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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 1, 2000
[ ] 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 $170,744,764 on June 19, 2000, 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 32,146,051 on
June 19, 2000.
DOCUMENTS INCORPORATED BY REFERENCE:
DOCUMENT FORM 10-K
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Proxy Statement for 2000 Annual Meeting of Stockholders to III
be held on September 28, 2000
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PART I
ITEM 1. BUSINESS:
INTRODUCTION
MTI Technology Corporation was incorporated in California in March 1981 and
reincorporated in Delaware in October 1992. Our principal executive offices are
located at 4905 East La Palma Avenue, Anaheim, California 92807. Our telephone
number at that location is (714) 970-0300. References in this Form 10-K to "we,"
"our," "us," the "Company" and "MTI" refer to MTI Technology Corporation and its
consolidated subsidiaries.
All references to years refer to our fiscal years ended April 6, 1996,
April 5, 1997, April 4, 1998, April 3, 1999 and April 1, 2000, as applicable,
unless the calendar year is specified. References to dollar amounts are in
thousands, except share and per share data and amounts in 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 a leading provider of high availability,
fault tolerant solutions for the enterprise storage marketplace. We design,
develop, manufacture, sell and support a complete line of integrated products
and services that provide customers with a full range of hardware, software and
networking components as well as sophisticated professional services, which we
combine into one solution to provide continuous access to online information. We
have historically sold our products and services to Global 2000 companies for
their data center computing environments. Recently our markets have expanded to
include e-commerce and Internet-related businesses, or IRBs, such as content
providers, online retailers and web-based advertisers. Our solutions are
compatible with Sun Solaris, HP-UX, Windows NT, Novell Netware, IBM AIX, Compaq
Tru64 and Linux operating systems, which enable us to address a broad range of
customer applications and markets.
Our customers represent a cross section of industries and governmental
agencies and range from Fortune 500 companies to small businesses. No single
customer accounted for more than 10 percent of total revenue during fiscal years
2000, 1999 and 1998.
OUR MARKET
In the last decade, there has been a dramatic increase in the volume of
data created, stored, processed and accessed throughout business organizations.
In addition, organizations have recognized the increasing importance and value
of their enterprise data as a strategic, competitive and often mission-critical
asset. These organizations are demanding rapid and reliable access to this data
24 hours a day, seven days a week. The continued deployment of mission-critical,
client-server applications, combined with the growth of enterprise data, and the
rapid growth in the number of IRBs, e-commerce and other companies whose
businesses completely rely on such data, has placed significant strain on
current storage architectures. Furthermore, the increased use of open-system
computing environments, which link multiple applications, files and databases to
networked computers, makes this task increasingly difficult.
OUR SOLUTION
Our enterprise storage solutions are designed to provide our customers with
continuous access to their mission-critical data, while enhancing performance of
their applications and reducing their information technology ("IT") staff's
management and support tasks. We provide these benefits to customers through the
delivery of advanced technology, extensive services and broad support. Key
elements of our solution include:
- a single and unique storage architecture that integrates Storage Area
Network ("SAN") and Network Attached Storage ("NAS") technology and
allows customers to select the access methodology best suited for each
data set;
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- proprietary software applications that enhance the access to, and
security of, an organization's mission-critical data;
- patented input/output ("I/O") architectures that can be tuned to optimize
the performance of a customer's applications and its ability to access
and interact with its data;
- an international support and service organization that assists customers
in determining their data storage needs, designing, implementing and
maintaining the system, and training customer personnel; and
- our certification for complete interoperability among multiple operating
systems.
We refer to our complete integrated enterprise storage solutions as MTI Data
Services, which are delivered through our principal product line, Vivant.
The Vivant solution is based upon our proprietary Fibre Channel data
storage servers for SANs and NAS connectivity. Vivant systems include the
necessary networking components to create sophisticated fabric-based
configurations; application software to enable backup, replication, management
and high availability options; and a service and support offering that seeks to
ensure that our systems perform to the specifications to which they were
designed. Our MTI Data Services solution offers our customers the following
benefits:
- SANs and NAS combined into a single cost-effective solution;
- scalable network connectivity;
- the ability to tune our system for optimal performance with individual
applications;
- integrated back-up capacity appropriately sized to match online storage
requirements;
- integrated replication for local or remote disaster recovery; and
- centralized management software that enables the management of multiple
operating systems from a single control station.
Our integration of technology, services and support into a single unique
storage architecture reduces the complexity and cost of building and managing
discrete SANs and NAS systems. This combination also increases the efficiency of
data storage usage by allowing an IT manager the flexibility to allocate storage
across multiple platforms. Furthermore, our cross-platform interoperability
helps to protect a customer's investment in the event that it chooses to migrate
to a new server platform.
OUR PRODUCTS
Our 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.
Storage Server Products
Our storage server products include our Vivant product line, which is based
on our proprietary controller technology, and our Gladiator 3000 product line.
These products are utilized primarily with Sun Solaris, HP-UX, Windows NT,
Novell Netware, IBM AIX, Compaq Tru64 and Linux operating systems.
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. We market and sell tape
library systems that are utilized primarily with Sun Solaris, HP-UX, Windows NT,
Novell Netware, IBM AIX, Compaq Tru64 and Linux operating systems.
