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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(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 3, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________ .
COMMISSION FILE NUMBER 0-23418
MTI TECHNOLOGY CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-3601802
(STATE OR OTHER JURISDICTION OF I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION IDENTIFICATION NO.)
4905 EAST LA PALMA AVENUE
ANAHEIM, CALIFORNIA 92807
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (714) 970-0300
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 $145,881,020 on June 21, 1999, 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 28,871,287 on
June 21, 1999.
DOCUMENTS INCORPORATED BY REFERENCE:
DOCUMENT FORM 10-K
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Proxy Statement for 1999 III
Annual Meeting of Stockholders to be held on September 23,
1999
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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 1,
1995, April 6, 1996, April 5, 1997, April 4, 1998 and April 3, 1999, 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. The fiscal year ended April 6, 1996
consisted of 53 weeks. All other fiscal years consisted of 52 weeks.
OVERVIEW
MTI Technology Corporation is an international provider of high-performance
data storage solutions for the Open Systems market. MTI designs, manufactures,
sells and services a fully integrated hierarchy of data storage solutions
including fault tolerant RAID disk arrays, solid state disk systems, tape
libraries and storage management software. In addition, the Company provides a
full line of customer services and support offerings. The Company's integrated
solutions are compatible with most Open System computing platforms, including
those of Sun Microsystems, Hewlett-Packard ("HP"), Silicon Graphics, IBM,
Digital Equipment ("DEC") and Linux-based computing systems. The Company's
cross-platform capability allows its customers to implement a standardized
storage and data management solution across heterogeneous (multi-vendor)
computing environments, thus simplifying the management of their on and off-line
data. The typical MTI customer operates a data center, where rapid,
uninterrupted access to on-line information is critical to the customer's
business operations. Historically, this information was centrally managed and
maintained. Today many of these customers are in the process of migrating to a
distributed client/server computing environment with 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 1999, 1998 and 1997.
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 received for these rights includes $30,000 to be
received in six equal annual installments of $5,000 each, the first four of
which were received in February 1996, January 1997, January 1998 and January
1999. The remaining payments are to be received in each of the subsequent two
years beginning January 2000. The Company will also receive royalty payments in
the aggregate of up to a maximum of $30,000 over the term of the agreement. As
part of the maximum $30,000 of royalties, minimum royalties 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 three annual installments were
received in March 1997, March 1998 and March 1999. Also, as part of the maximum
$30,000 of royalties, $10,000 of royalties will be received in five equal annual
installments beginning March 2000 as a result of the announced computer and
technology pact between EMC and IBM in March 1999. 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 of
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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.
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 server products consisting of RAID storage
subsystems, high performance storage servers, and solid state disk database
accelerators; tape library systems; and data management software consisting of
distributed network backup recovery, HSM and media management products.
Revenues from server products represented approximately 57%, 61% and 76% of
net product revenue in fiscal years 1999, 1998 and 1997, respectively. Revenues
from tape products represented approximately 34%, 31% and 19% of net product
revenue in fiscal years 1999, 1998 and 1997, respectively. Revenues from
software products represented approximately 9%, 8% and 5% of net product revenue
in fiscal years 1999, 1998 and 1997, 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 6000 product line, which is based on the Company's
proprietary controller technology, and its Gladiator 3000 product line. These
products are utilized primarily within the Sun, HP, Silicon Graphics, IBM and
Intel computing platforms.
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 and restoration of data in DEC, HP, Sun,
Manager a network environment IBM, Intel
Backup.UNET Provides client/server backup for cross-platform HP, Sun,
network environments Silicon Graphics,
IBM, DEC, Intel
Oasis Net Backup Performs network backup and provides recovery DEC, Sun, IBM,
capability utilizing the client/server model HP, Intel
Tape Control Automates and manages data backup and retrieval DEC
Autostor Migrates and archives expired data to multiple DEC
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 105 persons as of June 21, 1999, located in 19 sales offices in 16
states. This sales organization is supported by technical field support
personnel consisting of approximately 18 systems consultants as of June 21,
1999, 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 field sales
organization of 61 people, as of June 21, 1999, with 5 offices located in
Germany, France, United Kingdom and Ireland, and indirectly through independent
distributors. International sales represented 33%, 27% and 27% of the Company's
total revenue in fiscal years 1999, 1998 and 1997, respectively. 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 service
organization of 198 people, as of June 21, 1999, located in more than 45 service
locations in the United States and Europe.
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 22%, 18%
and 22% of the Company's total revenue in fiscal years 1999, 1998 and 1997,
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 71 persons as of June 21,
1999. During fiscal years 1999, 1998 and 1997, the Company's research and
development spending was approximately $12,800, $12,500 and $10,100,
respectively.
The Company has two 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.
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MANUFACTURING
The Company's manufacturing operations are 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 components 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 and Compaq, 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 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 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.
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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 21, 1999, the Company had approximately 580 full-time employees
worldwide, including 372 in marketing, sales and service support, 85 in
manufacturing and quality assurance, 71 in engineering and research and
development and 52 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 a 28,500 square foot facility in Dublin, Ireland where it
performs assembly and testing on a limited number of products, with the lease
expiring in 2023. In addition, the Company has an 18,600 square foot facility in
Westmont, Illinois, used for sales and sales technical support under a lease
expiring in June 2005. 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 26 sales and support offices located
in the U.S. and Europe.
ITEM 3. LEGAL PROCEEDINGS
During September and October 1998, the Company and certain directors and
officers were served with two purported stockholder class-action lawsuits
alleging violations of provisions of the Securities and Exchange Act of 1934 and
rules promulgated thereunder in connection with certain statements made during
the period from May 21, 1998 through June 9, 1998. Subsequently, these two
actions were consolidated into a single case, In re: MTI Technology Corp.
Securities Litigation. The consolidated complaint, filed February 2, 1999 in the
United States District Court for the Central District of California, alleges
that the defendants were aware of certain adverse information which they failed
to disclose.
In May 1999, the Company agreed to settle with plaintiffs. A Stipulation of
Settlement was signed providing for a total settlement amount of $900. The
Company's unreimbursed portion of the aggregate settlement was $100. An order,
preliminarily approving the settlement was signed by the court on May 17, 1999.
In addition to the above disclosed item, 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 1999.
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EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the names and ages of all executive officers
of the Registrant as of June 21, 1999. A summary of the background and
experience of each of these individuals is set forth below.
