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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED APRIL 4, 1998
[ ] 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
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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
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $0.001 PAR VALUE
(TITLE OF CLASS)
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (sec. 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant was $125,967,037 on June 22, 1998, based on the closing sale
price of such stock on The Nasdaq National Market. The number of shares
outstanding of Registrant's Common Stock, $0.001 par value, was 28,363,096 on
June 22, 1998.
DOCUMENTS INCORPORATED BY REFERENCE:
DOCUMENT FORM 10-K
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Proxy Statement for 1998 III
Annual Meeting of Stockholders
to be held on September 10, 1998
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PART I
ITEM 1. BUSINESS:
INTRODUCTION
MTI Technology Corporation (the "Registrant") was incorporated in
California in March 1981 and reincorporated in Delaware in October 1992. Unless
the context indicates otherwise, the "Company" and "MTI" each refer to the
Registrant and its consolidated subsidiaries.
All references to years refer to the Company's fiscal years ended April 2,
1994, April 1, 1995, April 6, 1996, April 5, 1997 and April 4, 1998, as
applicable unless the calendar year is specified. References to dollar amounts
are in thousands, except share and per share data and amounts in the Company's
Management's Discussion and Analysis of Financial Condition and Results of
Operations, unless otherwise specified.
OVERVIEW
MTI Technology Corporation is an international provider of high-performance
data storage solutions for the Open Systems and Digital markets. 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, Digital Equipment ("DEC") and NT-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.
The Company's customers represent a cross section of industries and
governmental agencies and range from Fortune 500 companies to small businesses.
No one customer accounted for more than 10 percent of total revenue during
fiscal years 1998, 1997 and 1996. During fiscal year 1998, approximately 92% of
the Company's net product revenue was derived from the sale of products that
operate in the Open Systems environment, as compared to 76% and 43% for fiscal
years 1997 and 1996, respectively. This material increase reflects the Company's
commitment to its strategy of expanding the revenue contribution from sales to
the Open Systems data storage market.
SIGNIFICANT BUSINESS DEVELOPMENTS
SALE OF PATENTS
Effective February 9, 1996, the Company entered into an agreement with EMC
Corporation ("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 $30,000 to be
received in six equal annual installments of $5,000 each, the first three of
which were received in February 1996, January 1997 and January 1998. The
remaining payments are to be received in each of the subsequent three years
beginning January 1999. The Company will also receive royalty payments in the
aggregate of up to a maximum of $30,000 over the term of the agreement, of which
a minimum of $10,000 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 two annual installments were received in March 1997 and March 1998. In
addition, the Company received an irrevocable, non-cancelable, perpetual and
royalty-free license to exploit, market and sell the technology protected under
the aforementioned patents.
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Pursuant to the terms and conditions of the agreement, this license will
terminate in the event of a change of control of the Company involving certain
identified acquirers. As part of the agreement, the Company and EMC granted to
each other the license to exploit, market and sell the technology associated
with each of their respective existing and future patents arising from any
patent applications in existence as of the effective date of the agreement for a
period of five years. See Note 10 of Notes to Consolidated Financial Statements.
NATIONAL PERIPHERALS, INC. ACQUISITION
Effective April 2, 1995, the Company acquired all the outstanding stock of
National Peripherals, Inc. ("NPI"), a privately held provider of cross-platform
RAID-based storage solutions for the Open Systems computing environment.
Consideration paid in the NPI acquisition included: (a) payments of $2,608 in
cash to NPI and its stockholders; (b) promissory notes in the aggregate amount
of $2,000 bearing 6% interest per annum and payable in two equal annual
installments beginning April 1996; (c) guaranteed earnout payments in the
aggregate amount of $3,000 and payable in three equal annual installments
beginning in April 1996; and (d) acquisition costs of $406. In addition, the
acquisition agreement provided for contingent payments of up to $1,000 payable
in April 1998 based on certain performance criteria. The Board of Directors
approved the payment of the contingent $1,000 payment during the fourth quarter
of fiscal year 1997. The accelerated timing of the payment was based on the
over-achievement of the performance criteria as set forth in the amended NPI
stock purchase agreement. As a result of the NPI acquisition, MTI increased its
presence in the Open Systems marketplace by adding approximately 18 salespeople
at the time of acquisition who were exclusively focused on Open Systems sales
opportunities. See Note 10 of Notes to Consolidated Financial Statements.
RAXCO, INC. ASSET ACQUISITION
In January 1995, the Company acquired certain assets of Raxco, Inc.
("Raxco"), including intellectual properties and source code rights of the UNIX
and Open VMS storage management software product lines of Raxco. Additionally,
as part of the acquisition, the Company acquired software development and
technical support teams located domestically and in the United Kingdom. The
Company also acquired access to the existing Raxco storage management software
and maintenance contract customer base.
Under the terms of the acquisition, Raxco received (a) $1,000 in cash, (b)
promissory notes in the aggregate amount of $2,500, bearing 8.5% interest and
payable in ten quarterly installments beginning March 31, 1995, and (c) the
assumption of certain liabilities in the amount of $1,903, consisting primarily
of deferred maintenance contracts. In addition, as part of the consideration
paid, the Company issued warrants to purchase 250,000 shares of the Company's
common stock with an exercise price of $6.00 per share.
On October 15, 1997, 161,830 shares of the Company's common stock were
issued to AXENT Technologies, Inc. (formerly Raxco), in exchange for the
surrender of warrants to purchase 250,000 shares of the Company's common stock
at a price of $6.00 per share. Pursuant to the terms of the warrants, in lieu of
exercising the warrants for cash, the holder elected to have withheld from the
number of shares otherwise deliverable, shares having a fair market value equal
to the aggregate warrant exercise price.
The Raxco and NPI acquisitions were part of the Company's strategy to
expand its product lines and increase revenue from the non-DEC marketplace. See
Note 10 of Notes to Consolidated Financial Statements.
PRODUCTS
The Company strives to meet its customers' storage management needs by
combining its products into a comprehensive, flexible storage solution. The
Company's goal is to enable customers to purchase a single, integrated storage
system, rather than multiple components requiring integration by the customer.
The Company's products include RAID storage subsystems, high performance storage
servers, disk and tape library systems, solid state disk database accelerators,
and data management software consisting of distributed network backup recovery,
HSM and media management products.
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Revenues from server products represented approximately 61%, 76% and 84% of
net product revenue in fiscal years 1998, 1997 and 1996, respectively. Revenues
from tape products represented approximately 31%, 19% and 11% of net product
revenue in fiscal years 1998, 1997 and 1996, respectively. Revenues from
software products represented approximately 8%, 5% and 5% of net product revenue
in fiscal years 1998, 1997 and 1996, respectively.
RAID Storage Subsystems
RAID storage subsystems provide increased protection and access to data. In
addressing the Open Systems market, the Company's RAID products include its
flagship Gladiator 3000 product line and its Gladiator 6000 product line, which
is based on the Company's own proprietary controller technology. These products
are utilized primarily within the Sun, HP, Silicon Graphics, IBM and Intel
computing platforms.
The Company also markets and sells its StorageWare RAID subsystems, a
proprietary product, focused on the DEC VMS market.
High Performance Storage Servers
MTI storage servers are special purpose computers that incorporate the
Company's proprietary imbedded RAID, fault tolerant and caching software in
order to manage the recording of data on, and retrieval of data from, a wide
variety of storage peripherals. The Company's high performance StingRay storage
servers are utilized primarily within the DEC computing platform.
Tape Library Systems
Tape library systems provide a lower cost, slower access method of
recording and retrieving large amounts of data, in comparison to magnetic disk
systems. Tape libraries are typically used for recording a secondary backup copy
of the data, thus providing extra data protection. The Company markets and sells
tape library systems that are utilized primarily within the Sun, HP, Silicon
Graphics, IBM, DEC and Intel computing platforms.
Application Software Products
The Company's data management application software has been specifically
developed and is employed for the direct support and management of stored data
and data storage devices. Certain of the Company's proprietary application
software products are set forth in the table below:
PRIMARY
COMPUTING
PRODUCT FUNCTION PLATFORM
------- -------- ---------
Oasis Robotic Library Provides automated backup DEC, HP, Sun, IBM, Intel
Manager and restoration of data in
a network environment
Backup.UNET Provides client/server HP, Sun, Silicon Graphics,
backup for cross-platform IBM, DEC, Intel
network environments
Oasis Net Backup Performs network backup DEC, Sun, IBM, HP, Intel
and provides recovery
capability utilizing the
client/server model
Tape Control Automates and manages data DEC
backup and retrieval
Autostor Migrates and archives DEC
expired data to multiple
hierarchies automatically
or upon user discretion
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In addition to its own proprietary software, the Company markets and sells
Legato's NetWorker, a comprehensive, cross-platform approach for enterprise-wide
solutions for network data protection and storage management.
SALES AND MARKETING
In the United States, the Company primarily markets and sells its products
directly to end users through its field sales organization and indirectly
through selected distributors. The Company's domestic sales organization
consists of 101 persons as of June 1, 1998, located in 19 sales offices in 16
states. This sales organization is supported by technical field support
personnel consisting of approximately 13 systems consultants as of June 1, 1998,
who provide consulting services and have experience in the management of complex
data and implementing distributed client server systems.
The Company markets its products internationally through its 47 person
field sales organization with 5 offices located in Germany, France, United
Kingdom and Ireland, and indirectly through independent distributors as of June
1, 1998. International sales represented 27% of the Company's total revenue in
fiscal years 1998, 1997 and 1996. See Note 9 of Notes to Consolidated Financial
Statements.
ORDER BACKLOG
The Company generally ships products within 30 days after receipt of a
purchase order. Historically, MTI has had relatively little backlog at any given
time and does not consider backlog to be a significant or important measure of
sales for any future period, and as a result, net product revenue in any quarter
is dependent on orders booked and products shipped during that quarter.
CUSTOMER SERVICE AND SUPPORT
The quality and reliability of the Company's products and the ongoing
support of these products are important elements of the Company's business. The
Company provides direct service for all of its products through a 176 person
service organization located in more than 40 service locations in the United
States and Europe as of June 1, 1998.
The Company currently offers a variety of customer services that include
system and software maintenance, consulting services, storage management
integration and training. The Company offers on-site service response within
four hours, 24 hours a day, seven days per week.
The Company provides its customers with a warranty against defects in the
Company's systems and software products for one year and 90 days, respectively.
Approximately 75% of the Company's customers have historically entered into
maintenance contracts with the Company for services during the second year of
product ownership. Customer service revenue represented approximately 18%, 22%
and 26% of the Company's total revenue in fiscal years 1998, 1997 and 1996,
respectively.
PRODUCT DEVELOPMENT
The computer industry is characterized by rapid technological change and is
highly competitive with respect to product innovation and introduction.
To develop the many different technologies that support MTI's product
development strategy, the Company has assembled several engineering teams with
complementary expertise consisting of approximately 67 persons as of June 1,
1998. During fiscal years 1998, 1997 and 1996, the Company's research and
development spending was approximately $12,500, $10,100 and $14,400,
respectively.
The Company has three separate primary product development centers: one is
located at its corporate headquarters in Anaheim, California, a second, the RAID
Technology Center, is located in Sunnyvale, California and a third is located in
Westmont, Illinois.
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MANUFACTURING
The Company's manufacturing operations are primarily located at its Anaheim
facility, with an additional facility located in Dublin, Ireland. The Ireland
facility manufactures over 90% of certain high-end product lines sold by the
Company in Europe. Manufacturing operations consist primarily of final systems
integration and reliability testing and rely principally on outside production
companies for the fabrication and assembly of circuit boards. These outside
production companies contract with the Company to produce and assemble products
in accordance with the Company's specifications. This "turnkey" approach to
product manufacturing reduces the Company's capital and employee requirements
and allows it to adopt manufacturing technologies as they emerge.
The principal components used in the Company's products include circuit
boards, drives and chassis. The Company procures all of its parts from outside
suppliers and has established manufacturing relationships with a number of key
suppliers, primarily of disk drives, tape and tape library systems. The Company
generally utilizes parts and components available from multiple vendors.
However, components critical to the current design of the Company's 9000 and
3000 series of products, a RAID controller board manufactured by Mylex
Corporation, is available to the Company only from this source. To date, the
Company has been able to obtain supplies of these parts and believes that
adequate quantities are available to meet its needs. Disruptions in supply or
material increases in the cost of these components would have an adverse effect
on the Company's operations.
COMPETITION
The market for the Company's products is extremely competitive. The Company
has a number of competitors in various markets, including EMC, HP, Sun, IBM,
Silicon Graphics, Compaq and DEC, each of which has substantially greater name
recognition, engineering, manufacturing and marketing capabilities, and greater
financial and personnel resources than the Company. The Company expects to
experience increased competition from established and emerging computer storage
hardware and management software companies, particularly DEC, HP, Sun, IBM,
Silicon Graphics, Compaq and EMC.
The principal elements of competition in the Company's markets include
rapid introduction of new technology, product quality and reliability, price and
performance characteristics, service and support, and responsiveness to
customers. The Company believes that, in general, it competes favorably with
respect to these factors. However, there can be no assurance that the Company
will be able to compete successfully or that competition will not have a
material adverse effect on the Company's results of operations.
PROPRIETARY RIGHTS
The Company relies on a combination of patent, copyright, trademark and
trade secret laws, employee and third-party non-disclosure agreements and
technical measures to protect its proprietary rights in its products. Although
the Company continues to take appropriate measures to protect its proprietary
rights, there can be no assurance that these measures will be successful. In
addition, the laws of certain foreign countries may not protect the Company's
intellectual property to the same extent as the laws of the United States.
Effective February 9, 1996, the Company entered into an agreement with EMC
whereby the Company sold to EMC substantially all of the Company's then existing
patents, patent applications, and rights thereof. The Company has an
irrevocable, non-cancelable, perpetual and royalty-free license to exploit,
market and sell the technology protected under the aforementioned patents.
Pursuant to the terms and conditions of the agreement, this license will
terminate in the event of a change of control of the Company involving certain
identified acquirers. As part of the agreement, the Company and EMC grant to
each other the license to exploit, market and sell the technology associated
with each of their respective existing and future patents arising from any
patent applications in existence as of the effective date of the agreement for a
period of five years.
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Although the Company often seeks patents on its products, the Company
believes that patents are of less significance in its industry than such factors
as innovative skills and technical expertise, frequency of product enhancements
and timeliness and quality of support services provided by the Company.
EMPLOYEES
As of June 1, 1998, the Company had approximately 562 full-time employees
worldwide, including 329 in marketing, sales and service support, 104 in
manufacturing and quality assurance, 67 in engineering and research and
development and 62 in general administration and finance.
None of the Company's employees is represented by a labor union, and the
Company considers its relations with its employees to be good.