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Data Management Software
Our data management software has been specifically developed and is
employed for the direct support and management of stored data and data storage
devices. In addition to our own proprietary software, we market and sell
Legato's NetWorker, a comprehensive, cross-platform approach for enterprise-wide
solutions for network data protection and storage management.
Revenue from server products represented approximately 74%, 57% and 61% of
net product revenue in fiscal years 2000, 1999 and 1998, respectively. Revenues
from tape library systems represented approximately 20%, 34% and 31% of net
product revenue in fiscal years 2000, 1999 and 1998, respectively. Revenues from
data management software represented approximately 6%, 9% and 8% of net product
revenue in fiscal years 2000, 1999 and 1998, respectively. See Note 10 of Notes
to Consolidated Financial Statements.
SIGNIFICANT BUSINESS DEVELOPMENTS
Effective February 9, 1996, we entered into an agreement (the "EMC
Agreement") with EMC Corporation ("EMC"), selling EMC substantially all of our
existing patents, patent applications and related rights. We are entitled to
receive $30,000 over the life of this agreement. In addition, we will also
receive royalty payments in the aggregate of a minimum of $20,000 and up to a
maximum of $30,000. We also received an irrevocable, non-cancelable, perpetual
and royalty-free license to exploit, market, and sell the technology protected
under the applicable patents. This license will terminate in the event there is
a change in control of the Company involving certain acquirers. As part of the
EMC Agreement, MTI 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 EMC Agreement for a period of five years. See Note 11 of
Notes to Consolidated Financial Statements.
SALES AND MARKETING
In the United States, we primarily market and sell our products directly to
end users through our field sales organization and indirectly through selected
distributors. As of May 27, 2000, our domestic sales organization consisted of
139 persons, located in 23 sales offices in 17 states. This sales organization
included a technical field support staff of approximately 32 systems
consultants, who provide consulting services and have experience in the
management of complex data and implementing distributed client server systems.
As of May 27, 2000, we marketed our products internationally through our field
sales organization of 66 people, with five offices located in Germany, France,
United Kingdom and Ireland, and indirectly through independent distributors.
International sales represented 28%, 33% and 27% of our total revenue in fiscal
years 2000, 1999 and 1998, respectively. See Note 10 of Notes to Consolidated
Financial Statements.
ORDER BACKLOG
We generally ship products within 30 days after receipt of a purchase
order. Historically, we have had relatively little backlog at any given time and
do not consider backlog to be a significant or important measure of sales for
any future period. As a result, our net product revenue in any given quarter is
dependent on orders booked and products shipped during that quarter.
CUSTOMER SERVICE AND SUPPORT
The quality and reliability of our products and the ongoing support of
these products are important elements of our business. As of May 27, 2000, we
provide direct service for all of our products through a service organization of
223 people, located in more than 40 service locations in the United States and
Europe. We currently offer a variety of customer services that include system
and software maintenance, consulting services, storage management integration
and training. We offer on-site service response within four hours, 24 hours a
day, seven days per week. We provide our customers with a warranty against
defects in our systems and software products for one year and 90 days,
respectively. Historically, approximately 75% of our customers have entered into
post-warranty maintenance contracts with us. Customer service revenue
represented approximately 22%, 22% and 18% of our total revenue in fiscal years
2000, 1999 and 1998, respectively.
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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 our product development
strategy, we have assembled several engineering teams with complementary
expertise, consisting of approximately 84 persons as of May 27, 2000. During
fiscal years 2000, 1999 and 1998, our research and development spending was
approximately $16,000, $12,800 and $12,500, respectively.
We have two separate primary product development centers: one is located at
our corporate headquarters in Anaheim, California, a second, the RAID Technology
Center, is located in Sunnyvale, California.
MANUFACTURING
Our manufacturing operations are located at our Anaheim facility, with an
additional facility located in Dublin, Ireland. The Ireland facility
manufactures over 90% of certain high-end product lines sold by us 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 us to produce and assemble products in accordance with our
specifications. This "turnkey" approach to product manufacturing reduces our
capital and employee requirements and allows us to adopt manufacturing
technologies as they emerge.
The principal components used in our products include networking
components, circuit boards, disk drives and chassis. We procure all of our
principal components from outside suppliers and have established manufacturing
relationships with a number of key vendors. We generally utilize parts and
components available from multiple vendors. However, for our Vivant product
line, we currently purchase disk drives solely from Seagate Technology, Inc.,
chipsets solely from Qlogic Corporation and Fibre Channel switches solely from
Ancor Communications, Inc. To date, we have been able to obtain supplies of
these components and we believe that adequate quantities are available to meet
our needs. Disruptions in supply or significant increases in component costs
from these vendors would have an adverse effect on our results of operations.
See "Risk Factors -- We are dependent on limited source suppliers for principal
components used in our products, and disruptions in supply or significant
increases in component costs could materially harm our business."
COMPETITION
The market for our products is extremely competitive. We have a number of
competitors in various markets, including EMC, Hewlett-Packard Company, Sun
Microsystems, Inc., IBM, Compaq Computer Corporation and Network Appliance,
Inc., each of which has substantially greater name recognition, engineering,
manufacturing and marketing capabilities, and greater financial and personnel
resources than we do. We expect to experience increased competition from
established and emerging computer storage hardware and management software
companies, particularly Hewlett-Packard, Sun Microsystems, IBM, Compaq and EMC.
The principal elements of competition in our markets include rapid
introduction of new technology, product quality, reliability and performance,
quality of service and support, and responsiveness to customer and market needs.
