<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 1, 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 August 7, 2000 was 32,223,167.
<PAGE> 2
MTI TECHNOLOGY CORPORATION
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of July 1, 2000 and April 1, 2000 3
Condensed Consolidated Statements of Operations for the Three Months Ended
July 1, 2000 and July 3, 1999 4
Condensed Consolidated Statements of Cash Flows for the Three Months Ended
July 1, 2000 and July 3, 1999 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 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 6. Exhibits and Reports on Form 8-K 14
</TABLE>
2
<PAGE> 3
MTI TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
JULY 1, APRIL 1,
2000 2000
--------- ---------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 13,351 $ 8,791
Accounts receivable, net 47,533 74,289
Inventories 28,966 25,515
Deferred income tax benefit 1,020 1,020
Prepaid expenses and other receivables 7,172 6,407
--------- ---------
Total current assets 98,042 116,022
Property, plant and equipment, net 15,206 14,464
Deferred income tax benefit 29,915 26,715
Investment in affiliate 13,210 14,304
Goodwill, net 6,321 8,998
Other 609 444
--------- ---------
$ 163,303 $ 180,947
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable $ 1,500 $ 1,500
Accounts payable 17,176 22,008
Accrued liabilities 15,869 20,372
Deferred income 19,280 20,708
--------- ---------
Total current liabilities 53,825 64,588
Other 3,147 2,864
--------- ---------
Total liabilities 56,972 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 32,652 and 32,352 shares at July 1, 2000
and April 1, 2000, respectively 33 32
Additional paid-in capital 134,746 133,007
Accumulated deficit (23,349) (14,609)
Less cost of treasury stock (479 shares at July 1, 2000 and April 1, 2000) (1,745) (1,745)
Accumulated other comprehensive loss (3,354) (3,190)
--------- ---------
Total stockholders' equity 106,331 113,495
--------- ---------
$ 163,303 $ 180,947
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 4
MTI TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------
JULY 1, JULY 3,
2000 1999
-------- -------
<S> <C> <C>
Net product revenue $ 25,443 $41,369
Service revenue 12,467 11,871
-------- -------
Total revenue 37,910 53,240
Product cost of revenue 17,147 26,630
Service cost of revenue 8,573 7,401
-------- -------
Total cost of revenue 25,720 34,031
-------- -------
Gross profit 12,190 19,209
Operating expenses:
Selling, general and administrative 18,836 12,442
Research and development 5,185 3,516
-------- -------
Total operating expenses 24,021 15,958
-------- -------
Operating income (loss) (11,831) 3,251
Interest and other income, net 985 1,036
Equity in net loss of affiliate 1,094 --
-------- -------
Income (loss) before income taxes (11,940) 4,287
Income tax expense (benefit) (3,200) 729
-------- -------
Net income (loss) $ (8,740) $ 3,558
======== =======
Net income (loss) per share:
Basic $ (0.27) $ 0.12
======== =======
Diluted $ (0.27) $ 0.12
======== =======
Weighted-average shares used in per share computation:
Basic 32,085 28,762
======== =======
Diluted 32,085 30,438
======== =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 5
MTI TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------
JULY 1, JULY 3,
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (8,740) $ 3,558
Adjustments to reconcile net income to net cash provided by (used
in) operating activities:
Depreciation and amortization 3,916 2,254
Provision for sales returns and losses on accounts receivable, net 1,033 175
Net loss in equity of affiliate 1,094 --
Provision for inventory obsolescence 637 856
Loss on disposal of fixed assets 350 194
Deferred income tax benefit (3,200) --
Deferred income (1,144) (2,259)
Changes in assets and liabilities:
Accounts receivable 25,627 (5,241)
Inventories (4,137) (6,993)
Prepaid expenses, other receivables and other assets (884) (323)
Accounts payable (4,858) 3,516
Accrued and other liabilities (4,587) 3,594
-------- --------
Net cash provided by (used in) operating activities 5,107 (669)
-------- --------
Cash flows from investing activities:
Capital expenditures for property, plant
and equipment, net (2,388) (503)
-------- --------
Net cash used in investing activities (2,388) (503)
-------- --------
Cash flows from financing activities:
Borrowings under notes payable -- 16,239
Proceeds from issuance of common stock and
exercise of options and warrants 1,740 587
Repayment of notes payable -- (16,875)
-------- --------
Net cash provided by (used in) financing activities 1,740 (49)
-------- --------
Effect of exchange rate changes on cash 101 54
-------- --------
Net increase (decrease) in cash and cash equivalents 4,560 (1,167)
Cash and cash equivalents at beginning of period 8,791 7,213
-------- --------
Cash and cash equivalents at end of period $ 13,351 $ 6,046
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 2 $ 92
Income taxes 42 31
</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 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 July 1, 2000, and the
condensed consolidated results of operations and cash flows for the three
month periods ended July 1, 2000 and July 3, 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:
JULY 1, APRIL 1,
2000 2000
------- --------
Raw Materials $12,008 $13,408
Work in Process 1,164 595
Finished Goods 15,794 11,512
------- -------
$28,966 $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. In addition, the Loan Modification
Agreement provided for a two month extension of the Loan Agreement. The
Loan Modification Agreement allows the Company to borrow at a rate equal
to prime rate, 9.5% at August 7, 2000. The Company has begun negotiations
for a renewal of its existing credit facility and believes the Company
will be able to secure comparable financing prior to the expiration of the
existing credit facility. However, there can be no assurance that the
Company will be able to do so on favorable terms or at all.