ITEM 2. DESCRIPTION OF PROPERTY:
The Company's corporate offices, including marketing, sales and support,
manufacturing, research and development, and general administration and finance
functions, are located in Anaheim, California, in a leased facility consisting
of approximately 131,000 square feet. These premises are occupied under a lease
agreement that expires in January 2003. The Company also has a 21,700 square
foot facility located in Sunnyvale under a lease agreement that expires in July
2006. The Company has an 11,000 square foot facility in Dublin, Ireland where it
performs assembly and testing on a limited number of products, with the lease
expiring in 2016. In addition, the Company has a 14,300 square foot facility in
Westmont, Illinois, used for sales and sales technical support under a lease
expiring in June 1999. The Company believes that its existing facilities are
adequate to meet its requirements for at least the next twelve months.
The Company also leases approximately 20 sales and support offices located
in the U.S. and Europe.
ITEM 3. LEGAL PROCEEDINGS:
The Company is from time to time subject to claims and suits arising in the
ordinary course of business. In the opinion of management, the ultimate
resolution of these matters will not have a material adverse effect on the
Company's financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
No matters were submitted to a vote of the security holders of the Company
during the fourth quarter of 1998.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the names and ages of all executive officers
of the Registrant as of June 22, 1998. A summary of the background and
experience of each of these individuals is set forth below.
NAME AGE POSITION(S)
---- --- -----------
Earl M. Pearlman 54 President and Chief Executive Officer
Dale R. Boyd 40 Senior Vice President, Finance and Administration, and
Chief Financial Officer
Charles J. Sitzman 50 Senior Vice President, Customer Service
Thomas P. Raimondi 40 Senior Vice President, General Manager
Gary M. Scott 42 Senior Vice President, European Operations
Venki Venkataraman 49 Senior Vice President, Manufacturing
Patrick Conroy 33 Vice President, Engineering, and Chief Technology
Officer
Frank H. Yoshino 36 Treasurer
Stephanie M. Braun 33 Corporate Controller, Chief Accounting Officer
Earl Pearlman was named President and Chief Executive Officer of the
Company in April 1996. From April 1995 to March 1996, Mr. Pearlman was Vice
President, U.S. Sales for the Company. Prior to joining the
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Company, Mr. Pearlman was the President and Chief Executive Officer of National
Peripherals, Inc., a supplier of cross-platform RAID-based storage products,
which he founded in 1980, acquired by the Company in 1995.
Dale R. Boyd was named Senior Vice President, Finance and Administration in
June 1998 and has served as the Chief Financial Officer of the Company since
April 1996. Mr. Boyd joined the Company in February 1995 as Corporate Controller
and was elected as Chief Accounting Officer the same month. Prior to joining the
Company, Mr. Boyd was Corporate Controller of Emulex Corporation, a manufacturer
of software and hardware-based networking products, from May 1992 to January
1995.
Charles J. Sitzman joined the Company in August 1997 as Senior Vice
President, Customer Service. Prior to joining the Company, Mr. Sitzman served in
several capacities for Decision One from October 1995 to August 1997. His most
recent position with Decision One was as Vice President of Sales. Prior to this,
Mr. Sitzman served as Vice President of Sales for Bell Atlantic.
Thomas P. Raimondi has been Senior Vice President and General Manager of
the Company since May 1996. Mr. Raimondi had been Vice President, Strategic
Planning, Product Marketing, and Director of Marketing of the Company since
1987. Prior to joining the Company, Mr. Raimondi served as Sales Manager for
System Industries, Inc. for seven years.
Gary M. Scott has been Senior Vice President, European Operations, of the
Company since October 1992. Mr. Scott had been Vice President, European
Operations, for the Company starting in 1988. Prior to joining MTI, Mr. Scott
served as General Manager of the German subsidiary of System Industries, Inc.
Venki Venkataraman was named Senior Vice President, Manufacturing in June
1998. Mr. Venkataraman served as Vice President, Operations from April 1996 to
June 1998. Prior to joining the Company, Mr. Venkataraman served in several
capacities for The Foxboro Company, a division of Siebe PLC, from 1988 to 1996.
His most recent position with Foxboro was as Manager of Product Development for
the systems products division, a post he held for two years.
Patrick Conroy was named Senior Vice President, Engineering, and Chief
Technology Officer in April 1998. He joined the Company in April 1995, and has
served as Vice President of Open Systems Engineering. Prior to joining the
Company, Mr. Conroy served in various capacities including Engineering Director
for National Peripherals, Inc. from January 1989 to April 1995. Mr. Conroy holds
a BS in Computer Engineering and an MS in Computer Science, both from the
University of Illinois at Urbania-Champaign, and a Master of Management degree
from Northwestern University.
Frank H. Yoshino has been Treasurer of the Company since July 1996. Prior
to joining the Company, Mr. Yoshino was Treasury Director of Emulex Corporation
from March 1992 to July 1996. Prior to this time, Mr. Yoshino served as Senior
Financial Analyst for Ashton-Tate.
Stephanie M. Braun has been Corporate Controller since July 1997 and was
elected Chief Accounting Officer in October 1997. Ms. Braun served as Director
of General Accounting from July 1996 to June 1997 and as Accounting Manager from
June 1994 to June 1996. Prior to joining the Company, Ms. Braun was Financial
Analyst Supervisor for a division of ITT Cannon from June 1991 to June 1994.
PART II
ITEM 5.MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS:
PRINCIPAL MARKET AND PRICES
The Company's common stock commenced trading on The Nasdaq National Market
under the symbol "MTIC" on April 7, 1994. From September 3, 1996, to February
25, 1998, the Company's common stock traded on The Nasdaq SmallCap Market.
Effective February 25, 1998, the Company's common stock resumed trading on The
Nasdaq National Market. The following table sets forth the range of high and low
sales prices per share of common stock of the Company for each quarterly period
as reported on The Nasdaq
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National Market and The Nasdaq SmallCap Market for the periods indicated. The
price of MTI's common stock at the close of business on June 22, 1998 was
$9.0625.
SALES PRICES
--------------------
HIGH LOW
-------- --------
Fiscal Year 1997
First Quarter $ 3.2500 $ 1.4375
Second Quarter 2.6250 1.6875
Third Quarter 3.7500 1.9375
Fourth Quarter 4.5000 3.2500
Fiscal Year 1998
First Quarter 5.1250 3.6875
Second Quarter 15.7500 4.3125
Third Quarter 17.8750 9.2500
Fourth Quarter 17.3750 11.0000
NUMBER OF COMMON STOCKHOLDERS
The approximate number of record holders of common stock of the Company as
of June 22, 1998 was 262.
DIVIDENDS
MTI has never declared or paid dividends. The Company presently intends to
retain earnings for use in its business and, therefore, does not anticipate
declaring or paying any cash dividends in the foreseeable future. In addition,
the terms of the Company's bank line of credit prohibits the declaration or
payment of any cash dividends by the Company.
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ITEM 6. SELECTED FINANCIAL DATA:
FISCAL YEAR ENDED
-------------------------------------------------------
APRIL 4, APRIL 5, APRIL 6, APRIL 1, APRIL 2,
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
SELECTED STATEMENT OF OPERATIONS DATA:
Net product revenue.................... $163,707 $120,359 $ 97,682 $ 91,140 $ 95,401
Service revenue........................ 36,304 33,368 34,232 36,177 28,067
-------- -------- -------- -------- --------
Total revenue........................ 200,011 153,727 131,914 127,317 123,468
Product gross profit................... 56,747 36,752 23,625(1) 19,058(6) 38,778
Service gross profit................... 14,262 13,172 12,070(2) 12,587(7) 10,969
-------- -------- -------- -------- --------
Gross profit......................... 71,009 49,924 35,695 31,645 49,747
Operating expenses:
Selling, general and
administrative.................... 41,055 34,936 65,715(3) 39,812(8) 33,256
Research and development............. 12,475 10,103 14,384 12,825(9) 11,451
-------- -------- -------- -------- --------
Total operating expenses............. 53,530 45,039 80,099(4) 52,637 44,707
-------- -------- -------- -------- --------
Operating income (loss).............. 17,479 4,885 (44,404) (20,992) 5,040
Other income (expense), net............ 2,557 1,483 (4,636)(5) (1,008) (1,161)
Income tax expense..................... 2,020 664 179 3,540 980
-------- -------- -------- -------- --------
Net income (loss).................... $ 18,016 $ 5,704 $(49,219) $(25,540) $ 2,899
======== ======== ======== ======== ========
Income (loss) per share(10):
Basic................................ $ 0.68 $ 0.22 $ (2.54) $ (1.34) $ 0.20
======== ======== ======== ======== ========
Diluted.............................. $ 0.62 $ 0.22 $ (2.54) $ (1.34) $ 0.18
======== ======== ======== ======== ========
Weighted average shares used in per
share computation:
Basic................................ 26,674 25,638 19,400 19,029 14,471
======== ======== ======== ======== ========
Diluted.............................. 29,112 26,437 19,400 19,029 15,925
======== ======== ======== ======== ========
APRIL 4, APRIL 5, APRIL 6, APRIL 1, APRIL 2,
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
SELECTED BALANCE SHEET DATA:
Cash and cash equivalents.............. $ 7,768 $ 3,487 $ 4,055 $ 5,562 $ 3,976
Working capital (deficit).............. 16,711 (12,267) (25,966) 17,641 4,955
Total assets........................... 105,091 83,592 84,023 102,451 110,354
Long-term debt, less current
maturities........................... -- 6 5,966 6,927 1,231
Total stockholders' equity
(deficiency)......................... 42,146 16,377 (187) 49,138 40,195
- ---------------
NOTES:
(1) Includes a charge of $2,056 to increase excess and obsolete reserves on
certain slower-moving or obsolete product inventories that support the DEC
market. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
(2) Includes a charge of $504 to write-down to estimated net realizable value
certain field service spares inventories that support the DEC market. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
(3) Includes a charge of $16,591 to write-down goodwill and a $2,088 charge for
settlement of a shareholder lawsuit and related legal costs. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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(4) Includes a charge of $1,777 for restructuring and severance costs, a charge
of $655 to write-off certain idle fixed assets and a charge of $1,855 for
sales and use tax liability. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
(5) Includes a fourth quarter charge of $1,450 for interest and penalties
related to sales and use tax liability. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
(6) Includes a charge of $7,209 to write-down slower-moving product inventories
associated with a discontinued product line and to reserve against
increased obsolescence of certain inventories that support the DEC market.
(7) Includes a charge of $3,297 to write-down to estimated net realizable value
certain field service spares inventories that support the DEC market.
(8) Includes a charge of $1,355 to write-down certain idle fixed assets and
goodwill.
(9) Includes a charge of $564 to write-down certain idle fixed assets.
(10) The Company implemented Statement of Financial Accounting Standards No.
128, "Earnings per Share," in fiscal 1998 and has restated all prior
periods to conform to the current presentation.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS:
Certain statements set forth below constitute "forward-looking statements"
involving known and unknown risks, uncertainties and other factors that may
cause the actual results, performance or achievements of the Company, or
industry results, to be materially different from any future results,
performance or achievements, expressed or implied, by such forward looking
statements, including statements about the Company's dependence on new products,
management of growth, competition, international sales, dependence on suppliers
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. See "Risk Factors." This discussion and analysis
should be read in conjunction with the Consolidated Financial Statements of the
Company and Notes thereto contained elsewhere in this report.
OVERVIEW
MTI's historic revenues have been achieved through introductions of new or
updated products, expansion of the Company's international operations, and
through acquisitions. The Company has attempted to increase its focus on
expanding its product and service offerings for the Open Systems computing
environment and decrease its historic dependence on sales and service from
Digital Equipment Corporation ("DEC") computing environment. Product revenue
from the Open Systems marketplace (as compared to DEC) increased from
approximately 21% for fiscal year 1995, to approximately 92% for fiscal year
1998, reflecting the Company's commitment to its strategy of expanding the
revenue contribution from sales to the Open Systems data storage market.
Effective April 2, 1995, the Company acquired National Peripherals, Inc.
("NPI"), a privately-held provider of cross-platform RAID based storage
solutions for the Open Systems computing environment. Consideration paid in the
NPI acquisition included: (a) payments of $2.6 million in cash to NPI and its
stockholders; (b) promissory notes in the aggregate amount of $2.0 million
bearing 6% interest per annum and payable in two equal annual installments
beginning April 1996; (c) guaranteed earnout payments in the aggregate amount of
$3.0 million and payable in three equal annual installments beginning in April
1996; and (d) acquisition costs of $0.4 million. In addition, the acquisition
agreement provides for contingent payments of up to $1.0 million payable in
April 1998 based on certain performance criteria. The Board of Directors
approved the payment of the contingent $1.0 million payment during the fourth
quarter of fiscal year 1997. The accelerated timing of the payment was based on
the over-achievement of the performance criteria as set forth in the amended NPI
stock purchase agreement. As a result of the NPI acquisition, MTI increased its
presence in the Open Systems marketplace by adding approximately 18 salespeople
at the time of acquisition who were exclusively focused on Open Systems sales
opportunities.
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In January 1995, the Company acquired certain assets, including
intellectual properties and source code rights, of the UNIX and Open VMS storage
management software product lines of Raxco, Inc. ("Raxco"). The purchase price
of the acquired assets consisted of $1.0 million in cash, notes in the amount of
$2.5 million, assumption of $1.9 million of certain liabilities, primarily
deferred service maintenance contracts, and the issuance of warrants to purchase
250,000 shares of the Company's common stock at a price of $6.00 per share. As
part of the transaction the Company also acquired software development and
technical support teams located domestically and in the United Kingdom. In
addition, the Company acquired access to the existing Raxco storage management
software customer base. In connection with the acquisition, the Company recorded
an accrual of $0.8 million to reflect the anticipated costs related to the
closure of excess facilities in the United Kingdom and the estimated costs to
satisfy certain preexisting product development obligations. In the fourth
quarter of fiscal year 1996, the Company recorded an additional $0.3 million
associated with the Company's satisfaction of the preexisting product
development obligations.
The NPI and Raxco acquisitions are part of the Company's strategy to expand
its product lines and increase revenue from the non-DEC marketplace. See Note 10
of Notes to Consolidated Financial Statements.
Effective April 7, 1996, the Company entered into an agreement with NFT
Ventures, Inc. ("NFT"), an entity affiliated with the Company's major
stockholder and Chairman of the Board, whereby NFT agreed to provide the Company
with up to $2.4 million of non-refundable research and development funding based
on actual research and development expenses incurred in connection with new and
enhanced Backup-UNET software products, the RLM Software Products Group and the
Open Media Products Group. The Company received $1.6 million under this
agreement in fiscal year 1997. The consideration NFT received for the funding
commitment included: (a) an irrevocable, worldwide, nonexclusive license to
develop, market and sell certain defined new or substantially enhanced software
products developed by the Company; (b) the right to royalty payments based on
the revenue recognized by the Company from sale of the defined software products
that are sold within four years of the effective date of the agreement; and (c)
a warrant to purchase up to 750,000 shares of the Company's common stock with an
exercise price of $2.25 per share. Based on the total of $1.6 million of NRE
funding received, a warrant to purchase up to 508,824 shares of the Company's
common stock was issued. On October 21, 1997, the warrant to purchase 508,824
shares of the Company's common stock was exercised in full.