We believe that we compete favorably with respect to these factors. However,
there can be no assurance that we will be able to compete successfully or that
competition will not have a material adverse effect on our results of
operations. See "Risk Factors -- The markets for our products are intensely
competitive which may lead to reduced sales of our products, reduced profits and
reduced market share for our business."
PROPRIETARY RIGHTS
We rely on a combination of patent, copyright, trademark and trade secret
laws, employee and third-party non-disclosure agreements and technical measures
to protect our proprietary rights in our products. Although we continue to take
appropriate measures to protect our proprietary rights, there can be no
assurance that these measures will be successful. In addition, the laws of
certain foreign countries may not protect our
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intellectual property to the same extent as the laws of the United States. See
"Risk Factors -- Our intellectual property is critical to our business and, if
we are unable to protect our intellectual property, the success of our business
and our results of operations could be materially harmed."
Pursuant to the February 9, 1996 EMC Agreement, we sold EMC substantially
all of our then-existing patents, patent applications, and related rights. We
have an irrevocable, non-cancelable, perpetual and royalty-free license to
exploit, market and sell the technology protected under the patents sold to EMC.
Pursuant to the terms and conditions of the EMC Agreement, the license we were
granted pursuant to that agreement will terminate in the event of a change of
control of the Company involving certain identified acquirers. As part of the
EMC Agreement, MTI 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, expiring February
2001.
Although we often seek patents on our products, we believe that patents are
of less significance in our industry than other items as innovative skills and
technical expertise, frequency of product enhancements and timeliness and
quality of support services provided by us.
EMPLOYEES
As of May 27, 2000, we had approximately 686 full-time employees worldwide,
including 438 in marketing, sales and service support, 98 in manufacturing and
quality assurance, 84 in engineering and research and development and 66 in
general administration and finance. None of our employees are represented by a
labor union, and we consider our relations with our employees to be good.
ITEM 2. DESCRIPTION OF PROPERTY:
Our 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. We also have a 21,700 square foot
facility located in Sunnyvale under a lease agreement that expires in July 2006.
We have a 28,500 square foot facility in Dublin, Ireland where we perform
assembly and testing on a limited number of products, with the lease expiring in
2023. In addition, we have an 18,600 square foot facility in Westmont, Illinois,
used for sales and sales technical support under a lease expiring in June 2005.
We believe that our existing facilities are adequate to meet our requirements
for at least the next twelve months.
We also lease approximately 29 sales and support offices located in the
U.S. and Europe.
ITEM 3. LEGAL PROCEEDINGS:
We are from time to time subject to claims and suits arising in the
ordinary course of business. In our opinion, the ultimate resolution of these
matters will not have a material adverse effect on our financial position,
results of operations or liquidity.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
On March 22, 2000, an amendment to the Restated Certificate of
Incorporation, to increase the number of authorized shares of Common Stock from
40,000,000 to 80,000,000, was approved by written consent of a majority of our
stockholders. The number of shares that approved the amendment by written
consent was 17,540,885. The number of shares outstanding as of March 14, 2000,
the date of record, was 31,849,079.
Executive Officers of the Registrant
The following table sets forth the names and ages of all executive officers
of the Registrant as of June 19, 2000. A summary of the background and
experience of each of these individuals is set forth below.
NAME AGE POSITION(S)
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Thomas P. Raimondi........................... 42 President and Chief Executive Officer
Dale R. Boyd................................. 41 Senior Vice President, Finance and
Administration, Chief Financial Officer and
Secretary
Richard L. Ruskin............................ 40 Executive Vice President, European Operations
Venki Venkataraman........................... 51 Senior Vice President, Manufacturing
Dan Brown.................................... 48 Senior Vice President, Engineering and Chief
Technology Officer
Frank H. Yoshino............................. 38 Vice President, Treasury and Human Resources
Stephanie M. Braun........................... 35 Vice President, Corporate Controller and Chief
Accounting Officer
Thomas P. Raimondi was named our President and Chief Executive Officer in
December 1999. From July 1998 to December 1998, Mr. Raimondi was our Chief
Operating Officer. Mr. Raimondi was our Senior Vice President and General
Manager from May 1996 until July 1998 and was our Vice President, Strategic
Planning, Product Marketing, and Director of Marketing from 1987 until May 1996.
Prior to joining MTI, Mr. Raimondi served as Sales Manager for System
Industries, Inc. for seven years.
Dale R. Boyd was named our Senior Vice President, Finance and
Administration in June 1998 and has served as our Chief Financial Officer of the
Company since April 1996. Mr. Boyd joined MTI in February 1995 as Corporate
Controller and was elected as Chief Accounting Officer the same month. Prior to
joining MTI, Mr. Boyd was Corporate Controller of Emulex Corporation, a
manufacturer of software and hardware-based networking products, from May 1992
to January 1995.
Richard L. Ruskin was named our Executive Vice President, European
Operations in April 2000. Mr. Ruskin was our Senior Vice President of Marketing
from September 1999 to April 2000. Prior to that, Mr. Ruskin served in several
capacities at MTI since 1988, including Vice President of U.S. Sales.
Venki Venkataraman was named our Senior Vice President, Manufacturing in
June 1998. Mr. Venkataraman served as our Vice President, Operations from April
1996 to June 1998. Prior to joining MTI, 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.