6
<PAGE> 7
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
----------------------
JULY 1, JULY 3,
2000 1999
-------- -------
<S> <C> <C>
Numerator:
Net income (loss) $ (8,740) $ 3,558
======== =======
Denominator:
Denominator for net income (loss) per share, basic -
weighted-average shares outstanding 32,085 28,762
Effect of dilutive securities:
Dilutive options outstanding -- 1,676
-------- -------
Denominator for net income (loss) per share, diluted -
adjusted weighted-average shares 32,085 30,438
======== =======
Net income (loss) per share, basic $ (0.27) $ 0.12
======== =======
Net income (loss) per share, diluted $ (0.27) $ 0.12
======== =======
</TABLE>
Options and warrants to purchase 6,824 shares of common stock were
outstanding at July 1, 2000, but were not included in the computation of
diluted loss per share for the three months ended July 1, 2000, because
the effect would be antidilutive.
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 prices were 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 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.
7
<PAGE> 8
A summary of the Company's operations by geographic area is presented
below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------
JULY 1, JULY 3,
2000 1999
-------- --------
<S> <C> <C>
Revenue:
United States $ 29,808 $ 40,274
Europe 11,196 16,253
Transfers between areas (3,094) (3,287)
-------- --------
Total revenue $ 37,910 $ 53,240
======== ========
Operating income (loss):
United States $(10,145) $ 1,707
Europe (1,686) 1,544
-------- --------
Total operating income (loss) $(11,831) $ 3,251
======== ========
<CAPTION>
JULY 1, APRIL 1,
2000 2000
-------- --------
<S> <C> <C>
Identifiable assets:
United States $131,491 $146,183
Europe 31,812 34,764
-------- --------
Total assets $163,303 $180,947
======== ========
</TABLE>
6. Goodwill Impairment
The Company applies Statement of Financial Accounting Standards No.
("Statement") 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of." Statement 121 requires that
long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Under the provisions
of Statement 121, if the sum of the expected future cash flows
(undiscounted and without interest charges) is less than the carrying
amount of the asset, an impairment loss is recognized. The amount of
impairment, if any, is measured based on projected discounted cash flows.
In the first quarter of fiscal 2001, the Company recorded an impairment
charge of $2,200 in accordance with Statement 121 related to unamortized
intangible assets acquired in the purchase of certain product lines from
RAXCO, Inc. The Company has evaluated the recoverability of the remaining
goodwill by analyzing forecasted undiscounted cash flows and found no
further impairment exists at July 1, 2000. The impairment charge was
recorded in selling, general and administrative expense.
7. Comprehensive Income (Loss)
The Company has adopted Statement 130, "Reporting Comprehensive Income."
Statement 130 establishes standards for reporting and displaying
comprehensive income (loss) 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 (loss) are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------
JULY 1, JULY 3,
2000 1999
------- -------
<S> <C> <C>
Net income (loss) $(8,740) $ 3,558
Foreign currency translation adjustment (164) (561)
------- -------
Total comprehensive income (loss) $(8,904) $ 2,997
======= =======
</TABLE>
8. Related Party Transactions
In the normal course of business, the Company sold goods and services
during the first quarter of fiscal 2001 of $92 to a subsidiary of The
Canopy Group, Inc. ("Canopy"). 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 made no sales to the subsidiary of Canopy
during the first quarter of fiscal 2000. In addition, at July 1, 2000,
there were no amounts due from the subsidiary of Canopy.