Effective February 9, 1996, the Company entered into an agreement with EMC
Corporation ("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 include $30.0 million to
be received in six equal annual installments of $5.0 million each, the first
three of which were received in February 1996, January 1997 and January 1998.
The remaining payments are to be received in each of the subsequent three years
beginning January 1999. 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, of
which a minimum 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 two annual installments were received in March 1997 and March 1998. In
addition, the Company received an irrevocable, non-cancelable, perpetual and
royalty-free license to exploit, market and sell the technology protected under
the aforementioned patents. Pursuant to the terms and conditions of the
agreement, this license will terminate in the event of a change in control of
the Company involving certain acquirers. As part of the agreement, the Company
and EMC granted to each other the license to exploit, market and sell the
technology associated with each of their respective existing and future patents
arising from any patent applications in existence as of the effective date of
the agreement for a period of five years.
The Company's primary reasons for entering into this agreement with EMC
were to realize a guaranteed minimum return on its historical research and
development investment, and to do so in such a manner as to provide the Company
with a predictable stream of both revenue and cash over several years. Pursuant
to the terms and conditions of this agreement, the Company will record a
quarterly benefit to income of $1.8 million, and will receive a minimum of $7.0
million cash on an annual basis, which includes $2.0 million of royalty payments
and $5.0 million from the sale of patents and associated rights.
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RESULTS OF OPERATIONS
The following table sets forth selected items from the Consolidated
Statements of Operations as a percentage of total 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 Selected Financial Data and Consolidated Financial
Statements included elsewhere herein:
FISCAL YEAR ENDED
--------------------------------
APRIL 4, APRIL 5, APRIL 6,
1998 1997 1996
-------- -------- --------
Net product revenue....................................... 81.8% 78.3% 74.0%
Service revenue........................................... 18.2 21.7 26.0
----- ----- -----
Total revenue........................................ 100.0 100.0 100.0
Product gross profit...................................... 34.7 30.5 24.2
Service gross profit...................................... 39.3 39.5 35.3
----- ----- -----
Gross profit......................................... 35.5 32.5 27.0
Selling, general and administrative....................... 20.6 22.7 49.8
Research and development.................................. 6.2 6.6 10.9
----- ----- -----
Operating income (loss).............................. 8.8 3.2 (33.7)
Other income (expense), net............................... 1.3 1.0 (3.5)
Income tax expense........................................ 1.0 0.5 0.1
----- ----- -----
Net income (loss).................................... 9.1% 3.7% (37.3)%
===== ===== =====
Net Product Revenue: Net product revenue in fiscal year 1998 increased
$43.3 million, or 36%, over fiscal year 1997. This increase was primarily due to
increased revenue of $27.5 million from optical/tape products, primarily the
mid-range 1500 series of automated DLT tape libraries. In addition, software
revenue and server revenue increased $6.8 million and $9.0 million,
respectively, over fiscal year 1997.
Net product revenue in fiscal year 1997 increased $22.7 million, or 23%,
over fiscal year 1996. This increase was primarily due to increased revenue of
$12.3 million from optical/tape products, primarily the mid-range 1500 series of
automated DLT tape libraries. In addition, software revenue and server revenue
increased $1.4 million and $10.6 million, respectively, over fiscal year 1996.
These increases were partially offset by decreased sales of $1.6 million to
Boeing Information Services, Inc. relating to Boeing's RCAS contract with the
federal government.
Service Revenue: Service revenue was $36.3 million for fiscal year 1998, an
increase of $2.9 million, or 9%, from the prior year. The increase is primarily
due to increased volume of service contracts primarily as a result of increased
product sales volume over the past two years.
Service revenue was $33.4 million for fiscal year 1997, a decrease of $0.9
million, or 3%, from the prior year. This decrease was primarily due to fewer
post-warranty service contracts sold as a result of lower product revenues from
the DEC market from the same period of the prior fiscal year.
Product Gross Profit: Product gross profit was $56.7 million for fiscal
year 1998, an increase of $20.0 million, or 54%, over fiscal year 1997, and the
gross profit percentage of net product sales was 35% for fiscal year 1998 as
compared to 31% for fiscal year 1997. The increase in gross profit percentage
was primarily due to increased operating efficiencies in the manufacturing
process as a result of continued improved inventory management and increased
product throughput.
Product gross profit was $36.8 million for fiscal year 1997, an increase of
$13.2 million, or 56%, over fiscal year 1996, and the gross profit percentage of
net product sales was 31% for fiscal year 1997 as compared to 24% for fiscal
year 1996. Cost of goods sold for product revenue included a charge of $2.1
million recorded in
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the fourth quarter of fiscal year 1996 to increase reserves on slower-moving and
obsolete product inventories primarily related to the DEC market. Before the
impact of this charge, product gross profit would have been $25.7 million for
fiscal year 1996, and the gross profit percentage of net product sales would
have been 26%. The increase in gross profit percentage, excluding the fourth
quarter of fiscal year 1996 charges, was primarily due to increased operating
efficiencies in the manufacturing process as a result of improved inventory
management and increased product throughput, and resulted in increased gross
profit of approximately $9.6 million. In addition, there was increased royalty
revenue recorded in fiscal year 1997 of $1.5 million related to the February
1996 sale to EMC of substantially all of the Company's existing patents, patent
applications and rights thereunder.
Service Gross Profit: Service gross profit for fiscal year 1998 increased
$1.1 million, or 8%, over fiscal year 1997. The gross profit percentage for
service revenue was 39% in fiscal year 1998 as compared to 40% for fiscal year
1997.
Service gross profit for fiscal year 1997 increased $1.1 million, or 9%,
over fiscal year 1996. The gross profit percentage for service revenue was 40%
in fiscal year 1997 as compared to 35% for fiscal year 1996. Cost of goods sold
for service revenue included a charge of $0.5 million recorded in the fourth
quarter of fiscal year 1996 to record the write-down of field service spares
inventory to net realizable value. Before the impact of this charge, service
gross profit would have been $3.3 million for fiscal year 1996, and the gross
profit percentage of net service revenue would have been 37%. The increase in
gross profit percentage, excluding the fourth quarter of fiscal year 1996
charge, was primarily due to reduced costs as a result of restructuring
activities begun in the fourth quarter of fiscal year 1996 and completed in the
first quarter of fiscal year 1997.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses in fiscal year 1998 increased $6.1 million, or 18%, from
fiscal year 1997, although as a percentage of revenue, selling, general and
administrative expense decreased to 21% for fiscal year 1998 from 23% in fiscal
year 1997. This increase in dollars was primarily due to increased
compensation-related costs resulting from increased staff and increased
revenues.
Selling, general and administrative expenses in fiscal year 1997 decreased
$30.8 million, or 47%, from fiscal year 1996. This decrease is substantially due
to charges recorded in the fourth quarter of fiscal year 1996. In the fourth
quarter of fiscal year 1996, the Company recorded a $14.2 million charge to
write-off the remaining unamortized intangible assets related to the SI
acquisition and recorded a $2.3 million charge to write-off the remaining
unamortized goodwill associated with the acquisition of SCR Technologies. These
charges were based on management's evaluation in the fourth quarter of the
recoverability of the acquired net assets. Additionally, the Company accrued
$2.1 million in the fourth quarter of fiscal year 1996 for the settlement of a
shareholder lawsuit and related legal costs, a $1.0 million charge for sales and
use tax liability and $1.5 million for restructuring activities. In addition,
payroll and related expenses decreased approximately $3.2 million as a result of
restructuring actions begun in the fourth quarter of fiscal year 1996 and
completed in the first quarter of fiscal year 1997, goodwill amortization
decreased $2.2 million due to the write-off of goodwill in the fourth quarter of
fiscal year 1996, depreciation expense decreased $1.0 million due to the write-
off of certain assets in the fourth quarter of fiscal year 1996, travel
expenses, supplies and services decreased $0.8 million due to the restructuring
actions noted above, legal expense decreased $0.8 million, primarily as a result
of the settlement of shareholder litigation, and other expense categories
decreased $1.7 million.
Research and Development Expenses: Research and development expenses in
fiscal year 1998 increased $2.4 million, or 23%, from fiscal year 1997. The
increase was primarily due to non-refundable research and development funding
received from NFT in fiscal year 1997 of $1.6 million, increased project costs
of $0.6 million and an increase in other expenses of $0.2 million.
Research and development expenses in fiscal year 1997 decreased $4.3
million, or 30%, from fiscal year 1996. The decrease was primarily due to
reduced payroll and related expenses of approximately $1.3 million as a result
of restructuring actions begun in the fourth quarter of fiscal year 1996 and
completed in the first quarter of fiscal year 1997, and non-refundable research
and development funding received from NFT in fiscal year 1997, of $1.6 million.
Additionally, in the fourth quarter of fiscal year 1996, the Company took a
charge of $0.9 million for sales and use tax liability and a charge of $0.5
million to write-off certain idle fixed assets.
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Other Income (Expense), Net: Other income, net in fiscal year 1998
increased $1.1 million, or 72%, over fiscal year 1997. This increase was
primarily due to reduced interest expense in fiscal year 1998 as compared to the
prior year as a result of decreased credit line balances and debt repayment.
Other income, net in fiscal year 1997 increased $6.1 million, or 132%, over
fiscal year 1996. This increase was primarily due to an additional $3.8 million
of income recognized on the sale of substantially all of the Company's existing
patents, patent applications and rights thereof to EMC in February 1996.
Additionally, other expense decreased due to charges recorded in fiscal year
1996 of $2.3 million related to a sales and use tax liability, including
interest.
Income Taxes: The Company recorded a net tax expense of $2.0 million for
fiscal year 1998, as compared to $0.7 million in fiscal year 1997. This increase
was primarily a result of increased income for fiscal year 1998 as compared to
fiscal year 1997. See Note 6 of Notes to Consolidated Financial Statements.
The Company recorded a net tax expense of $0.7 million for fiscal year
1997, as compared to an expense of $0.2 million in fiscal year 1996. This
increase was primarily a result of income before income taxes for fiscal year
1997 as compared to a loss before income taxes for fiscal year 1996. See Note 6
of Notes to Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
During fiscal years 1998 and 1997, the Company has financed its capital
requirements principally through cash provided by operations. Prior to fiscal
year 1997, the Company had financed its capital requirements principally through
public and private equity financing and bank borrowings, including approximately
$15.2 million of net bank borrowings in fiscal year 1996, $10.0 million of
private equity funding in fiscal year 1996, and approximately $36.6 million in
equity funding for fiscal year 1995 (of which $19.5 million was used to pay down
existing debt at the time of the Company's initial public offering). The Company
had cash and cash equivalents of $7.8 million at April 4, 1998.
Cash and cash equivalents increased $4.3 million at April 4, 1998, as
compared with the prior fiscal year-end. Net operating activities provided cash
of $19.1 million in fiscal year 1998, primarily due to $31.2 million of net
income adjusted for non-cash items and an increase in accounts payable of $5.9
million resulting primarily from increased inventories, partially offset by a
$13.6 million increase in accounts receivable and increased inventories of $6.5
million, primarily due to increased volume resulting from increased revenue.
Cash and cash equivalents decreased $0.6 million at April 5, 1997, as
compared with the prior fiscal year-end. Net operating activities provided cash
of $6.3 million in fiscal year 1997, primarily due to $17.0 million of operating
losses adjusted for non-cash items, partially offset by an $11.0 million
increase in accounts receivable, primarily due to increased volume resulting
from increased revenue.
The Company's investing activities during these periods included
acquisitions and capital expenditures to support research and development, sales
and operations. Effective April 2, 1995, the Company acquired all the
outstanding stock of NPI. As part of the acquisition the Company paid $2.6
million in cash to NPI, issued notes in the aggregate amount of $2.0 million
payable in two equal annual installments beginning April 1, 1996 and guaranteed
earnout payments in the aggregate amount of $3.0 million payable in three equal
annual installments beginning in April 1996. In addition, the acquisition
agreement provided for contingent payments of up to $1.0 million payable in
April 1998. The Board of Directors approved the payment of the contingent $1.0
million payment during the fourth quarter of fiscal year 1997. The accelerated
timing of the payment was based on the over-achievement of the performance
criteria as set forth in the amended NPI stock purchase agreement. In fiscal
year 1995, the Company acquired certain assets and assumed certain liabilities
of Raxco. As part of the acquisition, the Company paid $1.0 million in cash to
Raxco, and issued notes payable in the total principal amount of $2.5 million,
to be paid in ten quarterly installments beginning in April 1995. During fiscal
year 1993, the Company incurred and accrued non-recurring charges relating to
the DEC settlement and the Lexcel restructuring totaling $10.1 million. The cash
outlays relating to these charges amounted to $0.5 million in fiscal year 1998
and $1.0 million each in fiscal years 1997, 1996, 1995 and 1994. See Note 10 of
Notes to Consolidated Financial Statements.
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At April 4, 1998, the Company's days sales outstanding were 80 days, as
compared to 76 days at April 5, 1997. 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 fiscal year
1998 than the percentage of sales occurring within the last month of fiscal year
1997.
Effective June 12, 1997, the Company entered into an agreement with
Greyrock Business Credit whereby under an asset secured domestic line of credit,
the Company may borrow up to $30.0 million limited by the value of pledged
collateral. As part of the agreement, Silicon Valley Bank has a participation
interest. The agreement allows the Company to borrow at a blended rate of prime
rate plus 1.67%. The initial term of the agreement is for one year and
automatically and continuously renews for a subsequent year, unless terminated
by either party per the agreement. At April 4, 1998, borrowings outstanding were
$7.9 million under this agreement. At June 22, 1998, the outstanding balance
under this line was approximately $8.4 million.
The above referenced agreement replaced an existing agreement entered into
in March 1995, whereby the Company had available asset secured bank lines of
credit of up to $20.0 million, limited by the value of the pledged collateral
which consists of the Company's accounts receivable and inventories. In May
1996, the agreement was amended to increase the line of credit to $30.0 million
as a result of a collateralized guarantee made to the bank by an affiliate of
NFT, an entity affiliated with the Company's major stockholder and Chairman of
the Board. At April 5, 1997, borrowings outstanding were $22.1 million under
this agreement. This line replaced an existing agreement with two separate banks
whereby the Company had an asset-secured line of credit of up to $12.0 million.