Dan Brown was named our Chief Technology Officer in July 1999. He joined
MTI in September 1998, and has served as Senior Vice President, Engineering.
Prior to joining MTI, Mr. Brown served in various capacities including Senior
Vice President of Engineering for Storage Concepts, Inc., a manufacturer of data
storage products, from June 1996 to September 1998. From January 1987 to June
1996 Mr. Brown was the Vice President and Managing Director for the I/O product
division at Western Digital Corporation, a disk drive manufacturer. Mr. Brown
has more than 25 years experience in the computer industry.
Frank H. Yoshino was named our Vice President, Treasury and Human Resources
in January 1999. Mr. Yoshino had been our Treasurer since July 1996. Prior to
joining the Company, Mr. Yoshino was Treasury Director of Emulex Corporation
from March 1992 to July 1996. Prior to this time, Mr. Yoshino served as Senior
Financial Analyst for Ashton-Tate.
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Stephanie M. Braun was made a Vice President in July 1999. Ms. Braun has
been Corporate Controller since July 1997 and was elected Chief Accounting
Officer in October 1997. Ms. Braun served as our Director of General Accounting
from July 1996 to June 1997 and as our Accounting Manager from June 1994 to June
1996. Prior to joining MTI, Ms. Braun was the Financial Analyst Supervisor for a
division of ITT Cannon from June 1991 to June 1994.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS:
PRINCIPAL MARKET AND PRICES
Our common stock is quoted on the Nasdaq National Market. The following
table sets forth the range of high and low sales prices per share of our common
stock for each quarterly period as reported on The Nasdaq National Market for
the periods indicated. The price of our common stock at the close of business on
June 19, 2000 was $9.6875.
SALES PRICES
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HIGH LOW
FISCAL YEAR 1999 -------- --------
First Quarter............................................... $17.0000 $ 7.6250
Second Quarter.............................................. 9.8750 3.3125
Third Quarter............................................... 5.9375 3.1875
Fourth Quarter.............................................. 6.7500 4.6250
FISCAL YEAR 2000
First Quarter............................................... 16.4375 4.5000
Second Quarter.............................................. 29.6250 14.7500
Third Quarter............................................... 37.5000 14.1250
Fourth Quarter.............................................. 54.3750 23.8125
NUMBER OF COMMON STOCKHOLDERS
The approximate number of record holders of our common stock as of June 19,
2000 was 272.
DIVIDENDS
We have never declared or paid any dividends. We currently expect to retain
earnings for use in the operation of our business and, therefore, do not
anticipate declaring or paying any cash dividends in the foreseeable future. In
addition, the terms of our bank line of credit prohibit us from declaring or
paying any cash dividends.
WARRANTS
In February 2000, in a private placement transaction pursuant to Section
4(2) of the Securities Act of 1933, we issued 1,266 shares of common stock to GB
Storage SARL as a result of a cashless exercise of 1,988 shares of common stock,
at a price per share of $12.00, pursuant to a warrant agreement with GB Storage
SARL dated February 1998.
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ITEM 6. SELECTED FINANCIAL DATA:
FISCAL YEAR ENDED
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APRIL 1, APRIL 3, APRIL 4, APRIL 5, APRIL 6,
2000 1999 1998 1997 1996
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SELECTED STATEMENT OF OPERATIONS DATA:
Net product revenue........................... $177,770 $157,456 $163,707 $120,359 $ 97,682
Service revenue............................... 49,327 44,193 36,304 33,368 34,232
-------- -------- -------- -------- --------
Total revenue........................ 227,097 201,649 200,011 153,727 131,914
Product gross profit.......................... 71,202 50,689 56,747 36,752 23,625(1)
Service gross profit.......................... 18,871 16,276 14,262 13,172 12,070(2)
-------- -------- -------- -------- --------
Gross profit.................................. 90,073 66,965 71,009 49,924 35,695
Operating expenses:
Selling, general and administrative......... 64,829 46,326 41,055 34,936 65,715(3)
Research and development.................... 16,017 12,765 12,475 10,103 14,384
-------- -------- -------- -------- --------
Total operating expenses.................... 80,846 59,091 53,530 45,039 80,099(4)
-------- -------- -------- -------- --------
Operating income (loss)..................... 9,227 7,874 17,479 4,885 (44,404)
Other income (expense), net................... 998 3,739 2,557 1,483 (4,636)(5)
Income tax expense (benefit).................. (15,095) 1,521 2,020 664 179
-------- -------- -------- -------- --------
Net income (loss)........................... $ 25,320 $ 10,092 $ 18,016 $ 5,704 $(49,219)
======== ======== ======== ======== ========
Net income (loss) per share:
Basic....................................... $ 0.84 $ 0.35 $ 0.68 $ 0.22 $ (2.54)
======== ======== ======== ======== ========
Diluted..................................... $ 0.76 $ 0.34 $ 0.62 $ 0.22 $ (2.54)
======== ======== ======== ======== ========
Weighted average shares used in per share
computation:
Basic....................................... 30,268 28,451 26,674 25,638 19,400
======== ======== ======== ======== ========
Diluted..................................... 33,232 29,710 29,112 26,437 19,400
======== ======== ======== ======== ========
APRIL 1, APRIL 3, APRIL 4, APRIL 5, APRIL 6,
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
SELECTED BALANCE SHEET DATA:
Cash and cash equivalents..................... $ 8,791 $ 7,213 $ 7,768 $ 3,487 $ 4,055
Working capital (deficit)..................... 51,434 29,997 16,711 (12,267) (25,966)
Total assets.................................. 180,947 113,778 105,091 83,592 84,023
Long-term debt, less current maturities....... -- -- -- 6 5,966
Total stockholders' equity (deficiency)....... 113,495 54,141 42,146 16,377 (187)
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Notes:
(1) Includes a charge of $2,056 to increase excess and obsolete reserves on
identified 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
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 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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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 1, APRIL 3, APRIL 4,
