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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended January 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 February 7, 2000 was 31,316,874.
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MTI TECHNOLOGY CORPORATION
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of January 1, 2000
and April 3, 1999 3
Condensed Consolidated Statements of Income for the Three
and Nine Months Ended January 1, 2000 and January 2, 1999 4
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended January 1, 2000 and January 2, 1999 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities - Recent Sales of Securities 16
Item 6. Exhibits and Reports on Form 8-K 16
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MTI TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
JANUARY 1, APRIL 3,
2000 1999
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 1,973 $ 7,213
Accounts receivable, net 69,867 53,005
Inventories 30,768 16,987
Deferred income tax benefit 3,960 3,960
Prepaid expenses and other receivables 8,486 7,312
--------- ---------
Total current assets 115,054 88,477
Property, plant and equipment, net 13,539 13,802
Goodwill, net 9,480 10,890
Investment in affiliate 4,128 --
Other 597 609
--------- ---------
$ 142,798 $ 113,778
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 13,871 $ 5,824
Note payable 1,500 --
Accounts payable 18,820 18,632
Accrued liabilities 19,031 16,043
Deferred income 13,568 17,981
--------- ---------
Total current liabilities 66,790 58,480
Other 1,829 1,157
--------- ---------
Total liabilities 68,619 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 31,356
and 29,212 shares at January 1, 2000 and April 3, 1999,
respectively 31 29
Additional paid-in capital 107,611 98,539
Accumulated deficit (28,761) (39,929)
Less cost of treasury stock (520 and 575 shares at
January 1, 2000 and April 3, 1999, respectively) (1,899) (2,108)
Accumulated other comprehensive loss (2,803) (2,390)
--------- ---------
Total stockholders' equity 74,179 54,141
--------- ---------
$ 142,798 $ 113,778
========= =========
See accompanying notes to condensed consolidated financial statements.
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MTI TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------- --------------------------
JANUARY 1, JANUARY 2, JANUARY 1, JANUARY 2,
2000 1999 2000 1999
---------- ---------- --------- ----------
Net product revenue $ 46,550 $ 36,191 $ 129,840 $ 112,757
Service revenue 12,408 11,468 36,683 32,292
--------- --------- --------- ---------
Total revenue 58,958 47,659 166,523 145,049
Product cost of revenue 27,959 24,732 79,088 76,359
Service cost of revenue 7,658 7,133 22,455 20,510
--------- --------- --------- ---------
Total cost of revenue 35,617 31,865 101,543 96,869
Gross profit 23,341 15,794 64,980 48,180
--------- --------- --------- ---------
Operating expenses:
Selling, general and administrative 16,061 11,699 42,471 33,479
Research and development 4,253 3,158 11,834 9,874
--------- --------- --------- ---------
Total operating expenses 20,314 14,857 54,305 43,353
--------- --------- --------- ---------
Operating income 3,027 937 10,675 4,827
Other income, net 938 851 3,115 2,756
Equity in net loss of affiliate (1,432) -- (1,893) --
--------- --------- --------- ---------
Income before income taxes 2,533 1,788 11,897 7,583
Income tax expense -- 314 729 1,204
--------- --------- --------- ---------
Net income $ 2,533 $ 1,474 $ 11,168 $ 6,379
========= ========= ========= =========
Net income per share:
Basic $ 0.08 $ 0.05 $ 0.37 $ 0.22
========= ========= ========= =========
Diluted $ 0.08 $ 0.05 $ 0.34 $ 0.21
========= ========= ========= =========
Weighted-average shares used in
per share computations:
Basic 30,709 28,502 29,832 28,395
========= ========= ========= =========
Diluted 33,220 29,350 32,408 29,732
========= ========= ========= =========
See accompanying notes to condensed consolidated financial statements.