NAME AGE POSITION(S)
---- --- -----------
Earl M. Pearlman.................. 55 President and Chief Executive Officer
Dale R. Boyd...................... 41 Senior Vice President, Finance and Administration, and
Chief Financial Officer
Charles S. Sitzman................ 51 Senior Vice President, Customer Service
Thomas P. Raimondi................ 41 Chief Operating Officer
Gary M. Scott..................... 43 Senior Vice President, European Operations
Venki Venkataraman................ 50 Senior Vice President, Manufacturing
Patrick Conroy.................... 34 Vice President, Engineering, and Chief Technology Officer
Frank H. Yoshino.................. 37 Vice President, Treasury and Human Resources
Stephanie M. Braun................ 34 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 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 and was 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 S. 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 Chief Operating Officer since July 1998. Mr.
Raimondi had been Senior Vice President and General Manager of the Company since
May 1996 and had been Vice President, Strategic Planning, Product Marketing, and
Director of Marketing of the Company from 1987 until May 1996. 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 since 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.
Frank H. Yoshino has been Vice President, Treasury and Human Resources
since January 1999. Mr. Yoshino had been Treasurer of the Company since July
1996. Prior to joining the Company, Mr. Yoshino
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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 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 21, 1999 was $10.125.
SALES PRICES
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HIGH LOW
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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
FISCAL YEAR 1999
First Quarter............................................... 16.8130 7.8750
Second Quarter.............................................. 9.4380 4.0000
Third Quarter............................................... 5.5000 3.1875
Fourth Quarter.............................................. 6.4375 5.0000
NUMBER OF COMMON STOCKHOLDERS
The approximate number of record holders of common stock of the Company as
of June 21, 1999 was 319.
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
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APRIL 3, APRIL 4, APRIL 5, APRIL 6, APRIL 1,
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
SELECTED STATEMENT OF OPERATIONS DATA:
Net product revenue...................... $157,456 $163,707 $120,359 $ 97,682 $ 91,140
Service revenue.......................... 44,193 36,304 33,368 34,232 36,177
-------- -------- -------- -------- --------
Total revenue.................. 201,649 200,011 153,727 131,914 127,317
Product gross profit..................... 50,689 56,747 36,752 23,625(1) 19,058(6)
Service gross profit..................... 16,276 14,262 13,172 12,070(2) 12,587(7)
-------- -------- -------- -------- --------
Gross profit................... 66,965 71,009 49,924 35,695 31,645
Operating expenses:
Selling, general and administrative.... 46,326 41,055 34,936 65,715(3) 39,812(8)
Research and development............... 12,765 12,475 10,103 14,384 12,825(9)
-------- -------- -------- -------- --------
Total operating expenses....... 59,091 53,530 45,039 80,099(4) 52,637
-------- -------- -------- -------- --------
Operating income (loss)........ 7,874 17,479 4,885 (44,404) (20,992)
Other income (expense), net.............. 3,739 2,557 1,483 (4,636)(5) (1,008)
Income tax expense....................... 1,521 2,020 664 179 3,540
-------- -------- -------- -------- --------
Net income (loss).............. $ 10,092 $ 18,016 $ 5,704 $(49,219) $(25,540)
======== ======== ======== ======== ========
Net income (loss) per share:
Basic.................................. $ 0.35 $ 0.68 $ 0.22 $ (2.54) $ (1.34)
======== ======== ======== ======== ========
Diluted................................ $ 0.34 $ 0.62 $ 0.22 $ (2.54) $ (1.34)
======== ======== ======== ======== ========
Weighted average shares used in per share
computation:
Basic.................................. 28,451 26,674 25,638 19,400 19,029
======== ======== ======== ======== ========
Diluted................................ 29,710 29,112 26,437 19,400 19,029
======== ======== ======== ======== ========
APRIL 3, APRIL 4, APRIL 5, APRIL 6, APRIL 1,
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
SELECTED BALANCE SHEET DATA:
Cash and cash equivalents................. $ 7,213 $ 7,768 $ 3,487 $ 4,055 $ 5,562
Working capital (deficit)................. 29,997 16,711 (12,267) (25,966) 17,641
Total assets.............................. 113,778 105,091 83,592 84,023 102,451
Long-term debt, less current maturities... -- -- 6 5,966 6,927
Total stockholders' equity (deficiency)... 54,141 42,146 16,377 (187) 49,138
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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.
(2) Includes a charge of $504 to write-down to estimated net realizable value
certain field service spares inventories that support the DEC market.
(3) Includes a charge of $16,591 to write-down goodwill and a $2,088 charge for
settlement of a stockholder lawsuit and related legal costs.
(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.
(5) Includes a fourth quarter charge of $1,450 for interest and penalties
related to sales and use tax liability.
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(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.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS:
Certain statements set forth below are not historical or based on
historical facts and constitute "forward-looking statements" involving known and
unknown risks, uncertainties and other factors that may cause the actual
results, performance or achievements of the Company, or industry results, to be
materially different from any future results, performance or achievements,
expressed or implied, by such forward looking statements, including statements
about the Company's 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.
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 3, APRIL 4, APRIL 5,
1999 1998 1997
-------- -------- --------
Net product revenue....................................... 78.1% 81.8% 78.3%
Service revenue........................................... 21.9 18.2 21.7
----- ----- -----
Total revenue................................... 100.0 100.0 100.0
Product gross profit...................................... 32.2 34.7 30.5
Service gross profit...................................... 36.8 39.3 39.5
----- ----- -----
Gross profit......................................... 33.2 35.5 32.5
Selling, general and administrative....................... 23.0 20.6 22.7
Research and development.................................. 6.3 6.2 6.6
----- ----- -----
Operating income..................................... 3.9 8.8 3.2
Other income, net......................................... 1.9 1.3 1.0
Income tax expense........................................ 0.8 1.0 0.5
----- ----- -----
Net income........................................... 5.0% 9.1% 3.7%
===== ===== =====
Net Product Revenue: Net product revenue in fiscal year 1999 decreased $6.3
million, or 4%, from fiscal year 1998. This decrease was primarily due to
decreased revenue of $11.2 million from server products, partially offset by
royalty revenue, tape products and software revenue increases of $2.0 million,
$1.8 million and $1.1 million, respectively, over fiscal year 1998.
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 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.
Service Revenue: Service revenue was $44.2 million for fiscal year 1999, an
increase of $7.9 million, or 22%, over the prior year. The increase is primarily
due to an increased volume of service contracts associated with increased
product sales volume in fiscal year 1998 and a reduced warranty period on tape
products effective in fiscal year 1999.
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 an
increased volume of service contracts associated with increased product sales
volume over the past two years.