2000 1999 1998
-------- -------- --------
Net product revenue....................................... 78.3% 78.1% 81.8%
Service revenue......................................... 21.7 21.9 18.2
----- ----- -----
Total revenue................................... 100.0 100.0 100.0
Product gross profit...................................... 40.1 32.2 34.7
Service gross profit...................................... 38.3 36.8 39.3
----- ----- -----
Gross profit.................................... 39.7 33.2 35.5
Selling, general and administrative....................... 28.5 23.0 20.6
Research and development.................................. 7.1 6.3 6.2
----- ----- -----
Operating income................................ 4.1 3.9 8.8
Other income, net......................................... 1.7 1.9 1.3
Equity in net loss of affiliate........................... 1.2 -- --
Income tax expense (benefit).............................. (6.6) 0.8 1.0
----- ----- -----
Net income...................................... 11.2% 5.0% 9.1%
===== ===== =====
Net Product Revenue: Net product revenue for fiscal year 2000 increased
$20.3 million, or 13% from fiscal year 1999. This increase was primarily due to
increased revenue of $40.8 million from server products, partially offset by
decreased revenue from tape products and software products of $16.8 million and
$3.7 million, respectively. During fiscal year 2000, the Company's focus shifted
away from resale of tape product to the sale of its own proprietary server
products. Server product revenue in fiscal year 2000 from the Vivant product
family was $67.7 million, up from essentially zero in fiscal year 1999 when the
Vivant product family was introduced. The Company believes that it may
experience a reduction in demand from internet related businesses due to a
softening in capital markets for these businesses which could negatively impact
our net product revenue and results of operations. See "Risk Factors -- If there
is a decrease in the demand for our products by internet related businesses, our
business could materially suffer."
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.
Service Revenue: Service revenue was $49.3 million for fiscal year 2000, an
increase of $5.1 million, or 12%, from fiscal year 1999. This increase was
primarily due to increased revenue from maintenance contracts both domestically
and in Europe.
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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.
Product Gross Profit: Product gross profit for fiscal year 2000 was $71.2
million, an increase of $20.5 million, or 40%, over fiscal year 1999, and the
product gross profit percentage of net product sales was 40% for fiscal year
2000 as compared to 32% for fiscal year 1999. The increase in the product gross
profit percentage is primarily due to the increase in sales of server products,
which historically carry a higher margin and the impact of the introduction of
the Vivant product line.
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.
Service Gross Profit: Service gross profit percentage for fiscal year 2000
increased $2.6 million, or 16%, over fiscal year 1999. The gross profit
percentage for service revenue was 38% in fiscal year 2000 as compared to 37% in
fiscal year 1999. This increase in gross profit percentage was primarily due to
increased revenue from contracts without corresponding increases in support
costs. The Company expects the number of Vivant units sold to increase in fiscal
year 2001. Due to the increased number of installed Vivant units and the
increased complexity of Vivant products compared to previous products sold, the
Company intends to increase overall service and support headcount and upgrade
the skills of its staff to support the more complex product. As a result, the
Company expects that service cost of revenue will increase in fiscal year 2001,
which may adversely affect service gross profit. See "Risk Factors -- We may be
unable to hire, retain and integrate highly skilled personnel needed to sustain
our business."
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.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses in fiscal year 2000 increased $18.5 million, or 40%,
over fiscal year 1999. This increase and the increase as a percentage of total
revenue were primarily due to increased compensation and related costs,
exclusive of commissions, of $6.1 million resulting from increased headcount,
increased commissions of $5.7 million, increased marketing efforts of $2.9
million, $0.6 million of severance related costs in fiscal year 2000 and
increases in other expenses of $3.3 million. Effective with fiscal year 2001,
the Company modified its variable compensation plan (commissions and bonuses)
which it believes will reduce compensation expense as a percentage of total
revenue. The Company believes that this reduction will be partially offset by an
increase in technical sales headcount and training costs.
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.
Research and Development Expenses: Research and development expenses in
fiscal year 2000 increased $3.3 million, or 25%, over fiscal year 1999. This
increase is attributable to increased project costs of $2.0 million, increased
salary and related costs of $1.1 million related to increased headcount and
increased other expenses of $0.2 million. The Company intends to increase its
investment in research and development in absolute dollars and as a percentage
of total revenue in fiscal year 2001 as it continues to expand into additional
markets, such as NAS storage systems.
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.
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Other Income (Expense), Net: Other income (expense), net, exclusive of
equity in net loss of affiliate, in fiscal year 2000 increased $0.1 million, or
2%, over fiscal year 1999. Other income (expense), net, exclusive of equity in
net loss of affiliate, was 2% of total revenue in fiscal years 2000 and 1999.
Other income (expense), 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.
Equity in Net Loss of Affiliate: Equity in net loss of affiliate represents
the Company's proportionate share of Caldera Systems, Inc.'s ("Caldera") net
losses and amortization of the goodwill related to the investment made in
Caldera in August 1999. See Note 4 of Notes to Consolidated Financial
Statements.