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MTI TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
--------------------------
JANUARY 1, JANUARY 2,
2000 1999
-------- ---------
Cash flows from operating activities:
Net income $ 11,168 $ 6,379
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization 5,535 6,300
Provision for sales returns and losses on accounts
receivable, net 454 228
Provision for inventory obsolescence 2,011 1,876
Loss on disposal of fixed assets 227 57
Deferred income (3,741) (2,728)
Equity in net loss of affiliate 1,893 --
Changes in assets and liabilities:
Accounts receivable (17,475) (5,311)
Inventories (15,859) (9,559)
Prepaid expenses, other receivables and other assets (924) (928)
Accounts payable 165 2,691
Accrued and other liabilities 2,879 (1,448)
-------- --------
Net cash used in operating activities (13,667) (2,443)
-------- --------
Cash flows from investing activities:
Capital expenditures for property, plant
and equipment, net (4,304) (6,080)
Investment in affiliate (4,554) --
-------- --------
Net cash used in investing activities (8,858) (6,080)
-------- --------
Cash flows from financing activities:
Short term borrowings 65,201 82,268
Proceeds from issuance of common stock and
exercise of options and warrants 9,282 1,005
Repayment of short term borrowings (57,154) (78,611)
-------- --------
Net cash provided by financing activities 17,329 4,662
-------- --------
Effect of exchange rate changes on cash (44) 26
-------- --------
Net decrease in cash and cash equivalents (5,240) (3,835)
Cash and cash equivalents at beginning of period 7,213 7,768
-------- --------
Cash and cash equivalents at end of period $ 1,973 $ 3,993
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 473 $ 886
Income taxes 455 1,613
Note issued in connection with investment in
affiliate (see note 8) 1,500 --
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 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 January 1, 2000, and
the condensed consolidated results of operations for the three and nine
month periods ended January 1, 2000 and January 2, 1999, and the condensed
consolidated statements of cash flows for the nine month periods ended
January 1, 2000 and January 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:
JANUARY 1, APRIL 3,
2000 1999
---------- --------
Raw Materials $13,001 $ 8,262
Work in Process 1,144 367
Finished Goods 16,623 8,358
------- -------
$30,768 $16,987
======= =======
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.
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4. Net Income per Share
The following table sets forth the computations of basic and diluted
earnings per share:
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------- ------------------------
JANUARY 1, JANUARY 2, JANUARY 1, JANUARY 2,
2000 1999 2000 1999
--------- ---------- --------- ---------
Numerator:
Net income $ 2,533 $ 1,474 $11,168 $ 6,379
======= ======= ======= ======
Denominator:
Denominator for net income per
share, basic - weighted-average
shares outstanding 30,709 28,502 29,832 28,395
------- ------- ------- -------
Effect of dilutive securities:
Dilutive options outstanding 2,474 848 2,576 1,337
Dilutive warrants outstanding 37 -- -- --
------- ------- ------- -------
Dilutive potential common shares 2,511 848 2,576 1,337
------- ------- ------- -------
Denominator for net income per share,
diluted - adjusted weighted-average
shares 33,220 29,350 32,408 29,732
======= ======= ======= =======
Net income per share, basic $ 0.08 $ 0.05 $ 0.37 $ 0.22
======= ======= ======= =======
Net income per share, diluted $ 0.08 $ 0.05 $ 0.34 $ 0.21
======= ======= ======= =======
Options to purchase 2,049 shares of common stock at prices in excess of
$24.81 per share were outstanding at January 1, 2000, but were not
included in the computation of diluted earnings per share for the three
months January 1, 2000, because the options' exercise price was greater
than the average market price of the common shares during the period, and
therefore, the effect would be antidilutive.
Options to purchase 2,988 shares of common stock at prices in excess of
$8.18 per share were outstanding at January 2, 1999, but were not included
in the computation of diluted earnings per share for the three months
ended January 2, 1999 because the options' exercise price was greater than
the average market price of the common shares during the period, and
therefore, the effect would be antidilutive.
Options and warrants to purchase 2,293 shares of common stock at prices in
excess of $18.16 per share were outstanding at January 1, 2000, but were
not included in the computation of diluted earnings per share for the nine
months ended January 1, 2000, because the options' and warrants' exercise
price was greater than the average market price of the common shares
during the period, and therefore, the effect would be antidilutive.
Options to purchase 3,072 shares of common stock at prices in excess of
$4.45 per share were outstanding at January 2, 1999, but were not included
in the computation of diluted earnings per share for the nine months ended
January 2, 1999 because the options' exercise price was greater than the
average market price of the common shares during the period, and
therefore, the effect would be antidilutive.
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5. Litigation
In May 1999, the Company agreed to settle a purported stockholder
class-action lawsuit. 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. The final judgment was
entered by the court on December 1, 1999.
