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 December 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
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(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 32,297,193.
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MTI TECHNOLOGY CORPORATION
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of December 30, 2000
and April 1, 2000 3
Condensed Consolidated Statements of Operations for the Three
and Nine Months Ended December 30, 2000 and January 1, 2000 4
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended December 30, 2000 and January 1, 2000 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 14
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MTI TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
DECEMBER 30, APRIL 1,
2000 2000
---------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 11,043 $ 8,791
Accounts receivable, net 40,652 74,289
Inventories 31,956 25,515
Deferred income tax benefit 1,020 1,020
Prepaid expenses and other receivables 8,421 6,407
--------- ---------
Total current assets 93,092 116,022
Property, plant and equipment, net 17,270 14,464
Deferred income tax benefit 32,280 26,715
Investment in affiliate 10,966 14,304
Intangible assets and goodwill, net 5,543 8,998
Other 357 444
--------- ---------
$ 159,508 $ 180,947
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable $ -- $ 1,500
Current portion of capital lease obligations 140 --
Accounts payable 25,576 22,008
Accrued liabilities 15,414 20,372
Deferred income 15,332 20,708
--------- ---------
Total current liabilities 56,462 64,588
Capital lease obligations, excluding current portion 659 --
Other 3,717 2,864
--------- ---------
Total liabilities 60,838 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 32,715 and 32,352 shares at
December 30, 2000 and April 1, 2000, respectively 33 32
Additional paid-in capital 135,116 133,007
Accumulated deficit (30,458) (14,609)
Less cost of treasury stock (431 and 479 shares at
December 30, 2000 and April 1, 2000, respectively) (1,563) (1,745)
Accumulated other comprehensive loss (4,458) (3,190)
--------- ---------
Total stockholders' equity 98,670 113,495
Commitments and Contingencies
--------- ---------
$ 159,508 $ 180,947
========= =========
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)
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------- -----------------------------
DECEMBER 30, JANUARY 01, DECEMBER 30, JANUARY 01,
2000 2000 2000 2000
------------ ----------- ------------ -----------
Net product revenue $ 29,390 $ 46,550 $ 89,683 $ 129,840
Service revenue 12,631 12,408 37,837 36,683
-------- -------- --------- ---------
Total revenue 42,021 58,958 127,520 166,523
Product cost of revenue 20,752 27,959 59,337 79,088
Service cost of revenue 8,373 7,658 25,762 22,455
-------- -------- --------- ---------
Total cost of revenue 29,125 35,617 85,099 101,543
-------- -------- --------- ---------
Gross profit 12,896 23,341 42,421 64,980
-------- -------- --------- ---------
Operating expenses:
Selling, general and administrative 15,254 15,886 49,806 42,355
Research and development 3,927 4,253 13,483 11,834
-------- -------- --------- ---------
Total operating expenses 19,181 20,139 63,289 54,189
-------- -------- --------- ---------
Operating income (loss) (6,285) 3,202 (20,868) 10,791
Interest and other income, net 987 938 3,244 3,115
Equity in net loss of affiliate (1,076) (1,432) (3,338) (1,893)
Loss on foreign currency transactions (270) (175) (452) (116)
-------- -------- --------- ---------
Income (loss) before income taxes (6,644) 2,533 (21,414) 11,897
Income tax expense (benefit) (1,660) -- (5,565) 729
-------- -------- --------- ---------
Net income (loss) $ (4,984) $ 2,533 $ (15,849) $ 11,168
======== ======== ========= =========
Net income (loss) per share:
Basic $ (0.15) $ 0.08 $ (0.49) $ 0.37
======== ======== ========= =========
Diluted $ (0.15) $ 0.08 $ (0.49) $ 0.34
======== ======== ========= =========
Weighted-average shares used in
per share computations:
Basic 32,258 30,709 32,189 29,832
======== ======== ========= =========
Diluted 32,258 33,220 32,189 32,408
======== ======== ========= =========
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
----------------------------
DECEMBER 30, JANUARY 1,
2000 2000
------------ ----------
Cash flows from operating activities:
Net income (loss) $(15,849) $ 11,168
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 7,944 5,535
Provision for sales returns and losses on accounts
receivable, net 553 454