Income Taxes: The Company recorded a net tax benefit of $15.1 million in
fiscal year 2000. This benefit is a one time benefit which is primarily a result
of the reversal of valuation allowances held against certain net operating loss
carryforwards. The reversal of the valuation allowance was a result of
management's determination that it was more likely than not that the related
deferred tax assets would be realized based on projected financial results and
available tax planning strategies.
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 7 of Notes to Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and cash equivalents of $8.8 million and $7.2 million
at April 1, 2000 and April 3, 1999, respectively, an increase of $1.6 million.
Net operating activities provided cash of $1.4 million in fiscal year 2000, a
decrease of $6.9 million, primarily due to $25.6 million of net income adjusted
for non-cash items and increases in accounts payable and accrued and other
liabilities of $7.4 million, substantially offset by an increase in accounts
receivable of $22.1 million as a result of increased total revenue and increased
days sales outstanding, and an increase in gross inventories of $10.9 million
primarily due to increased revenue and an increase in product offerings. Net
investing activities used cash of $10.8 million due to expenditures for capital
equipment of $6.2 million and an equity investment in affiliate that required
cash of $4.5 million. See Note 4 of Notes to Consolidated Financial Statements.
Net cash provided by financing activities was $11.0 million primarily due to the
exercise of stock options and warrants providing cash of $16.8 million,
partially offset by net borrowings of $5.8 million.
At April 1, 2000, the Company's days sales outstanding were 112 days, as
compared to 96 days at April 3, 1999. The Company's average days sales
outstanding is impacted by the high percentage of sales occurring within the
last month of each quarter. The Company anticipates that its days sales
outstanding will continue to be negatively impacted by this sales linearity
issue. See "Risk Factors -- A significant portion of our sales occur in the last
month of a given quarter and we operate without a significant backlog of orders.
Consequently, our results of operations for that quarter may not meet our
expectations."
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. Effective July 22, 1999, the Company
renewed its agreement with Silicon Valley Bank and General Electric Capital
Corporation. The agreement allows the Company to borrow at a rate equal to the
prime rate. 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 Company was in compliance with these
covenants at April 1, 2000. The term of the agreement is for one year. There
were no borrowings outstanding under this agreement at June 19, 2000.
Effective February 9, 1996, the Company entered into the EMC Agreement
selling EMC substantially all of the Company's existing patents, patent
applications and related rights. Pursuant to the EMC Agreement, the Company is
entitled to receive $30.0 million over the life of this agreement, in six equal
annual installments of $5.0 million each. The Company has received five of the
six installments. The sixth and final
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payment is due January 2001. The Company will also receive royalty payments in
the aggregate of up to a maximum of $30.0 million over the term of the EMC
Agreement. As part of the maximum $30.0 million of royalties, minimum royalties
of $10.0 million will be received in five annual installments, beginning within
thirty days of the first anniversary of the effective date of the EMC Agreement,
and within thirty days of each subsequent anniversary thereof. The first four
annual installments were received in March 1997, March 1998, March 1999 and
March 2000. Also, pursuant to the terms of the EMC Agreement, $10.0 million of
the maximum $30.0 million of royalties, will be received in five equal annual
installments as a result of a computer and technology agreement between EMC and
IBM announced in March 1999. The first annual installment was received in March
2000. The EMC Agreement provides that the remaining four payments will be
received annually beginning in March 2001.
Management believes that the Company's working capital, bank lines of
credit and 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 July
31, 2000. The Company has begun negotiations for a renewal of its existing
credit facility and believes the Company will be able to secure comparable
financing prior to the expiration of the existing credit facility. No assurance
can be given that additional financing will be available or, if available, will
be on terms favorable to the Company.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities" was issued. SFAS
No. 133 establishes accounting and reporting standards for derivative
instruments, hedging activities and exposure definition. SFAS No. 133 requires
an entity to recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
Derivatives that are not hedges must be adjusted to fair value through income.
If the derivative is a hedge, depending on the nature of the hedge, changes in
fair value will either be offset against the change in fair value of the hedged
asset, liabilities, or firm commitments through earnings, or reported in other
comprehensive income until the hedge is recognized in earnings. In June 1999,
SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of FASB Statement No. 133" was
issued. The statement defers the effective date of SFAS No. 133 until the first
quarter of fiscal year 2002. In June 2000, SFAS No. 138, "Accounting for certain
Derivative Instruments and Certain Hedging Activities, an amendment of FASB
Statement No. 133" was issued. Although the Company continues to review the
effect of the implementation of SFAS No. 133 and No. 138, the Company does not
currently believe their adoption will have a material impact on its financial
position or overall trends in results of operations and does not believe
adoption will result in significant changes to its financial risk management
practices. However, the impact of adoption on the Company's results of
operations is dependent upon the fair values of the Company's derivatives and
related financial instruments at the date of adoption and may result in more
pronounced quarterly fluctuations in other income and expense.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." The objective of this SAB is to provide further guidance on revenue
recognition issues in the absence of authoritative literature addressing a
specific arrangement or a specific industry. The Company is required to follow
the guidance in the SAB no later than the first quarter of its fiscal year 2001.
