows the Company to
borrow at a rate equal to the prime rate + 1%. 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 level of profitability, and restricts the Company
from paying any dividends. The term of the agreement is for one year. As
of September 30, 2000, the Company was in compliance with all such
covenants. There were no borrowings outstanding under this agreement at
October 24, 2000.
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4. Net Income (Loss) per Share
The following table sets forth the computation of basic and diluted net
income (loss) per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------------- -----------------------------
SEPTEMBER 30, OCTOBER 2, SEPTEMBER 30, OCTOBER 2,
2000 1999 2000 1999
------------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) $ (2,125) $ 5,077 $ (10,865) $ 8,635
======== ======= ========= =======
Denominator:
Denominator for net income (loss) per
share, basic - weighted-average shares
outstanding 32,225 30,025 32,155 29,394
-------- ------- --------- -------
Effect of dilutive securities:
Dilutive options outstanding -- 2,662 -- 2,424
Dilutive warrants outstanding -- 6 -- --
-------- ------- --------- -------
Dilutive potential common shares -- 2,668 -- 2,424
-------- ------- --------- -------
Denominator for net income (loss) per
share, diluted - adjusted weighted-
average shares 32,225 32,693 32,155 31,818
======== ======= ========= =======
Net income (loss) per share, basic $ (0.07) $ 0.17 $ (0.34) $ 0.29
======== ======= ========= =======
Net income (loss) per share, diluted $ (0.07) $ 0.16 $ (0.34) $ 0.27
======== ======= ========= =======
</TABLE>
Options and warrants to purchase 8,260 shares of common stock were
outstanding at September 30, 2000, but were not included in the
computation of diluted earnings per share for the three and six months
ended September 30, 2000, as the effect would be antidilutive.
Options and warrants to purchase 73 shares of common stock at prices in
excess of $20.82 per share were outstanding at October 2, 1999, but were
not included in the computation of diluted earnings per share for the
three months ended October 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 and warrants to purchase 284 shares of common stock at prices in
excess of $14.66 per share were outstanding at October 2, 1999, but were
not included in the computation of diluted earnings per share for the six
months ended October 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.
5. Business Segment Information
The Company is engaged in the design, manufacture, sale and service of
high-availability storage systems. 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 (loss) and
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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
(loss) 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 SIX MONTHS ENDED
------------------------- -------------------------
SEPTEMBER 30, OCTOBER 2, SEPTEMBER 30, OCTOBER 2,
2000 1999 2000 1999
------------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
Revenue:
United States $ 32,754 $ 43,378 $ 62,562 $ 83,652
Europe 16,103 15,204 27,299 31,457
Transfers between areas (1,268) (4,257) (4,362) (7,544)
-------- -------- --------- --------
Total revenue $ 47,589 $ 54,325 $ 85,499 $107,565
======== ======== ========= ========
Operating income (loss):
United States $ (2,629) $ 2,684 $ (12,774) $ 4,391
Europe (305) 1,713 (1,991) 3,257
-------- -------- --------- --------
Total operating income (loss) $ (2,934) $ 4,397 $ (14,765) $ 7,648
======== ======== ========= ========
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, APRIL 1,
2000 2000
------------- --------
<S> <C> <C>
Identifiable assets:
United States $132,065 $146,183
Europe 30,184 34,764
-------- --------
Total assets $162,249 $180,947
======== ========
</TABLE>
6. Comprehensive Income (Loss)
The components of comprehensive income (loss) are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------- ----------------------------
SEPTEMBER 30, OCTOBER 2, SEPTEMBER 30, OCTOBER 2,
2000 1999 2000 1999
------------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
Net income (loss) $(2,125) $5,077 $(10,865) $8,635
Foreign currency translation adjustment 25 804 188 243
------- ------ -------- ------
Total comprehensive income (loss) $(2,100) $5,881 $(10,677) $8,878
======= ====== ======== ======
</TABLE>
7. Litigation
Class-action complaints were filed against the Company and certain
officers, alleging violations of provisions of the Securities Exchange Act
of 1934, and the rules promulgated thereunder. On October 20, 2000 the
complaints were consolidated in the U.S. District Courts for the Central
District of California. The complaints that were the subject of the
consolidation order have varying class periods and generally allege that
the defendants were aware of certain adverse information, which they
failed to disclose. Such complaints did not specify the amount of damages
being sought. The Company believes that the lawsuits are without merit and
intends to defend the suits vigorously.