Provision for inventory obsolescence 1,783 2,011
Loss on disposal of fixed assets 2,580 227
Deferred income tax benefit (5,565) --
Deferred income (4,522) (3,741)
Equity in net loss of affiliate 3,338 1,893
Changes in assets and liabilities:
Accounts receivable 32,494 (17,475)
Inventories (8,411) (15,859)
Prepaid expenses, other receivables and other assets (1,823) (924)
Accounts payable 3,342 165
Accrued liabilities (5,308) 2,879
-------- --------
Net cash provided (used) in operating activities 10,556 (13,667)
-------- --------
Cash flows from investing activities:
Capital expenditures for property, plant
and equipment, net (9,186) (4,304)
Investment in affiliate -- (4,554)
-------- --------
Net cash used in investing activities (9,186) (8,858)
-------- --------
Cash flows from financing activities:
Short term borrowings -- 65,201
Proceeds from issuance of common stock, treasury shares,
and exercise of options and warrants 2,292 9,282
Repayment of short term borrowings (1,500) (57,154)
-------- --------
Net cash provided by financing activities 792 17,329
-------- --------
Effect of exchange rate changes on cash 90 (44)
-------- --------
Net increase (decrease) in cash and cash equivalents 2,252 (5,240)
Cash and cash equivalents at beginning of period 8,791 7,213
-------- --------
Cash and cash equivalents at end of period $ 11,043 $ 1,973
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 396 $ 473
Income taxes 131 455
Supplemental disclosure of non-cash investing activities:
Acquisition of leased equipment 799 --
Note issued in connection with investment in
affiliate -- 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 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 December 30, 2000 and April 1, 2000, and the condensed
consolidated results of operations for the three and nine month periods
ended December 30, 2000 and January 1, 2000, and the condensed
consolidated statements of cash flows for the nine month periods ended
December 30, 2000 and January 1, 2000. 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:
DECEMBER 30, APRIL 1,
2000 2000
------------ --------
Raw Materials $10,654 $13,408
Work in Process 914 595
Finished Goods 20,388 11,512
------- -------
$31,956 $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. 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 December 30, 2000, the Company was in default under the
Amended Loan Agreement for failing to comply with certain covenants
particularly the covenant containing certain profitability requirements
which were subsequently waived for the period ended December 30, 2000
pursuant to an agreement among the Company, Silicon Valley Bank and
General Electric Capital Corporation. The Company is operating under this
waiver and is in the process of negotiating modified terms. There can be
no assurances that the covenants will be modified or that the Company will
be in compliance with the covenants in future periods. There were no
borrowings outstanding under this agreement at December 30, 2000 and
February 7, 2001.
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4. Net Income (Loss) per Share
The following table sets forth the computations of basic and diluted
earnings per share:
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------- -----------------------------
DECEMBER 30, JANUARY 1, DECEMBER 30, JANUARY 1,
2000 2000 2000 2000
------------ ---------- ------------ ----------
Numerator:
Net income (loss) $ (4,984) $ 2,533 $ (15,849) $11,168
========== ======= ========== =======
Denominator:
Denominator for net income (loss)
per share, basic - weighted-average
shares outstanding 32,258 30,709 32,189 29,832
---------- ------- ---------- -------
Effect of dilutive securities:
Dilutive options outstanding -- 2,474 -- 2,576
Dilutive warrants outstanding -- 37 -- --
---------- ------- ---------- -------
Dilutive potential common shares -- 2,511 -- 2,576
---------- ------- ---------- -------
Denominator for net income (loss) per
share, diluted - adjusted
weighted-average shares 32,258 33,220 32,189 32,408
========== ======= ========== =======
Net income (loss) per share, basic $ (0.15) $ 0.08 $ (0.49) $ 0.37
========== ======= ========== =======
Net income (loss) per share, diluted $ (0.15) $ 0.08 $ (0.49) $ 0.34
========== ======= ========== =======
Options and warrants to purchase 8,210 shares of common stock were
outstanding at December 30, 2000, but were not included in the
computation of diluted earnings per share for the three and nine months
ended December 30, 2000, as the effect would be antidilutive.