8
<PAGE> 9
9. Subsequent Event
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. The complaints received to
date were filed between July 31, 2000 and August 10, 2000, in the U.S.
District Courts for the Central District of California and for the
District of Delaware. The complaints reviewed to date have varying class
periods and generally allege that the defendants were aware of certain
adverse information, which they failed to disclose. Such complaints make
certain statements and do not specify the amount of damages being sought.
While not all of the complaints have been served on the Company, the
Company has obtained copies of the complaints from the courts. The Company
believes that the lawsuits are without merit and intends to defend the
suits vigorously.
10. New Accounting Standards
In June 1998, Statement 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.
In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") No.
101, "Revenue Recognition in Financial Statements." The objective of this
SAB is to provide further guidance on revenue recognition issues in the
absence of authoritative literature addressing a specific arrangement or a
specific industry. The Company is required to follow the guidance in the
SAB no later than the fourth quarter of its fiscal year 2001. The SEC has
recently indicated it intends to issue further guidance with respect to
adoption of specific issues addressed by SAB No. 101. Until such time as
this additional guidance is issued, the Company is unable to assess the
impact, if any, it may have on its financial position or results of
operations.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, "Accounting for Certain Transactions Involving
Stock Compensation - an interpretation of APB Opinion No. 25" ("FIN 44").
This Interpretation clarifies the definition of employee for the purposes
of applying Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees ("APB 25"), the criteria for determining whether
a plan qualifies as a noncompensatory plan, the accounting consequence of
various modifications to the terms of a previously fixed stock option
award, and the accounting for an exchange of stock compensation awards in
a business combination. This Interpretation is effective July 1, 2000, but
certain conclusions in this Interpretation cover specific events that
occur after either December 15, 1998, or January 12, 2000. We believe that
the impact of FIN 44 will not have a material effect on our financial
position or results of operations.
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 reduced net product revenue, expected Vivant sales,
increasing service cost of revenue and effect on service gross profit,
dependence on new products, management of growth, competition, international
sales, dependence on suppliers and quarterly fluctuations. Given these
uncertainties, investors in the Company's common stock are cautioned not to
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, 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. 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
Internet-related businesses, or 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
---------------------------
JULY 1, JULY 3,
2000 1999
------- -------
<S> <C> <C>
Net product revenue 67.1% 77.7%
Service revenue 32.9 22.3
------ ------
Total revenue 100.0 100.0
Product gross profit 32.6 35.6
Service gross profit 31.2 37.7
------ ------
Gross profit 32.2 36.1
Selling, general and administrative 49.7 23.3
Research and development 13.7 6.6
------ ------
Operating income (loss) (31.2) 6.2
Interest and other income, net 2.6 1.9
Equity in net loss of affiliate 2.9 --
Income tax expense (benefit) (8.4) 1.4
------ ------
Net income (loss) (23.1)% 6.7%
====== ======
</TABLE>
10
<PAGE> 11
Net Product Revenue: Net product revenue for the first quarter of fiscal 2001
decreased $15.9 million, or 38.5% from the same quarter of the prior year. The
Company transitioned its sales focus during fiscal 2000 towards its proprietary
products, away from its third party resale products. As a result of this
transition, the Company concentrated its sales efforts in IRBs. During the first
quarter of fiscal 2001, the Company experienced a decrease in demand of its
proprietary products from IRBs which resulted in reduced net product revenue.
The Company believes that it may experience a further reduction in demand from
IRBs due to a softening in capital markets for these businesses which could
continue to negatively impact the Company's net product revenue and results of
operations. The Company intends to refocus its sales force to penetrate Global
2000 accounts more deeply, but this effort is not expected to achieve
significant results within the next six months due, in part, to these larger
companies' longer procurement cycles.
Service Revenue: Service revenue for the first quarter of fiscal 2001 increased
$0.6 million, or 5.0% 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 $8.3 million for the first
quarter of fiscal 2001, a decrease of $6.4 million, or 43.7% from the same
quarter of the preceding year, and the gross profit percentage of net product
sales was 32.6% for the first quarter of fiscal 2001 as compared to 35.6% for
the same period of the prior year. The product gross profit percentage decrease
was primarily due to reduced manufacturing efficiencies resulting from a
reduction in product throughput.