11
12
Product Gross Profit: Product gross profit was $50.7 million for fiscal
year 1999, a decrease of $6.1 million, or 11%, from fiscal year 1998, and the
gross profit percentage of net product sales was 32% for fiscal year 1999 as
compared to 35% for fiscal year 1998. The decrease in gross profit percentage
was primarily due to reduced margins on tape products which historically carry a
lower margin.
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.
Service Gross Profit: Service gross profit for fiscal year 1999 increased
$2.0 million, or 14%, over fiscal year 1998. The gross profit percentage for
service revenue was 37% in fiscal year 1999 as compared to 39% for fiscal year
1998. The decrease in gross profit percentage was primarily attributable to a
higher percentage of service contract revenue for tape products which
historically have a lower gross profit margin.
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
Selling, General and Administrative Expenses: Selling, general and
administrative expenses in fiscal year 1999 increased $5.3 million, or 13%, over
fiscal year 1998. This increase in dollars was primarily due to increased
compensation-related costs resulting from increased staff.
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.
Research and Development Expenses: Research and development expenses in
fiscal year 1999 increased $0.3 million, or 2%, from fiscal year 1998. Research
and development expenses were 6% of total revenue in both fiscal years 1999 and
1998.
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.
Other Income (Expense), Net: Other income, net in fiscal year 1999
increased $1.2 million, or 46%, over fiscal year 1998. This increase was
primarily due to reduced interest expense in fiscal year 1999 as compared to the
prior year as a result of decreased credit line balances.
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.
Income Taxes: The Company recorded a net tax expense of $1.5 million for
fiscal year 1999, as compared to $2.0 million in fiscal year 1998. The decrease
was primarily due to lower income for fiscal year 1999 as compared to fiscal
year 1998. See Note 6 of Notes to Consolidated Financial Statements.
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.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and cash equivalents of $7.2 million and $7.8 million
at April 3, 1999 and April 4, 1998, respectively, a decrease of $0.6 million.
Net operating activities provided cash of $7.3 million in fiscal year 1999,
primarily due to $25.0 million of net income adjusted for non-cash items,
partially offset by an increase in accounts receivable of $9.4 million, a $2.8
million increase in prepaid expenses, other receivables
12
13
and other assets, primarily due to the EMC receivable, and a decrease in
accounts payable and accrued and other liabilities of $4.0 million resulting
primarily from decreased inventories and a decrease in accrued bonus.
At April 3, 1999, the Company's days sales outstanding were 96 days, as
compared to 80 days at April 4, 1998. 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
1999 than the percentage of sales occurring within the last month of fiscal year
1998.
Effective July 31, 1998, the Company entered into an agreement with Silicon
Valley Bank and General Electric Capital Corporation whereby the Company may
borrow up to $30.0 million under an asset secured domestic line of credit,
limited by the value of pledged collateral. The agreement allows the Company to
borrow at a rate equal to prime rate. Borrowings under the line of credit are
subject to certain financial and operating covenants, including, without
limitation, various financial covenants requiring the Company to maintain a
minimum current ratio, debt-net worth ratio, tangible net worth and level of
profitability, and restricts the Company from paying any dividends. The initial
term of the agreement is for one year. Borrowings outstanding under this
agreement at June 21, 1999 were $3.4 million.
Effective February 9, 1996, the Company entered into an agreement with EMC,
whereby the Company sold to EMC substantially all of the Company's existing
patents, patent applications and rights thereof. The consideration the Company
received for these rights includes $30.0 million to be received in six equal
annual installments of $5.0 million each, the first four of which were received
in February 1996, January 1997, January 1998 and January 1999. The remaining
payments are to be received in each of the subsequent two years beginning
January 2000. The Company will also receive royalty payments in the aggregate of
up to a maximum of $30.0 million over the term of the agreement. As part of the
maximum $30.0 million of royalties, minimum royalties of $10.0 million will be
received in five annual installments, beginning within thirty days of the first
anniversary of the effective date of the agreement, and within thirty days of
each subsequent anniversary thereof. The first three annual installments were
received in March 1997, March 1998 and March 1999. Also, as part of the of the
maximum $30.0 million of royalties, $10.0 million of royalties will be received
in five equal annual installments beginning March 2000 as a result of the
announced computer and technology pact between EMC and IBM in March 1999.
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. The Company's current line of credit agreement will expire in
July 1999. The Company has begun negotiations for a renewal of its existing
credit facility and believes the Company will be able to secure comparable
financing prior to the expiration of the existing credit facility. No assurance
can be given that additional financing will be available or, if available, will
be on terms favorable to the Company.
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
In the past, many computer software programs were written using two digits
rather than four digits to define the applicable year. As a result,
date-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This situation is generally referred to as the "Year 2000
Issue." If such a situation occurs, the potential exists for system failures or
miscalculations, which could disrupt operations.
13
14
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 it believes is year 2000 compliant based on
representations of the manufacturers. The manufacturing and accounting systems
have been replaced. Although the Company expects that remaining components of
the enterprise-wide business system installation will be completed by the end of
1999, there can be no assurance that the Company will be able to achieve this
installation on time or that unexpected compliance issues will not arise.
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 business, results of
operations and financial condition.
The Company has substantially completed a comprehensive remediation plan
for the Year 2000 Issue that includes the assessment, rectification, testing and
reporting of product compliance, the receipt and review of third party
representations of year 2000 compliance and assessment, and rectification and
testing of all internal IT and non-IT systems. The Company anticipates that
remediation will be complete by August 1999. As a part of the remediation plan,
the Company will evaluate the need for, and complete if necessary, a contingency
plan in the event any non-compliant critical systems remain by January 1, 2000.
The Company has received representations from the majority of suppliers and
is continuing to evaluate the adequacy of the responses. The Company has
identified certain suppliers that are critical to the business and is in the
process of performing site visits to better understand the suppliers' status
regarding year 2000 compliance. Evaluation of suppliers is an ongoing process
and this phase will continue through the end of calendar 1999 as the Company
will continue to update and reevaluate the status of critical suppliers.
The Company has tested the majority of its products for year 2000
compliance. The results of these tests are published on the Company's website at
"http://www.mti.com/other/year2000/index.htm." Testing on the remaining products
is expected to continue through the end of calendar 1999. The Company has
initiated a plan notifying customers of the information available on the website
and to encourage them to assess their own systems based on their operating
environment and the information provided by the Company.
The Company has completed the assessment of its critical internal IT and
non-IT systems. The assessment phase, including assessment of hardware and
software not supported by the Company's IT department, is expected to be
complete by August 1999.