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 ended 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 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.
5. Gain (loss) on foreign currency transactions
The Company reclassified gain (loss) on foreign currency transactions
from selling, general and administrative expenses to other non-operating
income/expense in the third quarter of fiscal year 2001. Prior periods
have been reclassified to conform to current year presentation.
6. 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. On or about December 5, 2000, Plaintiffs filed
a Consolidated Amended Complaint
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with the court. Such complaints did not specify the amount of damages
being sought. On January 19, 2001, the Company and the officer
defendants filed a motion to dismiss the Consolidated Amended Complaint
on the grounds that Plaintiffs had failed to state a claim in the
consolidated complaint and had failed to plead their allegations with
the specificity and particularity required by the Private Securities
Litigation Reform Act and cases interpreting and applying the same. The
Company believes that the lawsuits are without merit and intends to
defend the suits vigorously.
7. 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.
A summary of the Company's operations by geographic area is presented
below:
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------------- -----------------------------
DECEMBER 30, JANUARY 1, DECEMBER 30, JANUARY 1,
2000 2000 2000 2000
------------ ---------- ------------ ----------
Revenue:
United States $ 26,073 $ 44,418 $ 88,635 $ 128,070
Europe 17,699 16,827 44,998 48,284
Transfers between areas (1,751) (2,287) (6,113) (9,831)
-------- -------- --------- ---------
Total revenue $ 42,021 $ 58,958 $ 127,520 $ 166,523
======== ======== ========= =========
Operating income (loss):
United States $ (6,135) $ 2,421 $ (19,559) $ 6,761
Europe (150) 781 (1,309) 4,030
-------- -------- --------- ---------
Total operating income (loss) $ (6,285) $ 3,202 $ (20,868) $ 10,791
======== ======== ========= =========
DECEMBER 30, APRIL 1,
2000 2000
------------ ---------
Identifiable assets:
United States $ 125,335 $ 146,183
Europe 34,173 34,764
--------- ---------
Total assets $ 159,508 $ 180,947
========= =========
8. Comprehensive Income (Loss)
The components of comprehensive income (loss) are as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------- ----------------------------
DECEMBER 30, JANUARY 1, DECEMBER 30, JANUARY 1,
2000 2000 2000 2000
------------ ---------- ------------ ----------
Net income (loss) $(4,984) $ 2,533 $(15,849) $ 11,168
Foreign currency translation adjustment (1,079) (656) (1,267) (413)
------- ------- -------- --------
Total comprehensive income (loss) $(6,063) $ 1,877 $(17,116) $ 10,755
======= ======= ======== ========
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9. Recently Issued Accounting Pronouncements
In December 1999, the Securities and Exchange Commission 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 specific arrangement or a specific industry. All companies
are required to follow the guidance in SAB 101 no later than the fourth
quarter in fiscal year 2001, with restatement of earlier quarters in
fiscal 2001 required, if necessary. The SEC has recently issued further
guidance with respect to adoption of specific issues addressed in SAB
101. The Company believes that the impact of SAB 101 will not have a
material effect on its financial position or results of operations.
In September 2000, Statement of Financial Accounting Standards No. 140,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" was issued. Statement 140 replaces
Statement of Financial Accounting Standards No. 125 and is effective for
the Company in the second quarter of fiscal year 2002. The adoption of
SFAS 140 is not expected to have a material effect on the Company's
financial position or results of operations.
PART 1 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain statements set forth herein 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. Forward looking
statements include statements about the Company's revenue, markets, margin, the
effect of accounting changes, attempts to modify its banking facility,
proprietary product sales (including Vivant sales), customers (including
Internet-related businesses, or IRBs and focus on Global 2000 companies),
service and support costs, investment in research and development, foreign
currency hedging activity 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. The Company may fail to achieve anticipated revenue
levels and efficiencies of operation. 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(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.