On July 19, 1995, the Company entered into an agreement whereby it received
a loan of approximately $10.0 million from an entity affiliated with the
Company's major stockholder and Chairman of the Board. Pursuant to the terms of
the agreement, the Company issued a long-term subordinated note to the lender
which was convertible into common stock of the Company at a price per common
share equal to the fair market value of such stock on the date of the
conversion. On April 11, 1996, the lender exercised its right to convert the
current principal and accrued interest outstanding thereunder of $10.1 million
into common stock of the Company. See Notes 5 and 11 of Notes to Consolidated
Financial Statements.
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 include: (a) $30.0 million to be received in six
equal annual installments of $5.0 million each, the first three of which were
received in February 1996, January 1997 and January 1998. The remaining payments
are to be received in each of the subsequent three years beginning January 1999
and; (b) royalty payments in the aggregate of up to a maximum of $30.0 million
over the term of the agreement, of which a minimum 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 two annual installments were
received in March 1997 and March 1998.
Effective April 7, 1996, the Company entered into an agreement with NFT
whereby NFT was to provide the Company with up to $2.4 million of non-refundable
research and development funding based on actual research and development
expenses incurred in connection with new and enhanced Backup-UNET software
products, RLM Software Products Group, and the Open Media Products Group. The
Company received $1.6 million in fiscal year 1997 under this agreement.
Management believes that the Company's working capital, bank lines of
credit and cash flow from operating activities will be sufficient to meet the
Company's operating and capital expenditure requirements for 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, will be on terms favorable to the Company.
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INFLATION AND FOREIGN CURRENCY EXCHANGE
Inflation and foreign currency exchange rate fluctuations have not had a
material impact on the Company's results of operations in the past. There can be
no assurance, however, that they will not have a material adverse effect on the
Company's results of operations in future periods.
UPGRADE OF EXISTING COMPUTER INFRASTRUCTURE; YEAR 2000 ISSUE
The Company is in the process of upgrading its existing computer
infrastructure and replacing all of its manufacturing, accounting, customer
service and other management information software with an enterprise-wide
business system which is Year 2000 compliant. Although the Company expects that
the new computer hardware and enterprise-wide business system will be installed
by the end of fiscal year 1999, there can be no assurance that the Company will
be able to achieve this installation on time. Further, the Company has never
undertaken such a significant modification to its information management systems
and, accordingly, there can be no assurance that the Company will not experience
significant delays and/or compatibility issues in the installation and testing
of the enterprise-wide business system. The new enterprise-wide business system
will also require extensive training across all departments. Any delays or
significant issues with respect to installation or training could materially
adversely effect the Company's results of operation.
In addition, the Company has implemented a review program to address Year
2000 issues as they relate to the Company's software products sold to third
parties and the Company's key suppliers. The Company expects Year 2000
compliance during fiscal year 1999 and does not expect the cost to achieve
compliance to be material to the Company. Any delay by the Company or third
parties in achieving Year 2000 compliance could materially adversely effect the
Company's results of operations.
NEW ACCOUNTING STANDARDS
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130 and 131, "Reporting Comprehensive Income" ("Statement 130") and
"Disclosure about Segments of an Enterprise and Related Information" ("Statement
131"), respectively (collectively, the "Statements"). The Statements are
effective for fiscal years beginning after December 15, 1997. Statement 130
establishes standards for reporting of comprehensive income and its components
in annual financial statements. Statement 131 establishes standards for
reporting financial and descriptive information about an enterprise's operating
segments in its annual financial statements and selected segment information in
interim financial reports. Reclassification or restatement of comparative
financial statements or financial information for earlier periods is required
upon adoption of Statement 130 and Statement 131, respectively. Application of
the Statements' requirements is not expected to have a material impact on the
Company's consolidated financial position, results of operations or net income
(loss) per share data as currently reported.
In October 1997, the American Institute of Certified Public Accountants
("AICPA") released Statement of Position ("SOP") 97-2, "Software Revenue
Recognition." Among other things, SOP 97-2 eliminates the distinction between
significant and insignificant vendor obligations promulgated by SOP 91-1 and
requires each element of a software arrangement to meet certain criteria in
order to recognize revenue allocated to that element. Additionally, SOP 97-2
requires that total fees under an arrangement be allocated to each element in
the arrangement based upon vendor specific objective evidence, as defined. SOP
97-2 is effective for software transactions entered into by the Company in
fiscal 1999 and subsequent periods.
As a result of certain issues raised in applying SOP 97-2, in March 1998,
the AICPA issued a Statement of Position which delays for one year the effective
date of certain provisions of SOP 97-2 with respect to what constitutes
vendor-specific objective evidence of fair value of the delivered software
element in certain multiple-element arrangements that include service elements
entered into by entities that never sell the software elements separately. The
Company does not anticipate that the adoption of SOP 97-2 and the new SOP will
have a material effect on the Company's results of operations. However, the
ultimate resolution of the implementation issues referred to above, or
additional issues not yet raised or addressed by the AICPA, could change the
Company's expectation.
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RISK FACTORS
The non-historical information in this Form 10-K includes forward-looking
statements which involve risks and uncertainties. The actual results for the
Company may differ materially from those described in any forward-looking
statement. Factors that might cause such a difference include, but are not
limited to, those discussed below and throughout this Form 10-K.
Dependence on New Products
The computer industry is characterized by rapid technological change and is
highly competitive with respect to product innovation and introduction. The
Company believes that the development and introduction of new, innovative
product with features that respond to customers changing demands will be
critical to its future success. No assurance can be given that the Company will
be able to continue to design and manufacture products that will achieve market
acceptance. Any significant delay or failure to design, manufacture, and
successfully introduce products could have a material adverse effect on the
Company's results of operations.
The success of new products is dependent upon several factors, including
timely completion of product design, achievement of acceptable manufacturing
yields and market acceptance. Additional risks inherent in new product
introductions include the uncertainty of price-performance relative to products
of competitors, competitors' responses to the introductions, accurate
forecasting of customer demand, and the desire by customers to evaluate new,
more expensive products for longer periods of time. Continued product
development efforts are subject to all of the risks inherent in the development
of new products, including unanticipated development problems and delays as well
as the costs to undertake the development that could result in abandonment or
substantial change in the development of a specific product. There can be no
assurance that the Company will be able to effectively manage the transitions to
new products or new technologies.
Management of Growth
The Company has experienced rapid growth, particularly during the last two
years. The Company anticipates that continued growth, if any, will require
management of that growth, including but not limited to, recruiting, hiring,
training and retaining significant numbers of qualified personnel, forecasting
revenues, controlling expenses and managing assets. In particular, continued
growth will require that the Company train, integrate and retain qualified sales
personnel in various geographic regions. As the Company is in a highly
competitive growth market, the loss of a significant number of such persons, as
well as the failure to recruit additional personnel in a timely manner, could
have a material adverse effect on the Company's results of operations. Should
the Company continue to experience rapid growth, there can be no assurance that
the Company's personnel, systems, procedures and controls will be adequate to
support the Company's operations or that management will adequately anticipate
all demands that growth will place on the Company. If the Company's management
is unable to manage growth effectively, the quality of the Company's products
and its results of operations could be materially adversely affected.
Competition
The market for the Company's products is extremely competitive. The Company
competes with many companies, certain of which have substantially greater
financial and technological resources, larger distribution capabilities, earlier
access to customers and greater overall customer loyalty than the Company.
In addition, increased competitive pressure could lead to intensified
price-based competition, which could have a material adverse effect on the
Company's results of operations. There also has been, and may continue to be, a
willingness on the part of certain large competitors to reduce prices in order
to preserve or gain market share, which cannot be foreseen by the Company. The
Company believes that pricing pressures are likely to continue as competitors
develop more competitive product offerings.
17
19
The principal elements of competition in the Company's markets include
rapid introduction of new technology, product quality and reliability, price and
performance characteristics, service and support, and responsiveness to
customers. The Company believes that, in general, it competes favorably with
respect to these factors. However, there can be no assurance that the Company
will be able to compete successfully or that competition will not have a
material adverse effect on the Company's results of operations.
International Sales
International sales continue to represent a significant portion of the
Company's total revenue. These sales activities are subject to the normal risks
of conducting business internationally, including unexpected changes in
regulatory requirements, fluctuating exchange rates, tariffs and other barriers,
difficulties in staffing and managing foreign subsidiary operations and
potentially adverse tax consequences. Other risks inherent in the Company's
international business include longer payment cycles, greater difficulties in
accounts receivable collection and the burdens of complying with a wide variety
of foreign laws. Most of the sales made by the Company in international markets
are priced in the applicable local currency and are subject to currency exchange
fluctuations. The Company may enter into foreign currency exchange contracts in
an attempt to minimize foreign currency exposure. There can be no assurance that
the use of such contracts will be sufficient to manage the risk of foreign
currency fluctuations. International sales are subject to the risk of compliance
with laws of various countries and the risk of import/export restrictions and
tariff regulations. The Company has not experienced any difficulty in obtaining
export licenses from the United States Department of Commerce for international
sales.
Dependence on Suppliers
The principal components used in the Company's products include circuit
boards, drives and chassis. The Company procures all of its parts from outside
suppliers and has established manufacturing relationships with a number of key
suppliers, primarily of disk drives, tape and tape library systems. The Company
generally utilizes parts and components available from multiple vendors.
However, components critical to the current design of the Company's 9000 and
3000 series of products, namely a RAID controller board manufactured by Mylex
Corporation, is available to the Company only from this source. To date, the
Company has been able to obtain supplies of these parts and believes that
adequate quantities are available to meet its needs. Disruptions in supply or
material increases in the cost of these components would have an adverse effect
on the Company's operations.
UNEVEN PATTERN OF QUARTERLY RESULTS
The Company has experienced significant quarterly fluctuations in operating
results and anticipates that these fluctuations may continue in the future.
These fluctuations have been and may continue to be caused by a number of
factors, including competitive pricing pressures, the timing of customer orders
(a large majority of which have historically been placed in the last month of
each quarter), the timing of the introduction of new products and new versions
of the Company's products, shifts in product mix and the timing of sales and
marketing and research and development expenditures. Future operating results
may fluctuate as a result of these and other factors, including the Company's
ability to continue to develop innovative products, the introduction of new
products by the Company's competitors and decreases in gross profit margin for
mature products.
In addition, the Company has operated historically without a significant
backlog of orders and, as a result, net product revenue in any quarter is
dependent on orders booked and products shipped during that quarter. A
significant portion of the Company's operating expenses are relatively fixed in
nature and planned expenditures are based primarily on sales forecasts. If
revenue does not meet the Company's expectations in any given quarter, the
adverse impact on the Company's liquidity position and net income may be
magnified by the Company's inability to reduce expenditures quickly enough to
compensate for the revenue shortfall. Further, as is common in the computer
industry, the Company historically has experienced an increase in the number of
orders and shipments in the latter part of each quarter and the Company expects
this pattern to continue in
18
20
the future. The Company's failure to receive anticipated orders or to complete
shipments in the latter part of a quarter could have a material adverse effect
on the Company's results of operations for that quarter.
Due to all of the foregoing factors, the Company believes that
period-to-period comparisons of its operating results are not necessarily
meaningful and that such comparisons cannot be relied upon as indicators of
future performance. There can be no assurance that the Company will remain
profitable on a quarter-to-quarter basis or that future revenues and operating
results will not be below the expectations of public market analysts and
investors which could result in a material adverse effect on the Company's
common stock.
Volatility of Stock Price
The Company's stock price, like that of other technology companies, is
subject to significant volatility in response to the timing and announcement of
new products, services or technological innovations by the Company or its
competitors, variations in quarterly results of operations, failure of such
results of operations to meet the expectations of public market analysts and
investors, changes in revenue or earnings estimates by the investment community
and speculation in the press or investment community. In addition, the stock
price may be affected by general market conditions and domestic and
international economic factors unrelated to the operating performance of the
Company. The stock market has from time to time experienced significant price
and volume fluctuations that are unrelated to the operating performance of
particular companies. These broad market fluctuations affect the market price of
the Company's common stock. Because of these reasons, recent trends should not
be considered reliable indicators of future stock prices or financial results.
Intellectual Property Rights
The Company relies on a combination of patent, copyright, trademark and
trade secret laws, employee and third-party non-disclosure agreements and
technical measures to protect its intellectual property rights. Although the
Company continues to take appropriate measures to protect its intellectual
property rights, there can be no assurance such intellectual property rights can
be successfully asserted in the future or will not be invalidated, circumvented
or challenged. In addition, the laws of certain foreign countries in which the
Company's products are or may be sold may not protect the Company's intellectual
property rights to the same extent as the laws of the United States. The failure
of the Company to protect its intellectual property rights could have a material
adverse effect on the Company's results of operation.
Although the Company believes that its products and trade designations do
not infringe on the proprietary rights of third parties, there can be no
assurance that third parties will not assert infringement claims against the
Company in the future. If such a claim is made, the Company will evaluate the
claim as it relates to its products and, if appropriate, may seek a license to
use the protected technology. There can be no assurance that the Company would
be able to obtain a license to use such technology or that such a license could
be obtained on terms that would not have a material adverse effect on the
Company. If the Company or its suppliers are unable to license protected
technology, the Company could be prohibited from incorporating or marketing
products incorporating that technology. The Company could also incur substantial
costs to redesign its products or to defend any legal action taken against it.
Should the Company's products be found to infringe protected technology, the
Company could be required to pay damages to the infringed party or be enjoined
from manufacturing and selling such products, which could have a material
adverse effect on the Company's results of operation.
Control by Principal Shareholder
Raymond J. Noorda, the Chairman of the Board of the Company, beneficially
owns approximately 51% of the Company's outstanding common stock. As a result of
his ownership, Mr. Noorda is able to control actions of the Company which
require stockholder approval. Such concentration of ownership may have the
effect of changing or preventing a change in control of the Company, including
the election of the Board of Directors and the approval of significant corporate
transactions.
19
21
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS:
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA:
The information required by this Item is incorporated herein by reference
to the consolidated financial statements and supplementary data listed in Item
14 of Part IV of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH INDEPENDENT AUDITORS ON ACCOUNTING AND
FINANCIAL DISCLOSURE:
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT:
Information with respect to directors of the Company is incorporated by
reference to the information set forth in the Company's Proxy Statement under
the caption "Directors and Executive Officers." Information with respect to the
Company's executive officers is set forth in Part I, above, under the caption
"Executive Officers of the Registrant."
ITEM 11. EXECUTIVE COMPENSATION:
The information set forth under the caption "Compensation of Directors and
Executive Officers and Other Information" in the Company's Proxy Statement is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT:
The information set forth under the caption "Voting Securities and
Principal Holders Thereof " in the Company's Proxy Statement is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS:
The information set forth under the caption "Compensation of Directors and
Executive Officers and Other Information" in the Company's Proxy Statement is
incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K:
The following Consolidated Financial Statements of MTI and the Independent
Auditors' Report are attached hereto beginning on pages F-1 and S-1.