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:
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------- ---------------------------
JANUARY 1, JANUARY 2, JANUARY 1, JANUARY 2,
2000 1999 2000 1999
--------- ---------- ---------- ----------
Revenue:
United States $ 44,418 $ 34,651 $ 128,070 $ 106,792
Europe 16,827 15,760 48,284 47,709
Transfers between areas (2,287) (2,752) (9,831) (9,452)
--------- --------- --------- ---------
Total revenue $ 58,958 $ 47,659 $ 166,523 $ 145,049
========= ========= ========= =========
Operating income (loss):
United States $ 2,904 $ (1,086) $ 7,295 $ (1,986)
Europe 123 2,023 3,380 6,813
--------- --------- --------- ---------
Total operating income $ 3,027 $ 937 $ 10,675 $ 4,827
========= ========= ========= =========
JANUARY 1, APRIL 3,
2000 1999
---------- ---------
Identifiable assets:
United States $102,817 $ 75,830
Europe 39,981 37,948
-------- --------
Total assets $142,798 $113,778
======== ========
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The Company's revenues by product type are summarized below:
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------- --------------------------
JANUARY 1, JANUARY 2, JANUARY 1, JANUARY 2,
2000 1999 2000 1999
--------- -------- ---------- ----------
Server $ 34,405 $ 18,520 $ 93,221 $ 64,317
Tape 9,222 14,108 27,704 38,190
Software 2,923 3,563 8,915 10,250
Service 12,408 11,468 36,683 32,292
-------- -------- -------- --------
$ 58,958 $ 47,659 $166,523 $145,049
======== ======== ======== ========
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:
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------- ---------------------------
JANUARY 1, JANUARY 2, JANUARY 1, JANUARY 2,
2000 1999 2000 1999
---------- ---------- ---------- ---------
Net income $ 2,533 $ 1,474 $ 11,168 $ 6,379
Foreign currency translation adjustment (656) (464) (413) 173
-------- -------- -------- --------
Total comprehensive income $ 1,877 $ 1,010 $ 10,755 $ 6,552
======== ======== ======== ========
8. Investment in Affiliate
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. Subsequent to
the Company's initial investment in Caldera, the Company's percentage
ownership was diluted to 20%. The investment is accounted for under the
equity method as the Company has significant influence, but not control,
of the operations of Caldera.
The initial investment in Caldera was $6,084 and included: (a) cash
payment of $3,000, (b) note payable of $3,000 bearing interest at the
prime rate plus one percent per annum and payable in two equal semi-annual
payments beginning February 2000 and (c) investment costs of $84. In
November 1999, the Company accelerated the first $1,500 payment on the
note payable in exchange for the cancellation of any interest charges on
the note payable. The excess of the Company's investment in Caldera over
the related underlying equity in net assets of $5,417 is being amortized
on a straight-line basis over seven years.
The Canopy Group, Inc. ("Canopy"), 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.
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9. Related Party Transactions
In the normal course of business, the Company sold goods and services to a
subsidiary of Canopy. Goods and services sold to the subsidiary of
Canopy in the third quarter of fiscal 2000 and for the first nine months
of fiscal 2000, amounted to $1,703 and $4,656, respectively. The Company
made no sales to the subsidiary of Canopy prior to fiscal 2000. In
addition, at January 1, 2000, there were no amounts due from the
subsidiary of Canopy.
In August 1999, the Company issued a warrant to purchase 150,000 shares of
the Company's common stock at a price of $18.75 per share. The warrant was
issued to an individual affiliated with Canopy in connection with
consulting services provided to the Company and expire in August 2009. At
January 1, 2000, the warrant was not exercisable.
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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 increases in sales personnel and selling, general and
administrative costs, 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.
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Results of Operations
The following table sets forth selected items from the Condensed Consolidated
Statements of Income as a percentage of net revenues for the periods indicated,
except for product gross profit and service gross profit, which are expressed as
a percentage of the related revenue. This information should be read in
conjunction with the Condensed Consolidated Financial Statements included
elsewhere herein:
FOR THE FOR THE
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------- ------------------------
JANUARY 1, JANUARY 2, JANUARY 1, JANUARY 2,
2000 1999 2000 1999
---------- ---------- ---------- ----------
Net product revenue 79.0% 75.9% 78.0% 77.7%
Service revenue 21.0 24.1 22.0 22.3
----- ----- ----- -----
Total revenue 100.0 100.0 100.0 100.0
Product gross profit 39.9 31.7 39.1 32.3
Service gross profit 38.3 37.8 38.8 36.5
----- ----- ----- -----
Gross profit 39.6 33.1 39.0 33.2
Selling, general and administrative 27.3 24.5 25.5 23.1
Research and development 7.2 6.6 7.1 6.8
----- ----- ----- -----
Operating income 5.1 2.0 6.4 3.3
Other income, net 1.6 1.8 1.9 1.9
Equity in net loss of affiliate 2.4 -- 1.2 --
Income tax expense -- 0.7 0.4 0.8
----- ----- ----- -----
Net income 4.3% 3.1% 6.7% 4.4%
===== ===== ===== =====
Net Product Revenue: Net product revenue for the third quarter of fiscal 2000
increased $10.4 million, or 28.6% from the same quarter of the prior year. Net
product revenue for the first nine months of fiscal 2000 increased $17.1
million, or 15.2% from the same period of the prior year. These increases were
primarily due to increased revenue from server products resulting from an
increase in fiber channel product revenue offset by a reduction in SCSI product
revenue and tape products as the Company's focus shifted away from resale of
tape product to the sale of its own proprietary server products. Additionally,
these increases were primarily related to domestic operations.