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8. Recently Issued Accounting Pronouncements
On December 3, 1999, the Securities and Exchange Commission ("SEC") issued
SEC Staff Accounting Bulletin: No. 101 - Revenue Recognition in Financial
Statements. This Bulletin has subsequent updates: SAB 101A and SAB 101B.
Implementation of the guidelines is required for no later than the fiscal
fourth quarter of the fiscal year beginning after December 15, 1999. The
written guidance from the Commission staff was issued on October 12, 2000.
The Company is currently examining the potential impact upon revenue
recognition and resulting effects on the financial statements, and intends
to implement the guidelines no later than its fiscal fourth quarter.
In June 1998, Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" was issued.
Statement 133 establishes accounting and reporting standards for
derivative instruments, hedging activities and exposure definition.
Statement 133 requires an entity to recognize all derivatives as either
assets or liabilities in the statement of financial position and measure
those instruments at fair value. Derivatives that are not hedges must be
adjusted to fair value through income. If the derivative is a hedge,
depending on the nature of the hedge, changes in fair value will either be
offset against the change in fair value of the hedged asset, liabilities,
or firm commitments through earnings, or reported in other comprehensive
income until the hedge is recognized in earnings. In June 1999, Statement
137, "Accounting for Derivative Instruments and Hedging
Activities-Deferral of the Effective Date of FASB Statement No. 133" was
issued. The statement defers the effective date of Statements 133 until
the first quarter of fiscal year 2002. In June 2000, Statement 138,
"Accounting for certain Derivative Instruments and Certain Hedging
Activities, an amendment of FASB Statement No. 133" was issued. Although
the Company continues to review the effect of the implementation of
Statement 133 and 138, the Company does not currently believe their
adoption will have a material impact on its financial position or overall
trends in results of operations and does not believe adoption will result
in significant changes to its financial risk management practices.
However, the impact of adoption on the Company's results of operations is
dependent upon the fair values of the Company's derivatives and related
financial instruments at the date of adoption and may result in more
pronounced quarterly fluctuations in other income and expense.
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 revenue, proprietary product sales, customers (including
Internet-related businesses, or IRBs and focus on Global 2000 companies),
dependence on new products, management of growth, competition, international
sales, dependence on suppliers and quarterly fluctuations. The Company's
transition to sales of its proprietary products and its focus of sales efforts
on Global 2000 accounts may not be successful. The Company may experience a
reduction in demand from IRBs greater than that currently anticipated. 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 1, 2000.
Overview
MTI Technology Corporation is a leading provider of high availability, fault
tolerant solutions for the enterprise storage marketplace. The Company designs,
develops,
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manufactures, sells and supports a complete line of integrated products and
services that provide customers with a full range of hardware, software and
networking components as well as sophisticated professional services, which it
combines into one solution to provide continuous access to online
information(SM). The Company has historically sold its products and services to
Global 2000 companies for their data center computing environments. During
fiscal 2000 the Company's markets expanded to include e-commerce and IRBs, such
as content providers, online retailers and web-based advertisers. The Company's
solutions are compatible with Sun Solaris, HP-UX, Windows NT, Novell Netware,
IBM AIX, Compaq Tru64 and Linux operating systems, which enable it to address a
broad range of Customer applications and markets.