The SEC has recently indicated it intends to issue further guidance with respect
to adoption of specific issues addressed by SAB No. 101. Until such time as this
additional guidance is issued, the Company is unable to assess the impact, if
any, it may have on its financial position or results of operations.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation -- an interpretation of APB Opinion No. 25" ("FIN 44"). This
Interpretation clarifies the definition of employee for purposes of applying
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees ("APB 25"), the criteria for
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determining whether a plan qualifies as a noncompensatory plan, the accounting
consequence of various modifications to the terms of a previously fixed stock
option or award, and the accounting for an exchange of stock compensation awards
in a business combination. This Interpretation is effective July 1, 2000, but
certain conclusions in this Interpretation cover specific events that occur
after either December 15, 1998, or January 12, 2000. We believe that the impact
of FIN 44 will not have a material effect on our financial position or results
of operations.
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.
YEAR 2000 ISSUE
The Company completed its review of year 2000 issues as scheduled and
believes all of its critical systems are year 2000 compliant. However, there can
be no assurances that the Company has tested and identified all potential year
2000 issues including the impact of outside parties on the Company's operations.
As of June 19, 2000, the Company had not experienced any significant issues
in relation to the year 2000 issue in both its internal infrastructure as well
as its products. Additionally, the Company has not been made aware of any
significant year 2000 issues experienced by its customers or third party
vendors. The Company will continue to monitor year 2000 issues throughout
calendar 2000 with a focus on those dates impacted by the year 2000 issue.
The Company has incurred costs consisting primarily of internal labor costs
that are considered to be immaterial. Any additional costs, which are considered
primarily internal labor costs, are anticipated to be immaterial.
RISK FACTORS
The non-historical information in this Form 10-K constitute forward-looking
statements and involve risks and uncertainties. These statements relate to our
future plans, objectives, expectations and intentions. These statements may be
identified by the use of words such as "believes," "expects," "may," "will,"
"should," "seeks," "anticipates," "intends," "plans" and similar expressions.
Our actual results may differ materially from those discussed in these
statements. The sections entitled "Risk Factors," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business"
contain a discussion of some of the factors that could contribute to those
differences. Factors that could contribute to these differences include those
discussed below and elsewhere in this Form 10-K.
A SIGNIFICANT PORTION OF OUR SALES OCCUR IN THE LAST MONTH OF A GIVEN QUARTER
AND WE OPERATE WITHOUT A SIGNIFICANT BACKLOG OF ORDERS. CONSEQUENTLY, OUR
RESULTS OF OPERATIONS FOR THAT QUARTER MAY NOT MEET OUR EXPECTATIONS.
We have historically experienced a significant portion of our orders, sales
and shipments in the last month or weeks of each quarter. We expect this pattern
to continue, and possibly increase, in the future. This uneven pattern makes our
ability to forecast revenues, earnings and working capital requirements for each
quarter extremely difficult and uncertain. It has also increased our days sales
outstanding and is expected to continue to do so. For example, at April 3, 1999
our days sales outstanding were 96 and at April 1, 2000 our days sales
outstanding were 112. If we do not receive orders that we have anticipated or
complete shipments within a given quarter, our results of operations could be
materially harmed for that quarter.
In addition, we operate without a significant backlog of orders. As a
result, our quarterly sales and operating results in any given quarter are
dependent, in large part, upon the volume and timing of orders booked and
products shipped during that quarter. Accordingly, we may be unable to adjust
spending in a timely manner to compensate for any unanticipated decrease in our
orders, sales or shipments. Therefore, any
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decline in the demand for our products and services, in relation to our forecast
for any given quarter, could materially harm our results of operations.
THE SUCCESS OF OUR BUSINESS DEPENDS ON OUR ABILITY TO INTRODUCE NEW PRODUCTS ON
A TIMELY BASIS.
We believe that the development and introduction of new, innovative
products with features that respond to our customers' changing demands and
incorporate new technological standards will be critical to our future success.
We may not be able to design and manufacture products that address customer
needs or achieve market acceptance. Any significant delay or failure by us to
design, manufacture and successfully introduce new products could materially
harm our business. Our ability to successfully introduce new products depends on
several factors, including:
- timely completion of product design;
- achievement of acceptable manufacturing yields; and
- market acceptance.
We face additional risks inherent in new product introductions, including:
- competitors' responses to our product introductions;
- pricing pressures from competitors' products;
- difficulties in forecasting customer demand;
- the desire by customers to evaluate new products for longer periods of
time; and
- unanticipated development problems or delays.
These risks may result in unanticipated costs, diversion of management's
attention or the abandonment of the development of a specific product. In
addition, we may not be able to effectively manage the transitions to new
products or new technologies, which could materially harm our business.
THE MARKETS FOR OUR PRODUCTS ARE INTENSELY COMPETITIVE WHICH MAY LEAD TO REDUCED
SALES OF OUR PRODUCTS, REDUCED PROFITS AND REDUCED MARKET SHARE FOR OUR
BUSINESS.
The markets for our products are intensely competitive, and we expect
competition to intensify in the future. If we fail to maintain or enhance our
competitive position, we could experience pricing pressures and reduced sales,
margins, profits, and market share, each of which could materially harm our
business. Our customers' requirements and the technology available to satisfy
those requirements are continually changing. Therefore, we must be able to
respond to these changes in order to remain competitive. The principal elements
of competition in our markets include:
- ability to introduce new technology;
- product quality, reliability and performance;
- quality of service and support; and
- responsiveness to customer and market needs.