Management believes that the most reasonably likely worst case scenario
related to the Year 2000 Issue that the Company may experience, would be the
delay or inability to procure inventory components from suppliers or delays in
receiving orders or payments from customers due to year 2000 issues experienced
by third parties. Such factors could materially adversely affect the Company's
business, results of operations and financial condition.
The Company does not consider the cost 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 to be a cost relating to year 2000 compliance, because the
project was initiated independent of the Year 2000 Issue and the project
completion date has not been accelerated in order to achieve compliance. As of
June 21, 1999, the Company has incurred year 2000 costs consisting primarily of
internal labor costs. The Company anticipates that costs to complete year 2000
compliance will continue to consist primarily of internal labor costs and be
immaterial, but there can be no assurance that unanticipated costs will not be
incurred.
The Company expects year 2000 compliance during calendar year 1999.
However, there can be no assurances that the Company or third parties will not
experience delays or obstacles in becoming year 2000 compliant and any delay or
failure by the Company or critical third parties in achieving year 2000
compliance could materially adversely affect the Company's business, results of
operations and financial condition.
14
15
RISK FACTORS
The non-historical information in this Form 10-K constitute forward-looking
statements and involve risks and uncertainties. These statements relate to the
Company's future plans, objectives, expectations and intentions. We may identify
these statements by the use of words such as "believes," "expects,"
"anticipates," "intends," "plans" and similar expressions. 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. The
forward-looking statements speak only as of the date of this Form 10K.
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.
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 in past 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
and train additional personnel in a timely manner, could have a material adverse
effect on the Company's results of operations. Should the Company 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 Company and the quality of 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.
15
16
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.
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. Disruptions in
supply or material increases in the cost of these components would have an
adverse effect on the Company.
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 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.
16
17
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 indications 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. Recent trends should not be considered a reliable indication 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 operations.
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.
CONTROL BY PRINCIPAL SHAREHOLDER
Raymond J. Noorda, the Chairman of the Board of the Company, owns
approximately 50% of the Company's outstanding common stock. As a result of his
ownership, Mr. Noorda is able to substantially control actions of the Company
which require stockholder approval, including the election of the Board of
Directors and the approval of significant corporate transactions. Such
concentration of ownership may have the effect of changing or preventing a
change in control of the Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company transacts in foreign currencies, primarily European, and may be
exposed to financial market risk resulting from fluctuations in foreign currency
exchange risks, particularly the British Pound sterling. The volatility of the
pound and other currencies will be monitored in the coming year and the Company
may utilize hedging programs, currency forward contracts, currency options
and/or other derivative financial instruments commonly used to reduce financial
market risks.
17
18
The Company maintains a $30 million credit line. The interest rate applied
to any debt outstanding under this credit line is equal to the prime rate and
is, therefore, subject to a certain amount of risk arising from fluctuations in
these rates. However, a 10% increase in interest rates would not have a material
impact on the Company's results of operations. See Note 5 of Notes to
Consolidated Financial Statements.
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 1999 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 1999 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 1999 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 3, 1999 and April 4, 1998
Consolidated Statements of Income for fiscal years 1999, 1998 and 1997
Consolidated Statements of Stockholders' Equity for fiscal years 1999,
1998 and 1997
Consolidated Statements of Cash Flows for fiscal years 1999, 1998 and
1997
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19
Notes to Consolidated Financial Statements
(2) The following financial statement schedule for fiscal years 1999, 1998
and 1997 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.(6)
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)
*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)
19
20
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
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 Employment Agreement dated August 1, 1997, between Chuck
Sitzman and Registrant.(5)
10.27 Loan and Security Agreement between Company and Silicon
Valley Bank and General Electric Capital Corporation, as
co-lenders, and Schedule thereto.(7)
21.1 Subsidiaries of the Company.
23.1 Consent of KPMG LLP.
24 Power of Attorney. (see page 25)
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 ended October 6, 1995.
(5) Filed as an Exhibit to the Registrant's Quarterly Report on Form 10-Q for
the quarterly period ended October 4, 1997.
(6) Filed as an Exhibit to the Registrant's Quarterly Report on Form 10-Q for
the quarterly period ended January 3, 1998.
(7) Filed as an Exhibit to the Registrant's Quarterly Report on Form 10-Q for
the quarterly period ended July 4, 1998.
* Management or compensatory plan or arrangement.
(b) Reports on Form 8-K
Form 8-K, dated May 14, 1999, regarding the Company's right to receive an
additional $10 million under the Asset Purchase Agreement, dated February 9,
1996, between EMC Corporation and Registrant.
Form 8-K, dated May 24, 1999, regarding the preliminary approval of the
Company's settlement of its stockholders lawsuit.
20
21
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
1999.
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, 1999
- ------------------------------------------------
(Earl M. Pearlman)
/s/ DALE R. BOYD Senior Vice President, Chief July 1, 1999
- ------------------------------------------------ Financial Officer (Principal
(Dale R. Boyd) Financial Officer)
/s/ STEPHANIE M. BRAUN Corporate Controller, Chief July 1, 1999
- ------------------------------------------------ Accounting Officer
(Stephanie M. Braun)
/s/ RAYMOND J. NOORDA Chairman of the Board July 1, 1999
- ------------------------------------------------
(Raymond J. Noorda)
/s/ VAL KREIDEL Director July 1, 1999
- ------------------------------------------------
(Val Kreidel)
/s/ AL MELROSE Director July 1, 1999
- ------------------------------------------------
(Al Melrose)
/s/ JOHN REPP Director July 1, 1999
- ------------------------------------------------
(John Repp)
21
22
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets as of April 3, 1999 and April 4,
1998...................................................... F-3
Consolidated Statements of Income for the fiscal years ended
April 3, 1999, April 4, 1998 and April 5, 1997............ F-4
Consolidated Statements of Stockholders' Equity for the
fiscal years ended April 3, 1999, April 4, 1998 and April
5, 1997................................................... F-5
Consolidated Statements of Cash Flows for the fiscal years
ended April 3, 1999, April 4, 1998 and April 5, 1997...... F-6
Notes to Consolidated Financial Statements.................. F-7
Financial Statement Schedule
Schedule II -- Valuation and Qualifying Accounts............ S-1
F-1
23
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 3, 1999 and April 4, 1998,
and the results of their operations and their cash flows for each of the years
in the three-year period ended April 3, 1999, 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 LLP
Orange County, California
May 17, 1999
F-2
24
MTI TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
APRIL 3, APRIL 4,
1999 1998
-------- --------
Current assets:
Cash and cash equivalents................................. $ 7,213 $ 7,768
Accounts receivable, less allowance for doubtful accounts
and sales returns of $3,250 in 1999 and $5,686 in
1998................................................... 53,005 44,260
Inventories............................................... 16,987 18,819
Deferred income tax benefit............................... 3,960 4,277
Prepaid expenses and other receivables.................... 7,312 4,425
-------- --------
Total current assets.............................. 88,477 79,549
Property, plant and equipment, net.......................... 13,802 11,995
Intangible assets and goodwill, less accumulated
amortization of $7,438 in 1999 and $5,578 in 1998......... 10,890 12,753
Other....................................................... 609 794
-------- --------
$113,778 $105,091
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings..................................... $ 5,824 $ 7,898
Current maturities of long-term debt...................... -- 6
Accounts payable.......................................... 18,632 20,294
Accrued liabilities....................................... 16,043 18,199
Deferred income........................................... 17,981 16,441
-------- --------
Total current liabilities......................... 58,480 62,838
Other....................................................... 1,157 107
-------- --------
Total liabilities................................. 59,637 62,945
-------- --------
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
29,212 and 28,821 shares in 1999 and 1998,
respectively........................................... 29 29
Additional paid-in capital................................ 98,539 96,577
Accumulated deficit....................................... (39,929) (50,021)
Less cost of treasury stock (575 and 666 shares in 1999
and 1998, respectively)................................ (2,108) (2,452)
Accumulated other comprehensive loss...................... (2,390) (1,987)
-------- --------
Total stockholders' equity.................................. 54,141 42,146
Commitments and contingencies...............................