(a)(1) Consolidated Financial Statements:
Independent Auditors' Report
Consolidated Balance Sheets as of April 4, 1998 and April 5, 1997
Consolidated Statements of Operations for fiscal years 1998, 1997 and
1996
Consolidated Statements of Stockholders' Equity for fiscal years 1998,
1997 and 1996
Consolidated Statements of Cash Flows for fiscal years 1998, 1997 and
1996
Notes to Consolidated Financial Statements
20
22
(2) The following financial statement schedule for fiscal years 1998, 1997
and 1996 is submitted herewith:
Schedule II -- Valuation and Qualifying Accounts (See page S-1)
All other schedules are omitted because they are not applicable or the
required information is shown in the Consolidated Financial Statements or
notes thereto.
(3) Exhibits included herewith (numbered in accordance with Item 601 of
Regulation S-K):
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.1 Restated Certificate of Incorporation of the Company.(1)
3.2 Restated By-laws of the Company.(7)
4.1 Form of Registration Rights Agreement between the Company
and certain Purchasers, and schedule of such Purchasers.(1)
4.2 Registration Rights Agreement among the Company, Dialogic
System Corporation and NFT Ventures, Inc., dated June 15,
1992, as amended as of April 1, 1993 and as of February 11,
1994.(1)
4.3 Registration Rights Agreement between the Company and NFT
Ventures, Inc., dated November 30, 1992.(1)
4.4 [Intentionally omitted]
4.5 [Intentionally omitted]
4.6 Registration Rights Agreement between the Company and
Dialogic Systems Corporation, dated November 30, 1992.(1)
4.7 Specimen Stock Certificate.(1)
10.1 [Intentionally omitted]
10.2 Triple Net Lease between the Company and Catellus
Development Corporation effective December 20, 1991.(1)
10.3 Owner Participation Agreement between the Company, Catellus
Development Corporation and Anaheim Redevelopment Agency,
dated as of January 7, 1992, including exhibits.(1)
10.4 [Intentionally omitted]
10.5 [Intentionally omitted]
10.6 [Intentionally omitted]
*10.7 Form of Nonqualified Stock Option Agreement under the Stock
Incentive Plan.(1)
*10.8 Form of Indemnification Agreement.(1)
10.9 [Intentionally omitted]
10.10 [Intentionally omitted]
*10.11 Micro Technology, Inc. Incentive Stock Option
Plan -- 1985.(1)
*10.12 1987 Incentive Stock Option and Nonqualified Stock Option
Plan of the Company (the "1987 Stock Option Plan").(1)
*10.13 Form of Incentive Common Stock Option Agreement under the
1987 Stock Option Plan.(1)
*10.14 Form of Nonqualified Common Stock Option Agreement under the
1987 Stock Option Plan.(1)
*10.15 Stock Incentive Plan of the Company.(1)
*10.16 1988 Stock Option Plan, as amended August 12, 1991, of SF2
Corporation.(1)
10.17 Form of Consultant/Employee Confidentiality Agreement.(1)
10.18 Lease between Oak Creek Delaware, Inc., and the Company,
dated December 18, 1993.(1)
21
23
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
*10.19 Form of Incentive Stock Option Agreement under the Stock
Incentive Plan.(1)
*10.20 MTI Technology Corporation 1994 Employee Stock Purchase
Plan, as amended.(2)
*10.21 MTI Technology Corporation Directors' Non-Qualified Stock
Option Plan.(1)
10.22 Asset Purchase Agreement, dated February 9, 1996, between
EMC Corporation and Registrant, dated as of February 9,
1996. (Confidential treatment granted pursuant to Rule
24b-2)(3)
10.23 [Intentionally omitted]
10.24 1996 Stock Incentive Plan(4)
10.25 Amendment No. 2 to Stock Purchase Agreement and Senior
Promissory Notes dated as of October 3, 1996 between Earl M.
Pearlman, William E. Decker, the William E. Decker Trust and
Registrant.(4)
10.26 Loan and Security Agreement between the Company and Greyrock
Business Credit, dated May 23, 1997, and Schedule
thereto.(6)
*10.27 Employment Agreement dated August 1, 1997, between Chuck
Sitzman and Registrant.(5)
21.1 Subsidiaries of the Company.
23.1 Consent of KPMG Peat Marwick LLP.
24 Power of Attorney. (see page 23)
27 Financial Data Schedule.
- ---------------
(1) Filed as an Exhibit to the Registrant's Registration Statement on Form S-1
(No. 33-75180).
(2) Filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the
fiscal year ended April 2, 1994.
(3) Filed as an Exhibit to the Registrant's Quarterly Report on Form 10-Q for
the quarterly period ended December 30, 1995.
(4) Filed as an Exhibit to the Registrant's Quarterly Report on Form 10-Q for
the quarterly period ending October 6, 1995.
(5) Filed as an Exhibit to the Registrant's Quarterly Report on Form 10-Q for
the quarterly period ending October 4, 1997.
(6) Filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the
fiscal year ended April 5, 1997.
(7) Filed as an Exhibit to the Registrant's Quarterly Report on Form 10-Q for
the quarterly period ending January 3, 1998.
* Management or compensatory plan or arrangement.
(b) Reports on Form 8-K
Form 8-K, dated February 25, 1998, regarding the Company's common
stock and its resumption of trading on the Nasdaq National Market.
22
24
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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 1st day of July
1998.
MTI TECHNOLOGY CORPORATION
By: /s/ EARL M. PEARLMAN
------------------------------------
Earl M. Pearlman
(President and Chief Executive
Officer)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below, constitutes and appoints Earl M. Pearlman and Dale R. Boyd, jointly and
severally, attorneys-in-fact and agents, each with full power of substitution,
for him in any and all capacities to sign any and all amendments to this Report,
and to file the same, and all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact and agents, and
his or their substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and on
the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ EARL M. PEARLMAN President and Chief Executive July 1, 1998
- ----------------------------------------------------- Officer
(Earl M. Pearlman)
/s/ DALE R. BOYD Senior Vice President, Chief July 1, 1998
- ----------------------------------------------------- Financial Officer (Principal
(Dale R. Boyd) Financial Officer)
/s/ STEPHANIE M. BRAUN Corporate Controller, Chief July 1, 1998
- ----------------------------------------------------- Accounting Officer
(Stephanie M. Braun)
/s/ RAYMOND J. NOORDA Chairman of the Board July 1, 1998
- -----------------------------------------------------
(Raymond J. Noorda)
/s/ VAL KREIDEL Director July 1, 1998
- -----------------------------------------------------
(Val Kreidel)
/s/ DAVID PROCTOR Director July 1, 1998
- -----------------------------------------------------
(David Proctor)
23
25
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets as of April 4, 1998 and April 5,
1997...................................................... F-3
Consolidated Statements of Operations for the fiscal years
ended April 4, 1998, April 5, 1997 and April 6, 1996...... F-4
Consolidated Statements of Stockholders' Equity for the
fiscal years ended April 4, 1998, April 5, 1997 and April
6, 1996................................................... F-5
Consolidated Statements of Cash Flows for the fiscal years
ended April 4, 1998, April 5, 1997 and April 6, 1996...... F-6
Notes to Consolidated Financial Statements.................. F-7
Financial Statement Schedule of the Company
Schedule II -- Valuation and Qualifying Accounts............ S-1
F-1
26
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS
MTI TECHNOLOGY CORPORATION:
We have audited the consolidated financial statements of MTI Technology
Corporation and subsidiaries as listed in the accompanying index. In connection
with our audits of the consolidated financial statements, we also have audited
the financial statement schedule listed in the accompanying index. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of MTI
Technology Corporation and subsidiaries as of April 4, 1998 and April 5, 1997,
and the results of their operations and their cash flows for the fiscal years
ended April 4, 1998, April 5, 1997, and April 6, 1996, in conformity with
generally accepted accounting principles. Also in our opinion, the related
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
KPMG Peat Marwick LLP
Orange County, California
May 20, 1998
F-2
27
MTI TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
APRIL 4, APRIL 5,
1998 1997
-------- --------
Current assets:
Cash and cash equivalents................................. $ 7,768 $ 3,487
Short-term investments.................................... -- 850
Accounts receivable, less allowance for doubtful accounts
and sales returns of $5,686 in 1998 and $9,283 in
1997................................................... 44,260 31,899
Inventories............................................... 18,819 14,637
Deferred income tax benefit............................... 4,277 960
Prepaid expenses and other receivables.................... 4,425 2,862
-------- -------
Total current assets.............................. 79,549 54,695
Property, plant and equipment, net.......................... 11,995 13,220
Intangible assets and goodwill, less accumulated
amortization of $5,578 in 1998 and $3,680 in 1997......... 12,753 15,027
Other....................................................... 794 650
-------- -------
$105,091 $83,592
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings..................................... $ 7,898 $22,102
Current maturities of long-term debt...................... 6 1,851
Accounts payable.......................................... 20,294 14,347
Accrued liabilities....................................... 18,199 15,622
Deferred income........................................... 16,441 13,040
-------- -------
Total current liabilities......................... 62,838 66,962
Long-term debt, less current maturities..................... -- 6
Other....................................................... 107 247
-------- -------
Total liabilities................................. 62,945 67,215
-------- -------
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
28,821 and 26,537 shares in 1998 and 1997,
respectively........................................... 29 26
Additional paid-in capital................................ 96,577 88,780
Accumulated deficit....................................... (50,021) (68,010)
Less cost of treasury stock (666 and 755 shares in 1998
and 1997, respectively)................................ (2,452) (2,788)
Cumulative foreign currency translation adjustments....... (1,987) (1,631)
-------- -------
Total stockholders' equity........................ 42,146 16,377
Commitments and contingencies
-------- -------
$105,091 $83,592
======== =======
See accompanying notes to consolidated financial statements.
F-3
28
MTI TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FISCAL YEARS ENDED APRIL 4, 1998, APRIL 5, 1997 AND APRIL 6, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1998 1997 1996
-------- -------- --------
Net product revenue........................................ $163,707 $120,359 $ 97,682
Service revenue............................................ 36,304 33,368 34,232
-------- -------- --------
Total revenue.................................... 200,011 153,727 131,914
Product cost of revenue.................................... 106,960 83,607 74,057
Service cost of revenue.................................... 22,042 20,196 22,162
-------- -------- --------
Total cost of revenue............................ 129,002 103,803 96,219
-------- -------- --------
Gross profit.......................................... 71,009 49,924 35,695
Operating expenses:
Selling, general and administrative...................... 41,055 34,936 65,715
Research and development................................. 12,475 10,103 14,384
-------- -------- --------
Total operating expenses......................... 53,530 45,039 80,099
Operating income (loss)............................... 17,479 4,885 (44,404)
Other income (expense):
Interest expense......................................... (2,069) (2,993) (4,090)
Interest income.......................................... 176 87 99
Other income (expense)................................... 4,450 4,389 (645)
-------- -------- --------
Income (loss) before income taxes.......................... 20,036 6,368 (49,040)
Income tax expense.................................... 2,020 664 179
-------- -------- --------
Net income (loss)..................................... $ 18,016 $ 5,704 $(49,219)
======== ======== ========
Net income (loss) per share:
Basic.................................................... $ 0.68 $ 0.22 $ (2.54)
======== ======== ========
Diluted.................................................. $ 0.62 $ 0.22 $ (2.54)
======== ======== ========
Weighted average shares used in per share computation:
Basic.................................................... 26,674 25,638 19,400
======== ======== ========
Diluted.................................................. 29,112 26,437 19,400
======== ======== ========
See accompanying notes to consolidated financial statements.
F-4
29
MTI TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FISCAL YEARS ENDED APRIL 4, 1998, APRIL 5, 1997 AND APRIL 6, 1996
(IN THOUSANDS)
CUMULATIVE
FOREIGN TOTAL
COMMON STOCK ADDITIONAL RETAINED CURRENCY STOCKHOLDERS'
--------------- PAID-IN EARNINGS TRANSLATION EQUITY
SHARES AMOUNT CAPITAL (DEFICIT) ADJUSTMENTS (DEFICIENCY)
------ ------ ---------- --------- ----------- -------------
Balance at April 1, 1995............ 19,355 $20 $74,405 $(24,343) $ (944) $ 49,138
Exercise of stock options (including
compensation expense of $129)..... 30 -- 155 -- -- 155
Treasury shares issued under
Employee Stock Purchase Plan and
other............................. 64 -- 264 (83) -- 181
Foreign currency translation
adjustments....................... -- -- -- -- (442) (442)
Net loss............................ -- -- -- (49,219) -- (49,219)
------ --- ------- -------- ------- --------
Balance at April 6, 1996............ 19,449 20 74,824 (73,645) (1,386) (187)
Exercise of stock options (including
compensation expense of $14)...... 300 -- 529 -- -- 529
Treasury shares issued under
Employee Stock Purchase Plan and
other............................. 40 -- 150 (69) -- 81
Conversion of secured subordinated
note.............................. 5,993 6 10,107 -- -- 10,113
Issuance of warrants................ -- -- 382 -- -- 382
Foreign currency translation
adjustments....................... -- -- -- -- (245) (245)
Net income.......................... -- -- -- 5,704 -- 5,704
------ --- ------- -------- ------- --------
Balance at April 5, 1997............ 25,782 26 85,992 (68,010) (1,631) 16,377
Exercise of stock options (including
compensation expense of $18 and
income tax benefit of $3,495)..... 1,113 2 5,635 -- -- 5,637
Treasury shares issued under
Employee Stock Purchase Plan and
other............................. 89 -- 354 (27) -- 327
Conversion of warrants.............. 1,171 1 2,144 -- -- 2,145
Foreign currency translation
adjustments....................... -- -- -- -- (356) (356)
Net income.......................... -- -- -- 18,016 -- 18,016
------ --- ------- -------- ------- --------
Balance at April 4, 1998............ 28,155 $29 $94,125 $(50,021) $(1,987) $ 42,146
====== === ======= ======== ======= ========
See accompanying notes to consolidated financial statements.