Service Revenue: Service revenue for the third quarter of fiscal 2000 increased
$0.9 million, or 8.2% over the same quarter of the prior year. Service revenue
for the first nine months of fiscal 2000 increased $4.4 million, or 13.6% over
the same period of the prior year. These increases were primarily due to
increased revenue from maintenance contracts.
Product Gross Profit: Product gross profit was $18.6 million for the third
quarter of fiscal 2000, an increase of $7.1 million, or 62.2% over the same
quarter of the preceding year, and the gross profit percentage of net product
sales was 39.9% for the third quarter of fiscal 2000 as compared to 31.7% for
the same period of the prior year. This increase is primarily due to increased
revenue on server products which historically carry a higher margin.
Product gross profit was $50.8 million for the first nine months of fiscal 2000,
an increase of $14.4 million, or 39.4% over the same period of the preceding
year, and the gross profit percentage of net product sales was 39.1% for the
first nine months of fiscal 2000 as compared to 32.3% for the same period of the
prior year. This increase is primarily due to increased revenue on server
products which historically carry a higher margin.
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Service Gross Profit: Service gross profit was $4.8 million for the third
quarter of fiscal 2000, an increase of $0.4 million, or 9.6% over the same
period of the previous year. The gross profit percentage of service revenue
increased to 38.3% in the third quarter of fiscal 2000 as compared to 37.8% in
the same quarter of the preceding year. This increase is primarily due to
increased revenue from maintenance contracts without corresponding increases in
support costs.
Service gross profit was $14.2 million for the first nine months of fiscal 2000,
an increase of $2.4 million, or 20.8% over the same period of the previous year.
The gross profit percentage of service revenue increased to 38.8% for the first
nine months of fiscal 2000 as compared to 36.5% in the same period of the
preceding year. This increase is primarily due to increased revenue from
maintenance contracts without corresponding increases in support costs.
Selling, General and Administrative: Selling, general and administrative
expenses for the third quarter of fiscal 2000 increased $4.4 million, or 37.3%
from the same quarter of the preceding year. This increase was primarily due to
increased compensation-related sales costs resulting from increased staff of
$2.8 million, increased marketing efforts of $0.6 million, $0.6 million of
severance related cost in the third quarter of fiscal 2000 and increases in
other expenses of $0.4 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.
Selling, general and administrative expenses for the first nine months of fiscal
2000 increased $9.0 million, or 26.9% from the same period of the preceding
year. This increase was primarily due to increased compensation-related sales
costs resulting from increased staff of $5.0 million, increased marketing
efforts of $1.7 million, $0.6 million of severance related costs in fiscal 2000
and increases in other expenses of $1.7 million.
Research and Development: Research and development expenses for the third
quarter of fiscal 2000 increased $1.1 million, or 34.7% from the same quarter of
the prior year. This increase is attributable to increased project costs of $0.4
million, increased salary and related costs of $0.4 due to increased headcount
and increased other costs of $0.3 million.
Research and development expenses for the first nine months of fiscal 2000
increased $2.0 million, or 19.9% from the same period of the prior year. This
increase is attributable to increased project costs of $0.7 million, increased
salary and related costs of $0.9 due to increased headcount and increased other
costs of $0.4 million.
Other Income, Net: Other income, net, for the third quarter of fiscal 2000
increased $0.1 million, or 10.2% from the same period of the prior year. Other
income, net was 1.6% of total revenue for the third quarter of fiscal 2000 and
1.8% of total revenue for the same quarter of fiscal 1999.
Other income, net, for the first nine months of fiscal 2000 increased $0.4
million, or 13.0% over the same period of the prior year. Other income, net was
1.9% of total revenue for the first nine months of both fiscal 2000 and fiscal
1999.
Equity in net loss of affiliate: The equity in net loss of affiliate represents
the Company's proportionate share of Caldera's net losses and amortization of
the goodwill related to the acquisition of Caldera in August 1999.