Results of Operations
The following table sets forth selected items from the Condensed Consolidated
Statements of Operations as a percentage of net revenues for the periods
indicated, except for product gross profit and service gross profit, which are
expressed as a percentage of the related revenue. This information should be
read in conjunction with the Condensed Consolidated Financial Statements
included elsewhere herein:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
-------------------------- ---------------------------
SEPTEMBER 30, OCTOBER 2, SEPTEMBER 30, OCTOBER 2,
2000 1999 2000 1999
------------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
Net product revenue 73.2% 77.2% 70.5% 77.4%
Service revenue 26.8 22.8 29.5 22.6
----- ----- ----- -----
Total revenue 100.0 100.0 100.0 100.0
Product gross profit 38.5 41.6 36.0 38.6
Service gross profit 30.8 40.4 31.0 39.0
----- ----- ----- -----
Gross profit 36.4 41.3 34.5 38.7
Selling, general and administrative 33.4 25.7 40.6 24.6
Research and development 9.2 7.5 11.2 7.0
----- ----- ----- ----
Operating income (loss) (6.2) 8.1 (17.3) 7.1
Other income, net 2.7 2.1 2.6 2.0
Equity in net loss of affiliate 2.4 0.9 2.6 0.4
Income tax expense (benefit) (1.4) -- (4.6) 0.7
----- ----- ----- -----
Net income (loss) (4.5)% 9.3% (12.7)% 8.0%
===== ===== ===== =====
</TABLE>
Net Product Revenue: Net product revenue for the second quarter of fiscal 2001
decreased $7.1 million, or 16.9% from the same quarter of the prior year. Net
product revenue for the first six months of fiscal 2001 decreased $23.0 million,
or 27.6% from the same period of the prior year. The Company transitioned its
sales focus during fiscal 2000 towards its proprietary products, and away from
its third party resale products. As a result of this transition, the Company
increased its sales efforts with IRBs. During the first quarter, and continuing
in the second quarter of fiscal 2001, the Company experienced a decrease in
demand of its proprietary products from IRBs and made a conscious decision to
limit its sales to the IRBs, which resulted in reduced net product revenue. The
Company believes that it may experience a further reduction, which it expects
will not be as severe as in the first six months of fiscal 2001, in demand from
IRBs which could continue to negatively impact the Company's net product revenue
and results of operations. The Company has refocused its sales force to
penetrate Global 2000 accounts more deeply.
Service Revenue: Service revenue for the second quarter of fiscal 2001 increased
$0.3 million, or 2.7% over the same quarter of the prior year. Service revenue
for the first six months of fiscal 2001 increased $0.9 million, or 3.8% over the
same period of the prior year. The increased revenue reflects the cumulative
effect of the increased machine population.
Product Gross Profit: Product gross profit was $13.4 million for the second
quarter of fiscal 2001, a decrease of $4.0 million, or 23.0% from the same
quarter of the preceding
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year, and the gross profit percentage of net product sales was 38.5% for the
second quarter of fiscal 2001 as compared to 41.6% for the same period of the
prior year. The product gross profit percentage decrease was primarily volume
related. However, with the increased mix of proprietary products, overall
product margin decreased only 3.1 percentage points.
Product gross profit was $21.7 million for the first six months of fiscal 2001,
a decrease of $10.5 million, or 32.5% over the same period of the preceding
year, and the gross profit percentage of net product sales was 36.0% for the
first six months of fiscal 2001 as compared to 38.6% for the same period of the
prior year. These decreases are primarily the result of lower volumes offset by
the favorable impact of the margins associated with the newer proprietary
products.
Service Gross Profit: Service gross profit was $3.9 million for the second
quarter of fiscal 2001, a decrease of $1.1 million, or 21.7% over the same
period of the previous year. The gross profit percentage of service revenue
decreased to 30.8% in the second quarter of fiscal 2001 as compared to 40.4% in
the same quarter of the preceding year. This decrease is primarily due to
additional training of field personnel on new products and increased field
staffing for added service offerings in the areas of consulting, customer
training, and customer certification.
Service gross profit was $7.8 million for the first six months of fiscal 2001, a
decrease of $1.7 million, or 17.5% from the same period of the previous year.