-------- --------
$113,778 $105,091
======== ========
See accompanying notes to consolidated financial statements.
F-3
25
MTI TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
FISCAL YEARS ENDED APRIL 3, 1999, APRIL 4, 1998 AND APRIL 5, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1999 1998 1997
-------- -------- --------
Net product revenue........................................ $157,456 $163,707 $120,359
Service revenue............................................ 44,193 36,304 33,368
-------- -------- --------
Total revenue.................................... 201,649 200,011 153,727
Product cost of revenue.................................... 106,767 106,960 83,607
Service cost of revenue.................................... 27,917 22,042 20,196
-------- -------- --------
Total cost of revenue............................ 134,684 129,002 103,803
-------- -------- --------
Gross profit..................................... 66,965 71,009 49,924
Operating expenses:
Selling, general and administrative...................... 46,326 41,055 34,936
Research and development................................. 12,765 12,475 10,103
-------- -------- --------
Total operating expenses......................... 59,091 53,530 45,039
Operating income................................. 7,874 17,479 4,885
Other income (expense):
Interest expense......................................... (716) (2,069) (2,993)
Interest income.......................................... 66 176 87
Other income............................................. 4,389 4,450 4,389
-------- -------- --------
Income before income taxes................................. 11,613 20,036 6,368
Income tax expense....................................... 1,521 2,020 664
-------- -------- --------
Net income............................................... $ 10,092 $ 18,016 $ 5,704
======== ======== ========
Net income per share:
Basic.................................................... $ 0.35 $ 0.68 $ 0.22
======== ======== ========
Diluted.................................................. $ 0.34 $ 0.62 $ 0.22
======== ======== ========
Weighted average shares used in per share computation:
Basic.................................................... 28,451 26,674 25,638
======== ======== ========
Diluted.................................................. 29,710 29,112 26,437
======== ======== ========
See accompanying notes to consolidated financial statements.
F-4
26
MTI TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FISCAL YEARS ENDED APRIL 3, 1999, APRIL 4, 1998 AND APRIL 5, 1997
(IN THOUSANDS)
TOTAL
ACCUMULATED STOCK- TOTAL
COMMON STOCK ADDITIONAL RETAINED OTHER HOLDERS' COMPREHENSIVE
--------------- PAID-IN EARNINGS COMPREHENSIVE EQUITY INCOME
SHARES AMOUNT CAPITAL (DEFICIT) LOSS (DEFICIENCY) (LOSS)
------ ------ ---------- --------- ------------- ------------ -------------
Balance at April 6, 1996......... 19,449 $20 $74,824 $(73,645) $(1,386) $ (187)
Net income....................... -- -- -- 5,704 -- 5,704 $ 5,704
Foreign currency translation
adjustments.................... -- -- -- -- (245) (245) (245)
-------
Comprehensive income for the year
ended April 5, 1997............ $ 5,459
=======
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
------ --- ------- -------- ------- -------
Balance at April 5, 1997......... 25,782 26 85,992 (68,010) (1,631) 16,377
Net income....................... -- -- -- 18,016 -- 18,016 $18,016
Foreign currency translation
adjustments.................... -- -- -- -- (356) (356) (356)
-------
Comprehensive income for the year
ended April 4, 1998............ $17,660
=======
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
------ --- ------- -------- ------- -------
Balance at April 4, 1998......... 28,155 29 94,125 (50,021) (1,987) 42,146
Net income....................... -- -- -- 10,092 -- 10,092 $10,092
Foreign currency translation
adjustments.................... -- -- -- -- (403) (403) (403)
-------
Comprehensive income for the year
ended April 3, 1999............ $ 9,689
=======
Exercise of stock options
(including income tax benefit
of $988)....................... 392 -- 1,796 -- -- 1,796
Treasury shares issued under
Employee Stock Purchase Plan
and other...................... 90 -- 510 -- -- 510
------ --- ------- -------- ------- -------
Balance at April 3, 1999......... 28,637 $29 $96,431 $(39,929) $(2,390) $54,141
====== === ======= ======== ======= =======
See accompanying notes to consolidated financial statements.