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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:
FOR THE FOR THE
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------- ------------------------------
DECEMBER 30, JANUARY 1, DECEMBER 30, JANUARY 1,
2000 2000 2000 2000
------------ ---------- ------------ ----------
Net product revenue 69.9% 79.0% 70.3% 78.0%
Service revenue 30.1 21.0 29.7 22.0
------ ------ ------ ------
Total revenue 100.0 100.0 100.0 100.0
Product gross profit 29.4 39.9 33.8 39.1
Service gross profit 33.7 38.3 31.9 38.8
------ ------ ------ ------
Gross profit 30.7 39.5 33.3 39.0
Selling, general and administrative 36.3 26.9 39.1 25.4
Research and development 9.3 7.2 10.6 7.1
------ ------ ------ ------
Operating income (loss) (14.9) 5.4 (16.4) 6.5
Interest and other income, net (2.3) (1.6) (2.5) (1.8)
Equity in net loss of affiliate 2.6 2.4 2.6 1.1
Loss on foreign currency transactions 0.6 0.3 0.3 0.1
Income tax expense (benefit) (3.9) -- (4.4) 0.4
------ ------ ------ ------
Net income (loss) (11.9)% 4.3% (12.4)% 6.7%
====== ====== ====== ======
Net Product Revenue: Net product revenue for the third quarter of fiscal 2001
decreased $17.2 million, or 36.9% from the same quarter of the prior year. Net
product revenue for the first nine months of fiscal 2001 decreased $40.2
million, or 30.9% 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
three quarters of fiscal 2001, the Company experienced a decrease in demand of
its proprietary products from IRBs and made a conscious decision to reduce its
sales to the IRBs, which resulted in reduced net product revenue. The Company
believes that it may experience a further reduction in demand from IRBs which
could continue to negatively impact the Company's net product revenue and
results of operations. The Company continues to refocus its sales force to
penetrate Global 2000 accounts more deeply.
Service Revenue: Service revenue for the third quarter of fiscal 2001 increased
$0.2 million, or 1.8% over the same quarter of the prior year. Service revenue
for the first nine months of fiscal 2001 increased $1.2 million, or 3.1% over
the same period of the prior year. These increases were primarily due to
increased revenue from maintenance contracts for increased field population.
Product Gross Profit: Product gross profit was $8.6 million for the third
quarter of fiscal 2001, a decrease of $10.0 million, or 53.5% from the same
quarter of the preceding year, and the gross profit percentage of net product
revenue was 29.4% for the third quarter of fiscal 2001 as compared to 39.9% for
the same period of the prior year. This decrease is primarily due to the
relative increase in revenue concentration from back-up products which
historically carry a significantly lower margin than the Company's proprietary
storage products.
Product gross profit was $30.3 million for the first nine months of fiscal 2001,
a decrease of $20.4 million, or 40.2% from the same period of the preceding
year, and the gross profit percentage of net product revenue was 33.8% for the
first nine months of fiscal 2001 as compared to 39.1% for the same period of the
prior year. This decrease is primarily due to the relative increase in revenue
concentration from back-up products which historically carry a significantly
lower margin than the Company's proprietary storage products.
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Service Gross Profit: Service gross profit was $4.3 million for the third
quarter of fiscal 2001, a decrease of $0.5 million, or 10.4% from the same
period of the previous year. The gross profit percentage of service revenue
decreased to 33.7% in the third quarter of fiscal 2001 as compared to 38.3% 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 $12.1 million for the first nine months of fiscal 2001,
a decrease of $2.2 million, or 15.1% from the same period of the previous year.
The gross profit percentage of service revenue decreased to 31.9% for the first
nine months of fiscal 2001 as compared to 38.8% 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 installed Vivant
units 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 increased volume of proprietary product and service
offerings. As a result, the Company expects that service cost of revenue will
continue to increase in fiscal year 2001, which will continue to adversely
affect service gross profit.