F-5
30
MTI TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED APRIL 4, 1998, APRIL 5, 1997 AND APRIL 6, 1996
(IN THOUSANDS)
1998 1997 1996
--------- --------- ---------
Cash flows from operating activities:
Net income (loss)......................................... $ 18,016 $ 5,704 $ (49,219)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization........................... 7,920 9,854 28,255
Provision for sales returns and losses on accounts
receivable, net....................................... 1,107 319 154
Provision for inventory obsolescence.................... 1,968 3,238 4,056
Loss on disposal of fixed assets........................ 69 259 923
Deferred income tax benefit............................. (899) (176) --
Deferred income......................................... 3,260 (2,208) 3,056
Compensation related to stock options................... 18 14 129
Gain on sale of product lines........................... (246) -- --
Change in assets and liabilities, net of effect of
acquisitions:
Accounts receivable....................................... (13,565) (11,087) 8,404
Inventories............................................... (6,538) 1,984 (2,531)
Prepaid expenses, other receivables and other assets...... (1,449) 1,527 2,199
Accounts payable.......................................... 5,926 (228) (5,799)
Accrued and other liabilities............................. 3,527 (2,853) 3,299
--------- --------- ---------
Net cash provided by (used in) operating activities....... 19,114 6,347 (7,074)
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures for property, plant and equipment.... (4,759) (3,780) (8,910)
Proceeds from sale of property, plant and equipment,
net..................................................... -- -- 340
Acquisition of assets and liabilities of businesses, net
of cash acquired........................................ -- (1,000) (2,690)
Payments received on notes receivables.................... 246 -- --
Short term investments.................................... 850 (850) --
--------- --------- ---------
Net cash used in investing activities..................... (3,663) (5,630) (11,260)
--------- --------- ---------
Cash flows from financing activities:
Borrowings under notes payable, net of acquisitions....... 148,779 116,986 129,887
Borrowings under notes payable to fund acquisition of
NPI..................................................... -- 1,000 2,608
Proceeds from issuance of common stock and exercise of
options and warrants.................................... 4,596 596 66
Repayments of notes payable............................... (164,485) (119,552) (115,807)
--------- --------- ---------
Net cash provided by (used in) financing activities....... (11,110) (970) 16,754
--------- --------- ---------
Effect of exchange rate changes on cash..................... (60) (315) 73
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents........ 4,281 (568) (1,507)
Cash and cash equivalents at beginning of year.............. 3,487 4,055 5,562
--------- --------- ---------
Cash and cash equivalents at end of year.................... $ 7,768 $ 3,487 $ 4,055
========= ========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest................................................ $ 2,392 $ 2,963 $ 2,330
Income taxes............................................ 719 348 481
Supplemental schedule of noncash investing and financing
activities:
Conversion of debt to common stock........................ -- 10,113 --
Issuance of common stock, notes, options and warrants in
connection with acquisitions............................ -- -- 5,000
Income tax benefit from exercise of stock options......... 3,495 -- --
See accompanying notes to consolidated financial statements.
F-6
31
MTI TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
MTI Technology Corporation and subsidiaries (the "Company" or "MTI"). All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Fiscal Year
The Company's year-end is the first Saturday following March 31. Fiscal
years 1998 and 1997 ended on April 4 and April 5, respectively, and consisted of
52 weeks. Fiscal year 1996 ended on April 6 and consisted of 53 weeks.
Revenue Recognition
Sales of the Company's computer equipment are recorded upon shipment, net
of an allowance for estimated returns. Revenue from equipment maintenance
contracts is recorded as deferred income when billed and is recognized as earned
over the period in which the services are provided, primarily straight-line over
the term of the contract. The Company maintains a warranty accrual for the
estimated future warranty obligation based on the relationship of historical and
anticipated warranty costs and sales volumes.
The Company recognizes revenue from software licenses, provided there are
no significant Company obligations related to the sale and the resulting
receivable is deemed collectible, at the time the software is shipped, net of an
allowance for returns, cancellations and maintenance, including vendor and
post-contract support obligations. Revenue from maintenance agreements,
including the allowance for maintenance bundled with software licenses, is
recognized ratably over the term of the related agreement. Revenue from
consulting and other software-related services is recognized as the services are
rendered.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. At April 4,
1998 and April 5, 1997, $281 and $266, respectively, of short-term commercial
paper investments and money market fund investments are included in cash and
cash equivalents.
Short-Term Investments
Short-term investments are comprised of certificates of deposit with an
original maturity date longer than three months and are stated at cost, which
approximates market value. Management has the intention and ability to hold
investments until maturity.
Inventories
Inventories are valued at the lower of cost (first-in, first-out) or market
(net realizable value), net of an allowance for obsolete, slow-moving and
non-salable inventory. The allowance is periodically adjusted based upon
management's review of inventories on-hand, historic product sales and
forecasts.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Depreciation is
calculated using the straight-line method over the estimated useful lives of two
to seven years. Leasehold improvements are amortized using the straight-line
method over the lesser of the useful life of the improvement or the term of the
related lease. Maintenance and repairs are expensed as incurred.
F-7
32
MTI TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Accounting for Stock Options
Prior to April 7, 1996, the Company accounted for its stock option plan in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees," and related interpretations.
As such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. On
April 7, 1996, the Company adopted Statement of Financial Accounting Standards
No. ("Statement") 123, "Accounting for Stock-Based Compensation," which permits
entities to recognize as expense over the vesting period the fair value of all
stock based awards on the date of grant. Alternatively, Statement 123 also
allows entities to continue to apply the provisions of APB Opinion No. 25 and
provide pro forma net income and pro forma net income per share disclosures for
employee stock option grants made in fiscal year 1996 and future years as if the
fair-value-based method defined in Statement 123 had been applied. The Company
has elected to continue to apply the provisions of APB Opinion No. 25 and
provide the pro forma disclosure provisions of Statement 123.
Use of Estimates
Management has made a number of estimates and assumptions relating to the
reporting of assets and liabilities in conformity with generally accepted
accounting principles. Actual results could differ from these estimates.
Income Taxes
Under the asset and liability method of Statement 109, "Accounting for
Income Taxes," deferred tax assets and liabilities are determined based on
differences between the financial statement carrying amounts and the tax bases
of existing assets and liabilities using enacted tax rates in effect for the
year in which the differences are expected to reverse, net of a valuation
allowance for deferred tax assets which are determined to not be more likely
than not realizable. Under Statement 109, the effect on deferred taxes of a
change in tax rates is recognized in operations in the period that includes the
enactment date.
Intangible Assets and Goodwill
The Company amortizes intangible assets and costs in excess of net assets
acquired (goodwill) related to the Company's business acquisitions on a
straight-line basis over periods ranging from 7 to 10 years. The Company applies
the provisions of 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. Management regularly evaluates the
continuing recoverability of intangible assets and goodwill based upon the
historical and projected revenue and profitability of the related acquisitions
and continuing benefits of the underlying assets. Based upon these evaluations,
the Company believes that the established estimated useful lives are reasonable
based on the economic factors and continuing benefits applicable to the acquired
businesses and/or assets.
During the fourth quarter of fiscal year 1996, the Company wrote off
$14,244, representing the remaining unamortized intangible assets related to the
purchase, in December 1993, of substantially all the assets and assumption of
certain liabilities from System Industries, Inc., and $2,347, representing the
remaining unamortized goodwill related to the acquisition, in December 1991, of
SCR Technologies based on management's evaluation of the recovery of the
acquired net assets. The Company has evaluated the recoverability of the
remaining goodwill by analyzing forecasted undiscounted cash flows and found no
further
F-8
33
MTI TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
impairment exists at April 4, 1998. As of April 4, 1998, goodwill represents
intellectual property rights, access to an installed customer base and research
and development capacity related to Raxco and National Peripherals, Inc. (see
note 10) and is being amortized over 10 years.
Foreign Currency Translation
The Company follows the principles of Statement 52, "Foreign Currency
Translation," using the local currencies as the functional currencies of its
foreign subsidiaries. Accordingly, all assets and liabilities outside the United
States are translated into dollars at the rate of exchange in effect at the
balance sheet date. Income and expense items are translated at the weighted
average exchange rates prevailing during the period. Net foreign currency
translation adjustments accumulate as a separate component of stockholders'
equity. Net foreign currency transaction exchange losses of $237, $499 and $262
were realized in fiscal years 1998, 1997 and 1996, respectively, and are
included in selling, general and administrative expense in the accompanying
consolidated statements of operations.
Concentration of Credit Risk
Credit is extended for all customers based on financial condition and,
generally, collateral is not required. Concentrations of credit risk with
respect to trade receivables are limited due to the large number of customers
comprising the Company's customer base and dispersion across many different
industries and geographies.
The Company generally utilizes parts and components available from multiple
vendors. However certain critical components, primarily a RAID controller board,
are available to the Company only from a single source. To date, the Company has
been able to obtain supplies of these parts and believes that adequate
quantities are available to meet its needs. Disruptions in supply or material
increases in the cost of these components would have an adverse effect on the
Company's operations.
Net Income (Loss) per Share
The Company adopted Statement 128, "Earnings Per Share," in the third
quarter of fiscal year 1998. In accordance with Statement 128, primary earnings
per share have been replaced with basic earnings per share and fully diluted
earnings per share have been replaced with diluted earnings per share which
includes potentially dilutive securities such as outstanding options and
warrants. Prior periods have been restated to conform to Statement 128.
Basic earnings per share is computed by dividing income available to common
shareholders by the weighted-average number of common shares outstanding during
the period. Diluted earnings per share is computed by dividing income available
to common shareholders by the weighted-average number of common shares
outstanding during the period increased to include the number of additional
common shares that would have been outstanding if the dilutive potential common
shares had been issued. The dilutive effect of outstanding options and warrants
is reflected in diluted earnings per share by application of the treasury stock
method.
Fair Value of Financial Instruments
Statement 107, "Disclosure about Fair Value of Financial Instruments,"
requires all entities to disclose the fair value of financial instruments, both
assets and liabilities recognized and not recognized on the balance sheet, for
which it is practicable to estimate fair value. Statement 107 defines fair value
of a financial instrument as the amount at which the instrument could be
exchanged in a current transaction between willing parties. As of April 4, 1998,
the fair value of all financial instruments approximated their carrying value.
F-9
34
MTI TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Fourth Quarter 1996 Adjustments
During the fourth quarter of fiscal year 1996, the Company made a
determination that it would not seek to continue its participation as a
subcontractor relating to the U.S. Army's RCAS contract; settled its shareholder
lawsuit; completed its audit by the State of California and received a
determination of sales and use tax liability therefrom; and experienced a
substantial increase in its mix of revenues from the Open Systems marketplace,
partially offset by a corresponding decrease in revenues from the DEC market. As
a consequence of these events, during the fourth quarter of fiscal year 1996,
the Company reevaluated the future recoverability and economic usefulness of
certain assets, the composition of its operating infrastructure, and recorded
certain charges to reflect its liability related to these events.
During the fourth quarter of fiscal year 1996, the Company recorded
approximately $19,806 of charges related to asset write-downs and increased
inventory reserves. The charges included a $14,244 charge to write-off the
remaining unamortized intangible assets related to the purchase, in December
1993, of substantially all of the assets and assumption of certain liabilities
from System Industries, Inc. based on management's evaluation of the
recoverability of the acquired net assets; a $2,347 charge to write-off the
remaining goodwill related to the acquisition, in December 1991, of SCR
Technologies based on management's evaluation of the recoverability of the
acquired net assets; a $2,056 charge to increase excess and obsolete reserves on
certain slower-moving or obsolete product inventories that support the DEC
market; a $504 charge to record the write-down of field service spares inventory
that support the DEC market to estimated net realizable value; and a $655 charge
to write-off certain idle fixed assets.
In addition to the above charges, the Company accrued $2,088 for the
settlement of a shareholder lawsuit and related legal costs (see note 8), $1,855
for sales and use tax liability and $1,450 for related interest and penalties,
and $1,777 for restructuring and severance costs.
At April 6, 1996, accrued restructuring and severance costs were $1,777
which included $1,265 and $512 for severance costs and office closures,
respectively, charged to operating expenses. These restructuring activities
resulted in the termination of approximately 46 employees and 4 office closures.
During fiscal year 1997, $1,777 was paid and the remaining accrual at April 5,
1997 was zero.
F-10
35
MTI TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The following table summarizes the fiscal year 1996 fourth quarter charges
and the impact to the Company's results of operations:
Product cost of revenue:
Charge to increase excess and obsolete reserves on
product inventories................................... $ 2,056
-------
Service cost of revenue:
Write-down of field service spares inventory............. 504
-------
Operating expenses:
Write-off of unamortized System Industries, Inc.
-- related intangible assets.......................... 14,244
Write-off of unamortized SCR Technologies
-- related goodwill................................... 2,347
Reserve for shareholder lawsuit settlement and related
legal costs........................................... 2,088
Reserve for sales and use tax liability.................. 1,855
Restructuring and severance costs........................ 1,777
Write-off of idle fixed assets........................... 655
-------
22,966
-------
Other expenses:
Reserve for interest and penalties related to sales and
use tax liability..................................... 1,450
-------
Total fiscal year 1996 fourth quarter
adjustments.................................... $26,976
=======
Reclassifications
Certain reclassifications have been made to the fiscal years 1997 and 1996
consolidated financial statements to conform to the fiscal year 1998
presentation.
(2) INVENTORIES
Inventories consist of the following:
APRIL 4, APRIL 5,
1998 1997
-------- --------
Raw materials............................................ $10,822 $ 5,788
Work-in-process.......................................... 318 10
Finished goods........................................... 7,679 8,839
------- -------
$18,819 $14,637
======= =======
(3) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, at cost, are summarized as follows:
F-11
36
MTI TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
APRIL 4, APRIL 5,
1998 1997
-------- --------
Plant equipment, office furniture and fixtures........... $11,970 $12,032
Computer equipment....................................... 15,259 13,933
Field service spares..................................... 8,729 7,966
Leasehold improvements................................... 1,686 1,285
------- -------
37,644 35,216
Less accumulated depreciation and amortization...... 25,649 21,996
------- -------
$11,995 $13,220
======= =======
Property, plant and equipment include assets held under capital leases of
$10 and $71 (net of accumulated depreciation of $303 and $245, respectively) at
April 4, 1998 and April 5, 1997, respectively.
(4) ACCRUED LIABILITIES
Accrued liabilities consist of the following:
APRIL 4, APRIL 5,
1998 1997
-------- --------
Salaries, wages and commissions.......................... $ 6,800 $ 5,077
Taxes.................................................... 6,352 5,878
Accrued warranty costs................................... 916 912
Other.................................................... 4,131 3,755
------- -------
$18,199 $15,622
======= =======
(5) DEBT
Credit Agreement and Lines of Credit
Effective June 12, 1997, the Company entered into an agreement with
Greyrock Business Credit 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 blended rate of
prime rate plus 1.67%. The initial term of the agreement is for one year and
automatically and continuously renews for a subsequent year, unless terminated
by either party pursuant to the agreement. Borrowings outstanding under this
line at April 4, 1998 were $7,898 which is classified as short-term borrowings.
The bank line of credit agreement contains certain restrictive covenants. At
April 4, 1998, the Company was in compliance with all such covenants.
The above agreement replaced an existing agreement whereby the Company had
an asset secured line of credit up to $30,000 with Greyrock Business Credit.
Borrowings outstanding under this line at April 5, 1997 were $22,102 which is
classified as short-term borrowings. Subsequent to April 5, 1997, the
outstanding balance was repaid utilizing proceeds from the facility discussed
above.