F-5
27
MTI TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED APRIL 3, 1999, APRIL 4, 1998 AND APRIL 5, 1997
(IN THOUSANDS)
1999 1998 1997
--------- --------- ---------
Cash flows from operating activities:
Net income............................................ $ 10,092 $ 18,016 $ 5,704
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization...................... 8,281 7,920 9,854
Provision for sales returns and losses on accounts
receivable, net.................................. 434 1,107 319
Provision for inventory obsolescence............... 2,239 1,968 3,238
Loss on disposal of fixed assets................... 39 69 259
Deferred income tax expense (benefit).............. 1,305 (899) (176)
Deferred income.................................... 2,591 3,260 (2,208)
Compensation related to stock options.............. -- 18 14
Gain on sale of product lines...................... -- (246) --
Change in assets and liabilities, net of effect of
acquisitions:
Accounts receivable................................... (9,424) (13,565) (11,087)
Inventories........................................... (451) (6,538) 1,984
Prepaid expenses, other receivables and other
assets............................................. (2,841) (1,449) 1,527
Accounts payable...................................... (1,719) 5,926 (228)
Accrued and other liabilities......................... (2,284) 3,527 (2,853)
--------- --------- ---------
Net cash provided by operating activities............. 8,262 19,114 6,347
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures for property, plant and
equipment.......................................... (8,148) (4,759) (3,780)
Acquisition of assets and liabilities of businesses,
net of cash acquired............................... -- -- (1,000)
Payments received on notes receivables................ -- 246 --
Short term investments................................ -- 850 (850)
--------- --------- ---------
Net cash used in investing activities................. (8,148) (3,663) (5,630)
--------- --------- ---------
Cash flows from financing activities:
Borrowings under notes payable, net of acquisitions... 99,543 148,779 116,986
Borrowings under notes payable to fund acquisition of
NPI................................................ -- -- 1,000
Proceeds from issuance of common stock and exercise of
options and warrants............................... 1,318 4,596 596
Repayments of notes payable........................... (101,624) (164,485) (119,552)
--------- --------- ---------
Net cash provided by (used in) financing activities... (763) (11,110) (970)
--------- --------- ---------
Effect of exchange rate changes on cash................. 94 (60) (315)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents.... (555) 4,281 (568)
Cash and cash equivalents at beginning of year.......... 7,768 3,487 4,055
--------- --------- ---------
Cash and cash equivalents at end of year................ $ 7,213 $ 7,768 $ 3,487
========= ========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest.............................................. $ 1,046 $ 2,392 $ 2,963
Income taxes.......................................... 1,616 719 348
Supplemental schedule of noncash investing and financing
activities:
Conversion of debt to common stock.................... -- -- 10,113
Income tax benefit from exercise of stock options..... 988 3,495 --
See accompanying notes to consolidated financial statements.
F-6
28
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 1999, 1998 and 1997 ended on April 3, April 4, and April 5, respectively,
and consisted of 52 weeks.
Revenue Recognition
Sales of the Company's computer equipment are usually recorded upon
shipment, net of an allowance for estimated returns. Some revenues are
recognized on bill and hold transactions that meet revenue recognition criteria.
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
accrues for warranty expense at the time revenue is recognized and maintains a
warranty accrual for the estimated future warranty obligation based on the
relationship between historical and anticipated warranty costs and sales
volumes.
The Company applies Statement of Position 17-2, "Software Revenue
Recognition", whereby revenue is recognized 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. There are no
cash equivalents at April 3, 1999. At April 4, 1998, $281 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.
F-7
29
MTI TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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.
Accounting for Stock Options
The Company accounts for stock options 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 is
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 the
disclosure provisions of Statement of Financial Accounting Standards No.
("Statement") 123, "Accounting for Stock-Based Compensation."
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
Statement 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." Long-lived assets and certain identifiable
intangibles are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. 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 fair value. 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.
Goodwill represents intellectual property rights, access to an installed
customer base and research and development capacity related to the acquisitions
of Raxco and National Peripherals, Inc. 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
F-8
30
MTI TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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 other accumulated comprehensive
loss in stockholders' equity. Net foreign currency transaction exchange losses
of $669, $237 and $499 were realized in fiscal years 1999, 1998 and 1997,
respectively, and are included in selling, general and administrative expense in
the accompanying consolidated statements of operations.
Concentration of Credit Risk and Suppliers
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 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 3, 1999,
the fair value of all financial instruments approximated their carrying value.
F-9
31
MTI TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(2) INVENTORIES
Inventories consist of the following:
APRIL 3, APRIL 4,
1999 1998
-------- --------
Raw materials............................................ $ 8,262 $10,822
Work-in-process.......................................... 367 318
Finished goods........................................... 8,358 7,679
------- -------
$16,987 $18,819
======= =======
(3) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, at cost, are summarized as follows:
APRIL 3, APRIL 4,
1999 1998
-------- --------
Plant equipment, office furniture and fixtures........... $14,062 $11,970
Computer equipment....................................... 17,914 15,259
Field service spares..................................... 10,238 8,729
Leasehold improvements................................... 2,097 1,686
------- -------
44,311 37,644
Less accumulated depreciation and amortization........... 30,509 25,649
------- -------
$13,802 $11,995
======= =======
(4) ACCRUED LIABILITIES
Accrued liabilities consist of the following:
APRIL 3, APRIL 4,
1999 1998
-------- --------
Salaries, wages and commissions.......................... $ 6,955 $ 6,800
Taxes.................................................... 5,096 6,352
Accrued warranty costs................................... 804 916
Other.................................................... 3,188 4,131
------- -------
$16,043 $18,199
======= =======
(5) DEBT
Credit Agreement and Lines of Credit
Effective July 31, 1998, the Company entered into an agreement with Silicon
Valley Bank and General Electric Capital Corporation whereby the Company may
borrow up to $30,000 under an asset secured domestic line of credit, limited by
the value of pledged collateral. The agreement allows the Company to borrow at a
rate equal to prime rate. Borrowings under the line of credit are subject to
certain financial and operating covenants, including, without limitation,
various financial covenants requiring the Company to maintain a minimum current
ratio, debt-net worth ratio, tangible net worth and profitability and restricts
the Company from paying any dividends. At April 3, 1999, the Company was in
compliance with all such
F-10
32
MTI TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
covenants. The initial term of the agreement is for one year, expiring July 31,
1999. The Company has begun negotiations for a renewal of its existing credit
facility, and believes the Company will be able to secure comparable financing
prior to the expiration of the existing credit facility. Borrowings outstanding
under this agreement at April 3, 1999 were $5,824.
The above agreement replaced an asset secured line of credit up to $30,000
with Greyrock Business Credit which allowed the Company to borrow at a blended
rate of prime rate plus 1.67%.