Income Tax Expense: There was no income tax expense for the third quarter of
fiscal 2000. Income tax expense for the third quarter of fiscal 1999 was 17.6%
of income before income taxes. Income tax expense for the first nine months of
fiscal 2000 was 6.1% of income before income tax, as compared to 15.9% for the
same period of the prior year. The Company's low effective tax rate is primarily
due to utilization of net operating loss carryforwards which were held net of a
substantial valuation allowance. After these net operating loss carryforwards
are utilized, and the corresponding valuation allowance is eliminated,
management believes the Company will have an effective tax rate of approximately
35% assuming current enacted rates and current operating structure. In addition,
under current generally accepted accounting principles and in accordance with
the Company's policy, the Company could be required to
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reduce some or all of its valuation allowance prior to actual utilization of the
net operating losses, which would result in the recognition of a significant
immediate tax benefit for financial statement purposes and the expected
effective tax rate of approximately 35% on an ongoing basis. However, there can
be no assurance that the Company will ultimately generate adequate taxable
income to utilize any or all of its existing net operating loss carryforwards or
if utilized, that the actual effective tax rate on an ongoing basis would
approximate 35%.
Liquidity and Capital Resources
Cash and cash equivalents were $2.0 million at January 1, 2000, a decrease of
$5.2 million as compared to April 3, 1999, the prior fiscal year end. Net
operating activities used cash of $13.7 million for the first nine months of
fiscal 2000, primarily due to increased accounts receivable of $17.5 million as
a result of increased days sales outstanding and to increases in gross
inventories of $15.9 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 and less than anticipated shipments.
These uses of cash were partially offset by net income adjusted for non-cash
items of $17.5 million and an increase in accrued and other liabilities of $2.9
million.
At January 1, 2000, the Company's days sales outstanding were 108 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 third
quarter of fiscal year 2000 than the percentage of sales occurring within the
last month of the fourth quarter of fiscal year 1999. Subsequent to January 1,
2000, the Company has increased collection efforts worldwide and has reduced it
accounts receivable balance by approximately 23% as of January 29, 2000.
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 February 7, 2000 were reduced to
$2.9 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 five of which were paid
timely. The remaining 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 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 computer and technology agreement
between EMC and IBM announced in March 1999.
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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New Accounting Standard
In June 1998, the Financial Accounting Standards Board issued Statement 133,
"Accounting for Derivative Instruments and Hedging Activities." The new
statement is effective for 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.
Year 2000 Issue
The Company completed its review of year 2000 issues as scheduled and believes
all of its critical systems are year 2000 compliant. However, there can be no
assurances that the Company has tested and identified all potential year 2000
issues including the impact of outside parties on the Company's operations.
As of February 9, 2000, the Company had not experienced any significant issues
in relation to the year 2000 issue in both its internal infrastructure as well
as its products. Additionally, the Company has not been made aware of any
significant year 2000 issues experienced by its customers or third party
vendors. The Company will continue to monitor year 2000 issues throughout
calendar 2000 with a focus on those dates impacted by the year 2000 issue such
as the calendar leap year.
The Company has incurred costs consisting primarily of internal labor costs that
are considered to immaterial. Any additional costs, which are considered
primarily internal labor costs, are anticipated to be immaterial.
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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. 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, 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
In May 1999, the Company agreed to settle a purported stockholder class-action
lawsuit. 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. The final judgment was entered by the court on December
1, 1999.
ITEM 2(c) - CHANGES IN SECURITIES - RECENT SALES OF SECURITIES
In February 2000, in a private placement transaction pursuant to Section 4 (2),
the Company issued 1,266 shares of common stock to GB Storage SARL, for $12.00
per share pursuant to a warrant agreement with GB Storage SARL dated February
1998.
This transaction was made directly by the Company without use of an underwriter
or placement agent and without payment of commissions or other remuneration. In
each case the aggregate sales proceeds, after payment of offering expenses in
immaterial amounts, were applied to the working capital of the Company and other
general corporate purposes.
With respect to the exemption from registration claimed under Section 4 (2) of
the Securities Act of 1933, neither the Company nor any person acting on its
behalf offered or sold the securities by means of any form of general
solicitation or advertising. Prior to making any offer or sale, the Company had
reasonable grounds to believe and believed that the prospective investor was
capable of the merits and risks of the investment and was able to bear the
economic risk of the investment. The purchaser represented that such purchaser
was an accredited investor and that the securities were being acquired for
investment for purchaser's own account, and agreed that the securities would not
be sold without registration under the Securities Act or exemption therefrom.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27 -- Financial Data Schedule
(b) Reports on Form 8-K:
None.
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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 9th day of February, 2000.
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)
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EXHIBIT INDEX
Exhibit Number Description
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27 Financial Data Schedule
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