The gross profit percentage of service revenue decreased to 31.0% for the first
six months of fiscal 2001 as compared to 39.0% in the same period of the
preceding year. The decrease in service gross profit is primarily attributable
to increased employment costs and the addition of manpower to staff anticipated
upcoming service offerings. The Company expects the number of Vivant units sold
to increase in fiscal year 2001 over fiscal 2000 levels. The Company is
increasing overall service and support headcount and upgrading the skills of its
staff to support the more complex product and service offerings. As a result,
the Company expects that service cost of revenue will continue to increase in
fiscal year 2001, which may adversely affect service gross profit.
Selling, General and Administrative: Selling, general and administrative
expenses for the second quarter of fiscal 2001 increased $1.9 million, or 13.8%
from the same quarter of the preceding year. Substantially all of the change
relates to bad debt expense associated with prior sales to primarily IRB
customers and severance related obligations.
Selling, general and administrative expenses for the first six months of fiscal
2001 increased $8.3 million, or 31.5% from the same period of the preceding
year. This increase was primarily due to an impairment charge of $2.2 million
related to unamortized intangible assets acquired in the purchase of certain
product lines from RAXCO, Inc., increased compensation-related selling costs of
$3.0 million and increased bad debt of over $2.0 million primarily as a result
of a few internet-related customers' non-payment. The Company expects selling,
general and administrative expense to increase in fiscal 2001 as it continues
increasing its investment in selling and marketing of new products.
Research and Development: Research and development expenses for the second
quarter of fiscal 2001 increased $0.3 million, or 7.5% from the same quarter of
the prior year. Research and development expenses for the first six months of
fiscal 2001 increased $2.0 million, or 26.1% from the same period of the prior
year. These increases are primarily attributable to increased development costs
associated with new products. The Company intends to continue to increase its
investment in research and development in fiscal 2001 as it continues to expand
into additional markets.
Interest and Other Income, Net: Interest and other income, net, for both the
second quarter and year to date comparison to prior year reflects the Company's
share of the loss in it's affiliated company, offset by the recognition of the
sale of patents to EMC Corporation ("EMC").
Income Tax Expense (Benefit): The income tax benefit for the second quarter of
fiscal 2001 was $0.7 million as compared to zero in the comparable period of the
prior year and for the first six months of fiscal 2001 was a $3.9 million income
tax benefit as compared to $0.7 million of income tax expense for the comparable
six month period of the prior year.
Liquidity and Capital Resources
Cash and cash equivalents were $15.7 million at September 30, 2000, an increase
of $6.9 million as compared to April 1, 2000, the prior fiscal year end. Net
operating activities provided cash of $12.1 million for the first six months of
fiscal 2001, primarily due to decreased accounts receivable of $26.0 million as
a result of increased collection
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activity. This source of cash was partially offset by the use of cash from a net
loss adjusted for non-cash items of $2.2 million, an increase in inventories of
$4.4 million and a combined decrease in accounts payable and accrued and other
liabilities of $6.2 million.
At September 30, 2000, the Company's days sales outstanding were 83 days, as
compared to 112 days at April 1, 2000. 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 Company entered into an amended Loan and Security Agreement (the "Loan
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, effective
September 22, 2000. The Loan Agreement allows the Company to borrow at a rate
equal to the prime rate plus 1%. 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 and debt-net
worth ratio, and a limitation on quarterly net losses. The Loan Agreement
restricts the Company from paying any dividends. As of September 30, 2000, the
Company was in compliance with all such covenants. There were no borrowings
outstanding under the Loan Agreement at October 24, 2000.
Effective February 9, 1996, the Company entered into an agreement (the "EMC
Agreement") with EMC selling EMC substantially all of the Company's existing
patents, patent applications and related rights. Pursuant to the EMC Agreement,
the Company is entitled to receive $30.0 million over the life of this
agreement, in six equal annual installments of $5.0 million each. The Company
has received five of the six installments. The sixth and final payment is due
January 2001. The Company will also receive royalty payments in the aggregate of
up to a maximum of $30.0 million over the term of the EMC 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 EMC Agreement, and within thirty
days of each subsequent anniversary thereof. The first four annual installments
were received in March 1997, March 1998, March 1999 and March 2000. Also,
pursuant to the terms of the EMC Agreement, $10.0 million of the maximum $30.0
million of royalties, will be received in five equal annual installments as a
result of a computer and technology agreement between EMC and IBM announced in
March 1999. The first annual installment was received in March 2000. The EMC
Agreement provides that the remaining four payments will be received annually
beginning in March 2001.