(6) INCOME TAXES
The components of income before income taxes are as follows:
FISCAL YEARS ENDED
--------------------------------
APRIL 3, APRIL 4, APRIL 5,
1999 1998 1997
-------- -------- --------
U.S. .......................................... $ 3,965 $11,659 $1,010
Foreign........................................ 7,648 8,377 5,358
------- ------- ------
$11,613 $20,036 $6,368
======= ======= ======
Income tax expense (benefit) consists of the following:
CURRENT DEFERRED TOTAL
------- -------- ------
1999:
Federal........................................ $ (375) $1,305 $ 930
State.......................................... 25 -- 25
Foreign........................................ 566 -- 566
------ ------ ------
$ 216 $1,305 $1,521
====== ====== ======
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
====== ====== ======
F-11
33
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 3, APRIL 4, APRIL 5,
1999 1998 1997
-------- -------- --------
Federal statutory rate.................................... 35.0% 35.0% 35.0%
Effect of foreign operations.............................. (4.6) (0.9) (22.3)
State taxes, net of federal benefit....................... -- 0.7 2.1
Change in valuation allowance............................. (20.1) (26.0) (14.1)
Non-deductible expenses................................... 5.2 2.9 6.7
Other..................................................... (2.4) (1.6) 3.0
----- ----- -----
13.1% 10.1% 10.4%
===== ===== =====
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:
1999 1998 1997
------- ------- -------
Deferred tax assets:
Tax operating loss carryforwards.................... $15,436 $14,096 $20,267
Tax basis of intangible assets greater than book
basis............................................ 5,370 5,752 5,565
Accrued expenses not deductible for tax purposes.... 1,187 3,571 3,362
Inventory reserves.................................. 885 1,346 1,226
Book depreciation greater than tax depreciation..... 3,185 2,682 1,873
Recognition of income reported on different methods
for tax purposes than for financial reporting.... 1,982 1,564 80
Other............................................... (444) 1,241 (231)
------- ------- -------
27,601 30,252 32,142
Less valuation allowance.............................. 23,641 25,975 31,182
------- ------- -------
$ 3,960 $ 4,277 $ 960
======= ======= =======
At April 3, 1999, the Company had federal net operating loss ("NOL")
carryforwards arising from the acquisition of SF2, available to offset future
taxable income of $16,646, 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 3, 1999, the Company had federal NOL carryforwards, exclusive of
the $16,646 SF2 NOL discussed above, of $22,147. 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
3, 1999. The change in the valuation allowance from fiscal year 1998 to fiscal
year 1999 was $2,334 and the change in the valuation allowance from fiscal year
1997 to fiscal year 1998 was $5,207.
The Internal Revenue Service ("IRS") is conducting an examination of the
Company's fiscal years 1992 through 1995 federal income tax returns. During the
fourth quarter of fiscal 1999, the Company received notice from the IRS of
proposed adjustments for fiscal years 1992 through 1995. 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 IRS appeals office. The Company believes the ultimate resolution of
F-12
34
MTI TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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 per Share
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share amounts):
1999 1998 1997
------- ------- -------
Numerator:
Net income, basic and diluted....................... $10,092 $18,016 $ 5,704
======= ======= =======
Denominator:
Denominator for net income per share,
basic -- weighted-average shares outstanding..... 28,451 26,674 25,638
------- ------- -------
Effect of dilutive securities:
Dilutive options outstanding..................... 1,259 2,002 672
Dilutive warrants outstanding.................... -- 436 127
------- ------- -------
Dilutive potential common shares.................... 1,259 2,438 799
------- ------- -------
Denominator for net income per share,
diluted -- adjusted weighted-average shares...... 29,710 29,112 26,437
======= ======= =======
Net income per share, basic........................... $ 0.35 $ 0.68 $ 0.22
======= ======= =======
Net income per share, diluted......................... $ 0.34 $ 0.62 $ 0.22
======= ======= =======
Options to purchase 2,935,350 shares of common stock at prices in excess of
$7.54 per share were outstanding at April 3, 1999, 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
stock during the period, and therefore, the effect would be antidilutive.
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
stock 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' and warrants'
exercise price was greater than the average market price of the common stock
during the period, and therefore, the effect 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-13
35
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 receives 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 3, 1999, options to purchase 52,500 shares
of common stock were outstanding, of which 50,000 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 $0,
$18 and $14 for fiscal years 1999, 1998 and 1997, respectively.
The options granted typically vest over a period of four years from the
date of grant. At April 3, 1999 and April 4, 1998, the number of options
exercisable was 2,341,000 and 1,441,000, respectively, and the weighted-average
exercise price of those options was $4.72 and $2.21, respectively.
The per share weighted-average fair value of stock options granted during
fiscal years 1999, 1998 and 1997 was $4.11, $6.40 and $1.58, respectively, on
the date of grant using the Black-Scholes option pricing model with the
following weighted average assumptions: 1999 -- expected dividend yield of 0%,
risk-free interest rate of 5.43%, volatility of its stock over the expected life
of the options of .5 and an expected life of six years; 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 expected life of the options of .5 and an
expected life of six years.
F-14
36
MTI TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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 would have
been the pro forma amounts indicated below:
NET INCOME
NET INCOME PER SHARE, DILUTED
---------- ------------------
As reported:
1999........................................... $10,092 $0.34
1998........................................... $18,016 $0.62
1997........................................... $ 5,704 $0.22
Pro forma:
1999........................................... $ 4,912 $0.17
1998........................................... $15,169 $0.52
1997........................................... $ 4,601 $0.17
Pro forma net income reflects only options granted since fiscal year 1996.
Therefore, the full impact of calculating compensation cost for stock options
under Statement 123 is not reflected in the pro forma net income 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 6, 1996.................. 3,236 $ 1.88
Granted............................................. 1,660 2.75
Exercised........................................... (300) 1.72
Canceled............................................ (370) 2.06
------
Options outstanding at April 5, 1997.................. 4,226 2.22
Granted............................................. 1,567 12.25
Exercised........................................... (1,113) 1.91
Canceled............................................ (102) 8.76
------
Options outstanding at April 4, 1998.................. 4,578 5.56
Granted............................................. 2,020 7.86
Exercised........................................... (392) 2.06
Canceled............................................ (254) 8.30
------
Options outstanding at April 3, 1999.................. 5,952 $ 6.51
======
F-15
37
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 3, 1999 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 1,146 5.6 $ 1.74 933 $ 1.74
1.8750 - 2.2500 866 7.3 2.21 517 2.22
3.0000 - 5.6875 1,001 8.5 4.27 333 3.78
8.3125 - 9.0000 1,563 9.2 8.32 20 9.00
11.8750 - 12.8750 1,344 8.5 12.70 538 12.70
15.2500 - 15.3125 32 9.0 15.29 0 0.00
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 1999, 1998 and 1997, 90,645, 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 3, 1999 under all noncancelable
operating facility and equipment leases for subsequent fiscal years are as
follows:
2000....................................................... $ 4,457
2001....................................................... 3,846
2002....................................................... 3,559
2003....................................................... 3,226
2004....................................................... 1,944
Thereafter................................................. 3,420
-------
$20,452
=======
Rent expense totaled $5,422, $4,575 and $4,237, for fiscal years 1999, 1998
and 1997, respectively.