F-12
37
MTI TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Long-term Debt
A summary of long-term debt is as follows:
APRIL 4 APRIL 5,
1998 1997
-------- --------
Capital lease obligations................................ $ 6 $ 77
Notes payable............................................ -- 1,780
--- ------
$ 6 $1,857
Less current installments................................ 6 1,851
--- ------
$-- $ 6
=== ======
The Company leases equipment under capital leases. These leases have
imputed interest rates of approximately 11% and extend through 1999.
(6) INCOME TAXES
The components of income (loss) before income taxes are as follows:
FISCAL YEARS ENDED
--------------------------------
APRIL 4, APRIL 5, APRIL 6,
1998 1997 1996
-------- -------- --------
U.S........................................... $11,659 $1,010 $(44,178)
Foreign....................................... 8,377 5,358 (4,862)
------- ------ --------
$20,036 $6,368 $(49,040)
======= ====== ========
Income tax expense (benefit) consists of the following:
CURRENT DEFERRED TOTAL
------- -------- ------
1998:
Federal........................................ $1,381 $(899) $ 482
State.......................................... 167 -- 167
Foreign........................................ 1,371 -- 1,371
------ ----- ------
$2,919 $(899) $2,020
====== ===== ======
1997:
Federal........................................ $ 254 $(176) $ 78
State.......................................... 131 -- 131
Foreign........................................ 455 -- 455
------ ----- ------
$ 840 $(176) $ 664
====== ===== ======
1996:
Federal........................................ $ -- $ -- $ --
State.......................................... -- -- --
Foreign........................................ 179 -- 179
------ ----- ------
$ 179 $ -- $ 179
====== ===== ======
F-13
38
MTI TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Reconciliations of the federal statutory tax rate to the effective tax rate
are as follows:
FISCAL YEARS ENDED
--------------------------------
APRIL 4, APRIL 5, APRIL 6,
1998 1997 1996
-------- -------- --------
Federal statutory rate............................ 35.0% 35.0% (35.0)%
Effect of foreign operations...................... (0.9) (22.3) 3.1
State taxes, net of federal benefit............... 0.7 2.1 --
Change in valuation allowance..................... (26.0) (14.1) 33.1
Non-deductible expenses........................... 2.9 6.7 3.2
Other............................................. (1.6) 3.0 (4.0)
----- ----- -----
10.1% 10.4% 0.4%
===== ===== =====
Deferred tax assets and liabilities result from differences between the
financial statement carrying amounts and the tax bases of existing assets and
liabilities. The significant components of the deferred income tax assets and
deferred income tax liabilities are as follows:
1998 1997 1996
------- ------- -------
Deferred tax assets:
Tax operating loss carryforwards............ $14,096 $20,267 $20,158
Tax basis of intangible assets greater than
book basis............................... 5,752 5,565 5,804
Accrued expenses not deductible for tax
purposes................................. 3,571 3,362 3,101
Inventory reserves.......................... 1,346 1,226 1,715
Book depreciation greater than tax
depreciation............................. 2,682 1,873 1,758
Recognition of income reported on different
methods for tax purposes than for
financial reporting...................... 1,564 80 188
Other....................................... 1,241 (231) 140
------- ------- -------
30,252 32,142 32,864
Less valuation allowance...................... 25,975 31,182 32,080
------- ------- -------
$ 4,277 $ 960 $ 784
======= ======= =======
At April 4, 1998, the Company had federal net operating loss ("NOL")
carryforwards arising from the acquisition of SF2, available to offset future
taxable income of $17,630, subject to alternative minimum tax limitations. The
utilization of these carryforwards is limited to approximately $1,000 annually,
as a result of the Internal Revenue Code's restrictive change of ownership
rules.
At April 4, 1998, the Company had federal NOL carryforwards, exclusive of
the $17,712 SF2 NOL discussed above, of $22,212. These carryforwards expire
beginning in fiscal year 2008.
Management believes that it is more likely than not that the Company will
realize the benefits of the remaining net deferred tax asset existing at April
4, 1998. The change in the valuation allowance from fiscal year 1997 to fiscal
year 1998 was $5,207 and the change in the valuation allowance from fiscal year
1996 to fiscal year 1997 was $898.
The Internal Revenue Service ("IRS") is conducting an examination of the
Company's fiscal years 1991 through 1995 federal income tax returns. On July 29,
1996, the Company received notice from the IRS of proposed adjustments for
fiscal year 1991. The Company, after consultation with tax counsel, continues to
believe in the propriety of its positions as set forth in its tax returns and
has filed a letter of protest with the
F-14
39
MTI TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
IRS appeals office. No findings have been issued for fiscal years 1992 through
1995. The Company believes the ultimate resolution of the examinations will not
result in a material impact on the Company's consolidated financial position,
results of operations or liquidity.
(7) STOCKHOLDERS' EQUITY
Net Income (Loss) per Share
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share amounts):
1998 1997 1996
------- ------- --------
Numerator:
Net income (loss), basic and diluted....... $18,016 $ 5,704 $(49,219)
======= ======= ========
Denominator:
Denominator for net income (loss) per share,
basic -- weighted-average shares
outstanding................................ 26,674 25,638 19,400
------- ------- --------
Effect of dilutive securities:
Dilutive options outstanding............ 2,002 14 --
Dilutive warrants outstanding........... 436 813 --
------- ------- --------
Dilutive potential common shares........... 2,438 799 --
------- ------- --------
Denominator for net income (loss) per
share, diluted -- adjusted
weighted-average shares................. 29,112 26,437 19,400
======= ======= ========
Net income (loss) per share, basic........... $ 0.68 $ 0.22 $ (2.54)
======= ======= ========
Net income (loss) per share, diluted......... $ 0.62 $ 0.22 $ (2.54)
======= ======= ========
Options to purchase 1,410,000 shares of common stock at prices in excess of
$9.98 per share were outstanding at April 4, 1998, but were not included in the
net income per share, diluted computation for the year then ended 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 712,000 shares of common stock and warrants to purchase
270,000 shares of common stock at prices in excess of $2.75 per share were
outstanding at April 5, 1997, but were not included in the net income per share,
diluted computation for the year then ended 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 3,236,000 shares of common stock and warrants to
purchase 595,000 shares of common stock were outstanding at April 6, 1996, but
were not included in the net loss per share, diluted computation for the year
then ended because the effect of doing so would be antidilutive.
Stock Options
The Company has granted stock options under its 1985 Incentive Stock Option
Plan, its 1987 Incentive Stock Option Plan and Non-Qualified Stock Option Plan,
its 1992 Stock Incentive Plan and its 1996 Stock Incentive Plan, generally at
prices equal to the estimated fair market value of the Company's common stock at
date of grant. The Company intends to grant future options under its 1996 Stock
Incentive Plan and its 1992 Stock Incentive Plan. The 1985 Incentive Stock
Option Plan and the 1987 Incentive Stock Option Plan allow a maximum of 458,000
and 2,072,000 shares to be issued in the aggregate, respectively. In addition,
in
F-15
40
MTI TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
connection with the acquisition of SF2 the Company assumed outstanding options
to purchase 236,000 shares under the 1988 Stock Option Plan of SF2.
The 1992 Stock Incentive Plan provides for the grant by the Company of
stock options, stock bonuses/ purchases and stock appreciation rights to acquire
up to an aggregate of not more than the greater of 5% of the authorized shares
of the Company's common stock or 15% of the total number of shares outstanding
as of the Company's prior fiscal year-end, with the aggregate number of options
and rights outstanding not to exceed 30% of the then outstanding common stock of
the Company. The maximum number of shares available in any case under the plan
is 4,079,960.
The 1996 Stock Incentive Plan provides for the grant by the Company of
incentive stock options or non-qualified stock options. The exercise price of
the non-qualified stock options may not be less than 85% of the fair market
value at the date of grant. The maximum number of shares is initially 2,250,000,
increased each January 1, by a number equal to three percent of the number of
shares outstanding as of the immediately preceding December 31. Notwithstanding
the foregoing, the maximum number of incentive stock options is 2,250,000.
Directors' Non-Qualified Stock Option Plan
On March 31, 1994, the Company adopted the Directors' Non-Qualified Stock
Option Plan (the "Director Plan"). A total of 150,000 shares of the Company's
common stock are reserved for issuance under the Director Plan. Under the
Director Plan non-qualified options to purchase 10,000 shares were granted to
each non-employee director of the Company upon the closing of the Company's
initial public offering. Non-employee directors appointed to the Board of
Directors after the initial public offering also receive a non-qualified option
to purchase 10,000 shares of common stock. In addition, each non-employee
director who has served as a director for at least one year will receive an
option to purchase 2,500 shares of common stock following each annual meeting of
stockholders; provided that he or she continues to be a director of the Company
immediately following each meeting. The exercise price per share of each option
granted under the Director Plan will be the fair market value of the Company's
common stock on the date the option is granted, except that the initial grants
to directors, upon the closing of the Company's initial public offering had an
exercise price per share of $9.00 per share, the price to the public in the
initial public offering. As of April 4, 1998, options to purchase 52,500 shares
of common stock were outstanding, of which 47,500 were exercisable.
In fiscal years 1994, 1992 and 1991, certain options were granted below the
then determined fair value of the Company's common stock, resulting in
compensation expense. Such compensation expense is being amortized through a
charge to operations over the vesting period of four years and amounted to $18,
$14 and $129 for fiscal years 1998, 1997 and 1996, respectively.
In May 1995, options to purchase 1,789,000 shares with exercise prices
ranging from $3.375 to $5.00 per share were repriced to an exercise price of
$1.75, the then determined fair value of the Company's common stock. All shares
repriced were not exercisable until the earlier of May 1996 or 30 days prior to
their expiration.
The options granted typically vest over a period of four years from the
date of grant. At April 4, 1998 and April 5, 1997, the number of options
exercisable was 1,441,000 and 1,252,000, respectively, and the weighted-average
exercise price of those options was $2.21 and $1.89, respectively.
The per share weighted-average fair value of stock options granted during
fiscal years 1998, 1997 and 1996 was $6.40 , $1.58 and $1.02, respectively, on
the date of grant using the Black-Scholes option pricing model with the
following weighted average assumptions: 1998 -- expected dividend yield of 0%,
risk-free interest rate of 5.63%, volatility of its stock over the expected life
of the options of .5 and an expected life of six years; 1997 -- expected
dividend yield of 0%, risk-free interest rate of 6.84%, volatility of its stock
over the
F-16
41
MTI TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
expected life of the options of .5 and an expected life of six years;
1996 -- expected dividend yield of 0%, risk-free interest rate of 6.17%,
volatility of its stock over the expected life of the options of .5 and an
expected life of six years.
The Company applies APB Opinion No. 25 in accounting for its stock option
plans and, accordingly, no compensation cost has been recognized for its stock
options in the consolidated financial statements, except as noted above. Had the
Company determined compensation cost based on the fair value at the grant date
for its stock options under Statement 123, the Company's net income (loss) would
have been the pro forma amounts indicated below:
NET INCOME
NET INCOME (LOSS)
(LOSS) PER SHARE, DILUTED
---------- ------------------
As reported:
1998......................................... $ 18,016 $ 0.62
1997......................................... $ 5,704 $ 0.22
1996......................................... $(49,219) $(2.54)
Pro forma:
1998......................................... $ 15,169 $ 0.52
1997......................................... $ 4,601 $ 0.17
1996......................................... $(50,266) $(2.59)
Pro forma net income (loss) reflects only options granted in fiscal years
1998, 1997 and 1996. Therefore, the full impact of calculating compensation cost
for stock options under Statement 123 is not reflected in the pro forma net
income (loss) amounts presented above because compensation cost is reflected
over the options' vesting period of four years and compensation cost for options
granted prior to April 2, 1995 is not considered.
A summary of all stock option transactions follows (in thousands, except
per share data):
WEIGHTED
AVERAGE
SHARES EXERCISE PRICE
------ --------------
Options outstanding at April 1, 1995................ 1,941 $1.40
Granted............................................. 2,262 1.92
Exercised........................................... (29) .88
Canceled............................................ (938) 2.05
------
Options outstanding at April 6, 1996................ 3,236 1.88
Granted............................................. 1,660 2.75
Exercised........................................... (311) 1.72
Canceled............................................ (359) 2.06
------
Options outstanding at April 5, 1997................ 4,226 2.22
Granted............................................. 1,567 12.25
Exercised........................................... (1,103) 1.91
Canceled............................................ (112) 8.76
------
Options outstanding at April 4, 1998................ 4,578 $5.56
======
F-17
42
MTI TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
A summary of stock options outstanding at April 4, 1998 follows (in
thousands, except per share data):
EXERCISABLE
WEIGHTED --------------------
AVERAGE WEIGHTED WEIGHTED
NUMBER OF REMAINING AVERAGE AVERAGE
RANGE OF OPTIONS CONTRACTUAL EXERCISE NUMBER OF EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE OPTIONS PRICE
--------------- ----------- ----------- -------- --------- --------
$ 0.0980 - 1.7500 1,408 6.5 $ 1.74 809 $ 1.74
1.8750 - 3.0000 1,097 8.3 2.25 498 2.28
3.6875 - 9.0000 662 8.8 3.97 129 4.51
11.8750 - 12.8750 1,410 9.4 12.71 5 12.88
Employee Stock Purchase Plan
On March 31, 1994, the Company adopted the 1994 Employee Stock Purchase
Plan (the "Purchase Plan") allowing for an aggregate of 500,000 shares of the
Company's common stock. Under the Purchase Plan, the Board may authorize
participation by eligible employees, including officers, in periodic six month
offerings following the commencement of the Purchase Plan. The price of the
Company's common stock purchased under the Purchase Plan will be equal to 85% of
the lower of the fair market value of the Company's common stock at the
commencement date of each offering period or the relevant purchase date. During
fiscal years 1998 and 1997, 88,664 and 39,529 shares of stock, respectively,
were issued pursuant to this plan.
Stock Repurchase Program
In July 1994, the Company announced a stock repurchase program, pursuant to
which it would purchase up to 1,000,000 shares of the Company's common stock in
open market, negotiated, or block transactions. Purchased shares will be issued
to meet existing and future requirements of the Company's employee stock option
and stock purchase plans. During fiscal year 1995, the Company repurchased
approximately 875,000 shares of its common stock at an approximate aggregate
purchase price of $3,263 under this program.
(8) COMMITMENTS AND CONTINGENCIES
Leases
The Company leases facilities and certain equipment under non-cancelable
operating leases. Under the lease agreements for facilities, the Company is
required to pay insurance, taxes, utilities and building maintenance and is
subject to certain consumer price index adjustments.