Management believes that the Company's working capital, bank line 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.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's European operations transact in foreign currencies and may be
exposed to financial market risk resulting from fluctuations in foreign currency
exchange rates, 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, none of which were outstanding
at September 30, 2000. There can be no assurance that such actions will
successfully reduce the Company's exposure to 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 +1% and
is, therefore subject to a certain amount of risk arising from fluctuations in
these rates. However, the Company believes that a 10% increase in interest rates
would not have a material impact on the Company's results of operations.
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PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
Class-action complaints were filed against the Company and certain officers,
alleging violations of provisions of the Securities Exchange Act of 1934, and
the rules promulgated thereunder. On October 20, 2000 the complaints were
consolidated in the U.S. District Courts for the Central District of California.
The complaints that were the subject of the consolidation order have varying
class periods and generally allege that the defendants were aware of certain
adverse information, which they failed to disclose. Such complaints did not
specify the amount of damages being sought. The Company believes that the
lawsuits are without merit and intends to defend the suits vigorously.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of the stockholders of the Company was held on
September 28, 2000. Al Melrose and John Repp were reelected to the Company's
Board of Directors to hold office for the ensuing three years. The number of
shares voted in favor of their appointment was 30,097,674 and 30,323,034
respectively. The number of shares voted against was zero for both nominees.
Votes withheld were 784,909 and 559,549 respectively. Raymond Noorda, Val
Kreidel, Thomas Raimondi, and Ralph Yarro remain members of the Board of
Directors.
The stockholders of the Company voted in favor of the ratification of
selection of KPMG LLP as the Company's independent public accountants for fiscal
year 2001. The number of shares voted for ratification was 30,556,642. The
number of shares voted against ratification was 302,445. The number of shares
abstaining was 24,496.
The stockholders of the Company approved an amendment to the 1996 Stock
Incentive Plan. The number of shares voting in favor was 16,585,423. The number
of shares voting against was 5,940,171. The number of shares abstaining was
64,553. The number of shares not voting was 8,292,436.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.34 Amendment to Loan and Security Agreement between the Company and
Silicon Valley Bank and General Electric Capital Corporation, as
Co-Lenders, and Schedules thereto, dated September 22, 2000.
10.35 Severance & Consulting Agreement between Dale Boyd and the Company,
dated July 10, 2000.
10.36 Severance & Consulting Agreement between Dan Brown and the Company,
dated September 22, 2000.
10.37 Severance & Consulting Agreement between Paul Emery and the
Company, dated July 10, 2000.
27 Financial Data Schedule
(b) Reports on Form 8-K:
The Company filed a Form 8-K on August 10, 2000 with respect to the
Company's announcement of class action complaints filed against it and
certain of its officers. (See Item 1, above).
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on the 30th day of October, 2000.
MTI TECHNOLOGY CORPORATION
By: /s/ Paul W. Emery, II
-------------------------------------
Paul W. Emery, II
Chief Operating Officer, Acting Chief
Financial Officer
(Principal Financial Officer)
By: /s/ Guy M. Cheney
-------------------------------------
Guy M. Cheney
Vice President, Corporate Controller
and Chief Accounting Officer
(Principal Accounting Officer)
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EXHIBIT INDEX
Exhibit
Number Description
------ -----------
10.34 Amendment to Loan and Security Agreement between the Company and
Silicon Valley Bank and General Electric Capital Corporation, as
Co-Lenders, and Schedules thereto, dated September 22, 2000.
10.35 Severance & Consulting Agreement between Dale Boyd and the Company,
dated July 10, 2000.
10.36 Severance & Consulting Agreement between Dan Brown and the Company,
dated September 22, 2000.
10.37 Severance & Consulting Agreement between Paul Emery and the Company,
dated July 10, 2000.
27 Financial Data Schedule