F-16
38
MTI TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Litigation
During September and October 1998, the Company and certain directors and
officers were served with two purported stockholder class-action lawsuits
alleging violations of provisions of the Securities and Exchange Act of 1934 and
rules promulgated thereunder in connection with certain statements made during
the period from May 21, 1998 through June 9, 1998. Subsequently, these two
actions were consolidated into a single case, In re: MTI Technology Corp.
Securities Litigation. The consolidated complaint, filed February 2, 1999 in the
United States District Court for the Central District of California, alleges
that the defendants were aware of certain adverse information which they failed
to disclose.
In May 1999, the Company agreed to settle with plaintiffs. A Stipulation of
Settlement was signed providing for a total settlement amount of $900. The
Company's unreimbursed portion of the aggregate settlement was $100. An order
preliminarily approving the settlement was signed by the court on May 17, 1999.
The 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 the design, manufacture, sale and service of
high-performance storage systems, software and related products. The Company's
reportable business segments are based on geographic areas. The Company's
operations are structured to achieve consolidated objectives. As a result,
significant interdependence and overlap exists among the Company's geographic
areas. Accordingly, revenue, operating income and identifiable assets shown for
each geographic area may not be indicative of the amount which would have been
reported if the geographic areas were independent of one another.
Revenue and transfers between geographic areas are generally priced to
recover cost plus an appropriate mark-up for profit. Operating income is revenue
less cost of revenues and direct operating expenses.
A summary of the Company's operations by geographic area is presented
below:
1999 1998 1997
-------- -------- --------
Revenue:
United States.................................... $145,185 $157,215 $124,704
Europe........................................... 66,960 54,356 41,503
Transfers between areas.......................... (10,496) (11,560) (12,480)
-------- -------- --------
Total revenue...................................... $201,649 $200,011 $153,727
======== ======== ========
Operating income:
United States.................................... $ 136 $ 9,066 $ (188)
Europe........................................... 7,738 8,413 5,073
-------- -------- --------
Total operating income............................. $ 7,874 $ 17,479 $ 4,885
======== ======== ========
Identifiable assets:
United States.................................... $ 75,830 $ 72,069 $ 59,037
Europe........................................... 37,948 33,022 24,555
-------- -------- --------
Total assets....................................... $113,778 $105,091 $ 83,592
======== ======== ========
F-17
39
MTI TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The Company's revenues by product type are summarized below:
1999 1998 1997
-------- -------- --------
Server............................................. $ 90,992 $100,147 $ 91,153
Tape............................................... 52,550 50,783 23,260
Software........................................... 13,914 12,777 5,946
Service............................................ 44,193 36,304 33,368
-------- -------- --------
$201,649 $200,011 $153,727
======== ======== ========
No single customer accounted for more than 10% of revenue in fiscal years
1999, 1998 and 1997.
(10) 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 received for these rights includes $30,000 to be
received in six equal annual installments of $5,000 each, the first four of
which were received in February 1996, January 1997, January 1998 and January
1999. The remaining payments are to be received in each of the subsequent two
years beginning January 2000. The Company will also receive royalty payments in
the aggregate of up to a maximum of $30,000 over the term of the agreement. As
part of the maximum $30,000 of royalties, minimum royalties 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 three annual installments were
received in March 1997, March 1998 and March 1999. Also, as part of the maximum
$30,000 of royalties, $10,000 of royalties will be received in five equal annual
installments beginning March 2000 as a result of the announced computer and
technology pact between EMC and IBM in March 1999. Included in net product
revenue and other income for fiscal years 1999, 1998 and 1997 are $4,000, $2,000
and $2,000, and $5,000, $5,000 and $5,000, respectively, related to this
agreement. Included in deferred income at April 3, 1999 and April 4, 1998, 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.
(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 majority
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 and no additional funding will be received. 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
F-18
40
MTI TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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.
(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 Board of Directors. During
fiscal year 1999 and 1998, the Company contributed $243 and $393, respectively.
During fiscal year 1997, the Company made no contributions to the plan.
(13) QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial data for continuing operations for fiscal
years 1999 and 1998 are as follows:
NET
INCOME
NET PER SHARE,
TOTAL REVENUES GROSS PROFIT INCOME DILUTED
-------------- ------------ ------- ----------
1999:
Fourth quarter..................... $ 56,600 $18,785 $ 3,713 $0.13
Third quarter...................... 47,659 15,794 1,474 0.05
Second quarter..................... 47,974 14,490 828 0.03
First quarter...................... 49,416 17,896 4,077 0.14
-------- ------- -------
Total................................ $201,649 $66,965 $10,092
======== ======= =======
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
======== ======= =======
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 the fourth quarter of fiscal year 1999, the Company recognized $2,000
from royalty revenue resulting from the sale of patents to EMC (see note 10).
Based on the agreement, the Company will receive $10,000 of royalties in five
equal annual installments beginning March 2000. The Company will recognize
$2,000 of royalty revenue in the fourth quarter for fiscal years 2000, 2001,
2002 and 2003.
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
F-19
41
MTI TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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-20
42
SCHEDULE II
MTI TECHNOLOGY CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
FOR THE FISCAL YEARS ENDED APRIL 3, 1999, APRIL 4, 1998 AND APRIL 5, 1997
(IN THOUSANDS)
CHARGED TO BALANCE
BALANCE AT REVENUE, AT
BEGINNING COSTS AND END OF
DESCRIPTION OF PERIOD EXPENSES(1) DEDUCTIONS PERIOD
----------- ---------- ----------- ---------- -------
Year ended April 3, 1999
Allowance for doubtful accounts and sales
returns..................................... $5,686 $ (2,002)(3) $ (434) $3,250
====== ======== ======= ======
Allowance for inventory obsolescence........... $3,037 $ 2,239 $(2,027) $3,249
====== ======== ======= ======
Year ended April 4, 1998
Allowance for doubtful accounts and sales
returns..................................... $9,283 $ (2,490)(2) $(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
====== ======== ======= ======
- ---------------
(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 1998.
(3) Includes amounts related to the recognition of receivables whose related
revenue was not recognized until fiscal year 1999.
S-1
43
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION PAGE
- ------- ----------- ----
21.1 Subsidiaries of the Company................................. 45
23.1 Consent of KPMG LLP......................................... 46
27 Financial Data Schedule..................................... 47