Future minimum lease payments at April 4, 1998 under all noncancelable
operating facility and equipment leases for subsequent fiscal years are as
follows:
1999................................................... $ 4,096
2000................................................... 3,643
2001................................................... 2,647
2002................................................... 2,326
2003................................................... 2,189
Thereafter............................................. 3,384
-------
$18,285
=======
Rent expense totaled $4,575, $4,237 and $4,373, for fiscal years 1998, 1997
and 1996, respectively.
F-18
43
MTI TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Litigation
The Company is from time to time subject to claims and suits arising in the
ordinary course of business. In the opinion of management, the ultimate
resolution of these matters will not have a material adverse effect on the
Company's consolidated financial position, results of operations or liquidity.
(9) BUSINESS SEGMENT AND INTERNATIONAL INFORMATION
The Company is engaged in one business segment, the design, manufacture,
sale and service of high-performance storage systems, software and related
products. 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 profit 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:
1998 1997 1996
-------- -------- --------
Revenue:
United States.......................... $157,215 $124,704 $105,153
Europe................................. 54,356 41,503 35,795
Transfers between areas................ (11,560) (12,480) (9,034)
-------- -------- --------
Total revenue............................ $200,011 $153,727 $131,914
======== ======== ========
Operating income (loss):
United States.......................... $ 9,066 $ (188) $(43,005)
Europe................................. 8,413 5,073 (1,399)
-------- -------- --------
Total operating income (loss)............ $ 17,479 $ 4,885 $(44,404)
======== ======== ========
Identifiable assets:
United States.......................... $ 72,069 $ 59,037 $ 65,513
Europe................................. 33,022 24,555 18,510
-------- -------- --------
Total assets............................. $105,091 $ 83,592 $ 84,023
======== ======== ========
No single customer accounted for more than 10% of revenue in fiscal years
1998, 1997 and 1996.
(10) ACQUISITIONS AND DISPOSITIONS
Sale of Patents
Effective February 9, 1996, the Company entered into an agreement with EMC
Corporation ("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 include $30,000 to be
received in six equal annual installments of $5,000 each, the first three of
which were received in February 1996, January 1997 and January 1998. The
remaining payments are to be received in each of the subsequent three years
beginning January 1999. The Company will also receive royalty payments in the
aggregate of up to a maximum of $30,000 over the term of the agreement, of which
a minimum of $10,000 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 two annual installments were received
F-19
44
MTI TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
in March 1997 and March 1998. Included in net product revenue and other income
for fiscal years 1998, 1997 and 1996 are $5,000, $5,000 and $1,250, and $2,000,
$2,000 and $500, respectively, related to this agreement. Included in deferred
income at April 4, 1998 and April 5, 1997, is $3,750 related to this agreement.
In addition, the Company also received an irrevocable, non-cancelable, perpetual
and royalty-free license to exploit, market, and sell the technology protected
under the aforementioned patents. Pursuant to the terms and conditions of the
agreement, this license will terminate in the event of a change in control of
the Company involving certain acquirers. As part of the agreement, the Company
and EMC granted to each other the license to exploit, market and sell the
technology associated with each of their respective existing and future patents
arising from any patent applications in existence as of the effective date of
the agreement for a period of five years.
National Peripherals, Inc.
Effective April 2, 1995, the Company acquired all the outstanding stock of
National Peripherals, Inc. ("NPI"), a privately held provider of cross-platform
RAID-based storage solutions for the Open Systems computing environment.
Consideration paid in the NPI acquisition included: (a) payments of $2,608 in
cash to NPI and its stockholders, (b) promissory notes in the aggregate amount
of $2,000 bearing 6% interest per annum and payable in two equal annual
installments beginning April 1996, (c) guaranteed earnout payments in the
aggregate amount of $3,000 and payable in three equal annual installments
beginning in April 1996, and (d) acquisition costs of $406. In addition, the
acquisition agreement provides for contingent payments of up to $1,000 payable
in April 1998 based on certain performance criteria. The Board of Directors
approved the payment of the contingent $1,000 payment during the fourth quarter
of fiscal year 1997. The accelerated timing of the payment was based on the
over-achievement of the performance criteria as set forth in the amended NPI
stock purchase agreement. During fiscal year 1997, the Company further increased
goodwill $1,000 as a result of the contingent payment made based on certain
performance criteria pursuant to the terms of the acquisition agreement.
Raxco Inc. Asset Purchase
In January 1995, the Company acquired certain assets, including
intellectual properties and source code rights, of the UNIX and OpenVMS storage
management software product lines of Raxco, Inc. ("Raxco"). The purchase price
of the acquired assets included payment of $1,000 in cash, notes in the amount
of $2,500, assumption of certain liabilities of $1,903, primarily deferred
service maintenance contracts, and acquisition costs of $58. In connection with
the acquisition, the Company recorded an accrual of $825 to reflect the
anticipated costs related to the closure of excess facilities in the United
Kingdom and the estimated costs to satisfy certain preexisting product
development obligations. In the fourth quarter of fiscal year 1996, the Company
recorded an additional $282 associated with the Company's satisfaction of the
preexisting product development obligations. In addition, as part of the
consideration paid, the Company issued warrants to purchase 250,000 shares of
the Company's common stock with an exercise price of $6.00 per share. In
management's opinion, based on the current market value of the Company's common
stock, the fair market value of these warrants was not material, and no value
was assigned to the warrants. In October 1997, 161,830 shares of the Company's
common stock were issued to AXENT Technologies, Inc. (formerly Raxco, Inc.), in
exchange for the surrender of the warrants to purchase 250,000 shares of the
Company's common stock. Pursuant to the terms of the warrants, in lieu of
exercising the warrants for cash, the holder elected to have withheld from the
number of shares otherwise deliverable, shares having a fair market value equal
to the aggregate warrant exercise price.
F-20
45
MTI TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(11) RELATED PARTY TRANSACTIONS
Effective April 7, 1996, the Company entered into an agreement with NFT
Ventures, Inc. ("NFT"), an entity affiliated with the Company's major
stockholder and Chairman of the Board, whereby NFT agreed to provide the Company
with up to $2,400 of non-refundable research and development funding based on
actual research and development expenses incurred in connection with new and
enhanced Backup-UNET software products, the RLM Software Products Group and the
Open Media Products Group. The Company received $1,628 under this agreement in
fiscal year 1997. The consideration NFT received for the funding commitment
included: (a) an irrevocable, worldwide, nonexclusive license to develop, market
and sell certain defined new or substantially enhanced software products
developed by the Company; (b) the right to royalty payments based on the revenue
recognized by the Company from sale of the defined software products that are
sold within four years of the effective date of the agreement; and (c) a warrant
to purchase up to 750,000 shares of the Company's common stock with an exercise
price of $2.25 per share. Based on the total of $1,628 of NRE funding received,
a warrant to purchase up to 508,824 shares of the Company's common stock was
issued. On October 21, 1997, the warrant to purchase 508,824 shares of the
Company's common stock was exercised in full.
On July 19, 1995, the Company entered into an agreement (the "Agreement")
whereby it received a loan of approximately $10,000 from NFT V2, an entity
affiliated with the Company's major stockholder and Chairman of the Board.
Pursuant to the Agreement, the Company issued a long-term, secured subordinated
note (the "Note") to NFT V2, which bears annual interest of 10.75% and was
repayable in two equal installments, the first installment being due and payable
in January 1997, the second in July 1997. Pursuant to the terms of the
agreement, the Note was convertible at the lender's option into common stock of
the Company 90 days after the date of the agreement at a price per common share
equal to the then fair market value of such stock. Proceeds from the loan are
being used for working capital purposes.
During the second quarter of fiscal year 1996, the Company entered into an
agreement with NFT V2, whereby pursuant to the terms of the agreement, the
Company licensed certain software products to NFT V2 for commercial use and
resale. As consideration for the licenses, the Company received a $650 credit
against amounts owing to NFT V2 under the Agreement and has access to certain
product enhancements to be developed by NFT V2.
On April 11, 1996, NFT V2 exercised its right to convert current principal
and accrued interest outstanding thereunder of $10,113, under the Note, into
5,992,665 shares of the Company's common stock at the current market price of
$1.6875 per share on the day of conversion. After giving effect to the
conversion, NFT V2 and related entities hold approximately 13,699,461 shares of
the Company's common stock, or approximately 54 percent of shares outstanding at
the date of conversion. The common stock provided to NFT V2 as part of the
conversion was not registered under the Securities Act of 1933, and NFT V2 has
indicated that it is acquiring the shares for investment purposes only.
In May 1996, the Company's line of credit agreement with Greyrock Business
Credit was amended to increase the line of credit to $30,000 based on additional
pledged collateral by an affiliate of NFT, an entity affiliated with the
Company's major stockholder and Chairman of the Board. As consideration for the
guaranty, the Company issued warrants to purchase up to 500,000 shares of the
Company's common stock at a price of $2.00 per share (see note 5). On October
21, 1997, the warrants to purchase 500,000 shares of the Company's common stock
were exercised.
(12) EMPLOYEE BENEFITS
The Company maintains an employee savings plan which is intended to qualify
under section 401(k) of the Internal Revenue Code. The Company's contributions
to the plan are determined at the discretion of the
F-21
46
MTI TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Board of Directors. During fiscal year 1998, the Company contributed $393.
During fiscal years 1997 and 1996, the Company made no contributions to the
plan.
(13) QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial data for continuing operations for fiscal
years 1998 and 1997 are as follows:
NET
INCOME
TOTAL GROSS NET PER SHARE,
REVENUES PROFIT INCOME DILUTED
-------- ------- ------- ----------
1998:
Fourth quarter................................ $ 55,451 $19,880 $ 5,754 $0.19
Third quarter................................. 53,989 18,614 5,079 0.17
Second quarter................................ 46,796 16,637 4,089 0.14
First quarter................................. 43,775 15,878 3,094 0.11
-------- ------- -------
Total........................................... $200,011 $71,009 $18,016
======== ======= =======
1997:
Fourth quarter................................ $ 42,131 $14,543 $ 2,249 $0.08
Third quarter................................. 38,908 12,658 1,767 0.07
Second quarter................................ 36,511 11,597 1,231 0.05
First quarter................................. 36,177 11,126 457 0.02
-------- ------- -------
Total........................................... $153,727 $49,924 $ 5,704
======== ======= =======
The Company has experienced significant quarterly fluctuations in operating
results and anticipates that these fluctuations may continue in the future.
These fluctuations have been and may continue to be caused by a number of
factors, including competitive pricing pressures, the timing of customer orders
(a large majority of which have historically been placed in the last month of
each quarter), the timing of the introduction of new products and new versions
of the Company's products, shifts in product mix and the timing of sales and
marketing and research and development expenditures. Future operating results
may fluctuate as a result of these and other factors, including the Company's
ability to continue to develop innovative products, the introduction of new
products by the Company's competitors and decreases in gross profit margin for
mature products.
In addition, the Company has operated historically without a significant
backlog of orders and, as a result, net product revenue in any quarter is
dependent on orders booked and products shipped during that quarter. A
significant portion of the Company's operating expenses are relatively fixed in
nature and planned expenditures are based primarily on sales forecasts. If
revenue does not meet the Company's expectations in any given quarter, the
adverse impact on the Company's liquidity position and net income may be
magnified by the Company's inability to reduce expenditures quickly enough to
compensate for the revenue shortfall. Further, as is common in the computer
industry, the Company historically has experienced an increase in the number of
orders and shipments in the latter part of each quarter and the Company expects
this pattern to continue in the future. The Company's failure to receive
anticipated orders or to complete shipments in the latter part of a quarter
could have a material adverse effect on the Company's results of operations for
that quarter.
Due to all of the foregoing factors, the Company believes that
period-to-period comparisons of its operating results are not necessarily
meaningful and that such comparisons cannot be relied upon as indicators of
future performance. There can be no assurance that the Company will remain
profitable on a quarter-to-quarter basis or that future revenues and operating
results will not be below the expectations of public market analysts and
investors which could result in a material adverse effect on the Company's
common stock.
F-22
47
SCHEDULE II
MTI TECHNOLOGY CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
FOR THE FISCAL YEARS ENDED APRIL 4, 1998, APRIL 5, 1997 AND APRIL 6, 1996
(IN THOUSANDS)
BALANCE CHARGED TO BALANCE
AT REVENUE, AT
BEGINNING COSTS AND END OF
DESCRIPTION OF PERIOD EXPENSES(1) DEDUCTIONS PERIOD
----------- --------- ----------- ---------- -------
Year ended April 4, 1998
Allowance for doubtful accounts and sales
returns..................................... $9,283 $(2,490)(3) $(1,107) $5,686
====== ======= ======= ======
Allowance for inventory obsolescence........... $3,495 $ 1,968 $(2,426) $3,037
====== ======= ======= ======
Year ended April 5, 1997
Allowance for doubtful accounts and sales
returns..................................... $5,437 $ 4,165 $ (319) $9,283
====== ======= ======= ======
Allowance for inventory obsolescence........... $3,944 $ 3,238 $(3,687) $3,495
====== ======= ======= ======
Year ended April 6, 1996
Allowance for doubtful accounts and sales
returns..................................... $9,986 $(4,395)(2) $ (154) $5,437
====== ======= ======= ======
Allowance for inventory obsolescence........... $8,613 $ 4,056 $(8,725) $3,944
====== ======= ======= ======
- ---------------
(1) The allowance for sales returns is recorded as a charge to revenue, the
allowance for doubtful accounts is charged to selling, general and
administrative expenses, and the allowance for inventory obsolescence is
charged to product cost of revenue.
(2) Includes amounts related to the recognition of receivables whose related
revenue was not recognized until fiscal year 1996.
(3) Includes amounts related to the recognition of receivables whose related
revenue was not recognized until fiscal year 1998.
S-1
48
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION PAGE
- ------- ----------- ----
21.1 Subsidiaries of the Company.................................
23.1 Consent of KPMG Peat Marwick LLP............................
27 Financial Data Schedule.....................................
49
EXHIBIT 21.1
SUBSIDIARIES OF MTI TECHNOLOGY CORPORATION
JURISDICTION OF
SUBSIDIARY INCORPORATION
---------- -------------------
MTI Technology GmbH......................................... Germany
MTI Technology Limited...................................... Scotland
MTI France SA............................................... France
Microtechnology Scandinavia, AB............................. Sweden
MTI Technology Ireland Ltd.................................. Ireland
MTI Technology BV........................................... Holland
MTI Technology SA........................................... Switzerland
MTI Technology Europe....................................... Ireland
National Peripherals, Inc................................... Illinois, USA
International Micro Technology, Inc......................... U.S. Virgin Islands
SI Computer Systems, Ltd.................................... UK
System Industries (Deutschland) GmbH........................ Germany
SI Network Storage Canada, Ltd.............................. Canada
System Industries Ireland, Ltd.............................. Ireland
System Industries Network Storage B.V....................... Holland
System Industries (Switzerland), S.A........................ Switzerland