Selling, General and Administrative: Selling, general and administrative
expenses for the third quarter of fiscal 2001 decreased $0.6 million, or 4.0%
from the same quarter of the preceding year. This decrease was due to reduced
sales expense of $0.9 million, which was tied directly to reduced revenue, and
reduced salaries in the general and administrative areas of $0.4 million, offset
by increased bad debt expense of $0.7 million.
Selling, general and administrative expenses for the first nine months of fiscal
2001 increased $7.4 million, or 17.6% from the same period of the preceding
year. This increase was primarily due to an impairment charge recorded in the
first quarter of this fiscal year of $2.2 million related to unamortized
intangible assets acquired in the purchase of certain product lines from RAXCO,
Inc., increased total selling costs of $1.9 million, increased legal costs of
$0.4 million associated with the class action lawsuit and increased bad debt of
over $2.9 million primarily as a result of internet-related customers'
non-payment.
Research and Development: Research and development expenses for the third
quarter of fiscal 2001 decreased $0.3 million, or 7.7% from the same quarter of
the prior year. This decrease is attributable to better project cost control
with a value of $0.4 million, offset only slightly by increased salary and
related costs of $0.1 million.
Research and development expenses for the first nine months of fiscal 2001
increased $1.6 million, or 13.9% from the same period of the prior year. These
increases are primarily attributable to increased development costs associated
with new products.
Interest and Other Income, Net, Equity in Affiliate, and Foreign Currency: These
items for both the third quarter and year to date comparison to prior year
reflects the Company's share of the loss in its affiliated company offset by the
recognition of the sale of patents to EMC Corporation ("EMC") and slightly
unfavorable foreign currency activities.
Income Tax Expense (Benefit): The income tax benefit for the third quarter of
fiscal 2001 was $1.7 million as compared to zero in the comparable period of the
prior year and for the first nine months of fiscal 2001 was a $5.6 million
income tax benefit as compared to $0.7 million of income tax expense for the
comparable nine month period of the prior year.
Liquidity and Capital Resources
Cash and cash equivalents were $11.0 million at December 30, 2000, an increase
of $2.3 million as compared to April 1, 2000, the prior fiscal year end. Net
operating activities provided cash of $10.6 million for the first nine months of
fiscal 2001, primarily due to decreased accounts receivable of $32.5 million as
a result of increased collection activity. This source of cash was partially
offset by the use of cash from a net loss adjusted for non-cash items of $9.7
million, a combined increase in inventories, prepaid and other assets, and
accounts payable of $6.9 million, and a decrease in accrued liabilities of $5.3
million.
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At December 30, 2000, the Company's days sales outstanding were 88 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 has added processes
to pursue collections earlier than in the past.
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. 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 December
30, 2000, the Company was in default under the Amended Loan Agreement for
failing to comply with certain covenants particularly the covenant containing
certain profitability requirements which were subsequently waived for the period
ended December 30, 2000 pursuant to an agreement among the Company, Silicon
Valley Bank and General Electric Capital Corporation. The Company is operating
under this waiver and is in the process of negotiating modified terms. There can
be no assurances that the covenants will be modified or that the Company will be
in compliance with the covenants in future periods. There were no borrowings
outstanding under this agreement at December 30, 2000 and February 7, 2001.
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. As of January
2001, the Company has received all installments. 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
(assuming the contemplated modifications) 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, if the
bank line is not modified or 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 December 30, 2000. There can be no assurance that such actions will
successfully reduce the Company's exposure to financial market risks.
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The Company maintains a $30 million credit line which currently operates under a
waiver. 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, 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. On or about December 5,
2000, Plaintiffs filed a Consolidated Amended Complaint with the court. Such
complaints did not specify the amount of damages being sought. On January 19,
2001, the Company and the officer defendants filed a motion to dismiss the
Consolidated Amended Complaint on the grounds that Plaintiffs had failed to
state a claim in the consolidated complaint and had failed to plead their
allegations with the specificity and particularity required by the Private
Securities Litigation Reform Act and cases interpreting and applying the same.
The Company believes that the lawsuits are without merit and intends to defend
the suits vigorously.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on the 12th day of February, 2001.
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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