Service Gross Profit: Service gross profit was $3.9 million for the first
quarter of fiscal 2001, a decrease of $0.6 million, or 12.9% from the same
period of the previous year. The gross profit percentage of service revenue
decreased to 31.2% in the first quarter of fiscal 2001 as compared to 37.7% in
the same quarter of the preceding year. The decrease in service gross profit is
primarily attributable to increased compensation-related costs as a result of
increased headcount. The Company expects the number of Vivant units sold to
increase in fiscal year 2001 over fiscal 2000 levels. Due to the increased
number of installed Vivant units and the increased complexity of Vivant products
compared to previous products sold, the Company intends to increase overall
service and support headcount and upgrade the skills of its staff to support the
more complex product. 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 first quarter of fiscal 2001 increased $6.4 million, or 51.4%
over the same quarter 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 sales costs of $1.6 million resulting from increased staff,
increased commissions of $1.0 million resulting from a change in the commission
compensation plan, increased bad debt of $0.8 million primarily as a result of
one internet-related customer's non-payment, increased legal expense of $0.2
million and increases in other expenses of $0.6 million. The Company expects
selling, general and administrative expense to increase in fiscal 2001 as it
continues to increase technical sales headcount and training costs.
Research and Development: Research and development expenses for the first
quarter of fiscal 2001 increased $1.7 million, or 47.5% over the same quarter of
the preceding year. This increase is primarily attributable to increased project
costs. The Company intends to continue to increase its investment in research
and development in absolute dollars and as a percentage of total revenue in
fiscal 2001 as it continues to expand into additional markets, such as NAS
storage systems.
Interest and Other Income, Net: Interest and other income, net, for the first
quarter of fiscal 2001 was $1.0 million, essentially unchanged from the same
quarter of the preceding year. Interest and other income, net, is primarily the
recognition of the sale of patents to EMC Corporation ("EMC").
11
<PAGE> 12
Income Tax Expense (Benefit): The income tax benefit for the first quarter of
fiscal 2001 was $3.2 million, or 26.8% of the loss before income taxes as
compared with the income tax expense of $0.7, or 17.0% of income before income
taxes 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 $13.4 million at July 1, 2000, an increase of
$4.6 million as compared to April 1, 2000, the prior fiscal year end. Net
operating activities provided cash of $5.1 million for the first three months of
fiscal 2001, primarily due to decreased accounts receivable of $25.6 million as
a result of collections made on prior quarter sales. This source of cash was
partially offset by the use of cash from a net loss adjusted for non-cash items
of $6.1 million, an increase in inventories of $4.1 million and a combined
decrease in accounts payable and accrued and other liabilities of $9.4 million.
At July 1, 2000, the Company's days sales outstanding were 114 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 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. In addition, the Loan Modification Agreement provided for a
two month extension of the Loan Agreement. The Loan Modification Agreement
allows the Company to borrow at a rate equal to prime rate, 9.5% at August 7,
2000. 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 agreement restricts the Company from paying any
dividends. The Company has begun negotiations for a renewal of its existing
credit facility, and believes the Company will be able to secure comparable
financing prior to the expiration of the existing credit facility term. However,
there can be no assurance that the Company will be able to do so on favorable
terms or at all. There were no borrowings outstanding under the Loan
Modification Agreement at August 7, 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 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.
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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 July 1, 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 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. The complaints received to date were filed
between July 31, 2000 and August 10, 2000, in the U.S. District Courts for the
Central District of California and for the District of Delaware. The complaints
reviewed to date have varying class periods and generally allege that the
defendants were aware of certain adverse information, which they failed to
disclose. Such complaints make certain statements and do not specify the amount
of damages being sought. While not all of the complaints have been served on the
Company, the Company has obtained copies of the complaints from the courts. The
Company believes that the lawsuits are without merit and intends to defend the
suits vigorously.
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
(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.
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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 10th day of August, 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/ Stephanie M. Braun
-------------------------------------
Stephanie M. Braun
Vice President, Corporate Controller
and Chief Accounting Officer
(Principal Accounting Officer)
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EXHIBIT INDEX
Exhibit Number Description
-------------- -----------
10.28 Loan Modification Agreement between Company and Silicon Valley Bank
and General Electric Capital Corporation, as co-lenders.
27 Financial Data Schedule