We have a number of competitors in various markets, including EMC,
Hewlett-Packard, Sun Microsystems, IBM, Compaq and Network Appliance, each of
which has substantially greater name recognition, engineering, manufacturing and
marketing capabilities, and greater financial, technological and personnel
resources than we do.
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OUR SYSTEMS ARE COMPLEX AND MAY CONTAIN UNDETECTED SOFTWARE OR HARDWARE ERRORS
THAT COULD BE DIFFICULT, COSTLY AND TIME CONSUMING TO REPAIR.
Undetected software or hardware errors frequently occur in networking
products when they are first introduced or as new versions of products are
released. Our systems are complex, and from time to time we may find errors in
our existing, new or enhanced products. In addition, our systems are combined
with products and components made by other vendors, and if errors occur, it may
be difficult to identify the source of the problem. These errors, whether caused
by our or another vendor's products, could:
- adversely affect sales of our products;
- cause us to incur significant warranty and repair costs;
- divert the attention of our engineering personnel from our product
development efforts;
- cause significant customer relations problems;
- harm our competitive position;
- hurt our reputation; and
- cause purchase delays.
Any of these effects could materially harm our business or results of
operations.
WE MAY BE UNABLE TO HIRE, RETAIN AND INTEGRATE HIGHLY SKILLED PERSONNEL NEEDED
TO SUSTAIN OUR BUSINESS.
Our future success depends to a significant degree upon our ability to
hire, train, motivate and retain additional personnel, particularly those in
sales, marketing and engineering. Competition for these people is intense. If we
are unable to attract or retain qualified people in the future, or if we
experience delays in hiring required personnel, our ability to develop,
introduce or sell our products could be materially harmed. In addition, if we
are unable to retain our current employees, or any future employees, our
business or results of operations could be materially harmed.
WE ARE DEPENDENT ON LIMITED SOURCE SUPPLIERS FOR PRINCIPAL COMPONENTS USED IN
OUR PRODUCTS, AND DISRUPTIONS IN SUPPLY OR SIGNIFICANT INCREASES IN COMPONENT
COSTS COULD MATERIALLY HARM OUR BUSINESS.
For our Vivant product line, we currently purchase disk drives solely from
Seagate, chipsets solely from Qlogic, host bus adapters solely from JNI, Emulex
and Sun Microsystems, and Fibre Channel switches solely from Ancor
Communications, Inc. Disruptions in supply or significant increases in the
component costs from these vendors could materially harm our business and our
results of operations.
WE ORDER COMPONENTS AND MATERIALS BASED ON ROLLING FORECASTS WHICH COULD CAUSE
US TO OVERESTIMATE OR UNDERESTIMATE OUR ACTUAL REQUIREMENTS. THIS COULD CAUSE US
TO INCREASE OUR COSTS OR PREVENT US FROM MEETING CUSTOMER DEMAND.
We use rolling forecasts based on anticipated product orders to determine
our component requirements. Lead times for materials and components that we
order vary significantly and depend on factors such as specific supplier
requirements, contract terms and current market demand for such components. As a
result, our component requirement forecasts may not be accurate. If we
overestimate our component requirements, we may have excess inventory, which
would increase our costs. If we underestimate our component requirements, we may
have inadequate inventory, which could interrupt our manufacturing and delay
delivery of our products to our customers. Any of these occurrences would
negatively impact our business and results of operations.
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OUR QUARTERLY RESULTS MAY FLUCTUATE FROM PERIOD TO PERIOD. THEREFORE, HISTORICAL
RESULTS MAY NOT BE INDICATIVE OF FUTURE RESULTS OR HELPFUL IN EVALUATING THE
RESULTS OF OUR BUSINESS.
We have experienced quarterly fluctuations in operating results and
anticipate that these fluctuations may continue in the future. These
fluctuations have resulted from, and may continue to be caused by, a number of
factors, including:
- changes in demand for our Vivant line of products and services;
- the introduction of new products by our competitors and competitive
pricing pressures;
- the timing of customer orders;
- the timing of the introduction of new products and new versions of our
products;
- shifts in our product mix;
- the timing of sales, marketing, research and development expenditures;
and
- decreases in our gross profit as a percentage of revenues for mature
products.
Accordingly, we believe that quarter-to-quarter comparisons of our operating
results are not necessarily meaningful and that such comparisons cannot be
relied upon as indications of our future performance. We cannot assure you that
we will remain profitable on a quarter-to-quarter basis or that our future
revenues and operating results will meet or exceed the expectations of
securities analysts and investors, any of which could cause a significant
adverse change in the trading price of our common stock.
IF THERE IS A DECREASE IN THE DEMAND FOR OUR PRODUCTS BY INTERNET RELATED
BUSINESSES OUR BUSINESS COULD MATERIALLY SUFFER.
In fiscal year 2000, we derived a significant portion of our revenue from
the sale of our products to internet related businesses. Any decrease in the
growth of the internet, in the demand of our products by internet related
businesses or in the financial resources available to internet related business
to purchase our products could have a material adverse effect on our business,
financial condition and results of operations.
WE ARE SUBJECT TO FINANCIAL AND OPERATING RISKS ASSOCIATED WITH INTERNATIONAL
SALES.
International sales represent a significant portion of our total revenue.
For example, international sales represented 28% of our total sales for fiscal
year 2000. If we are unable to maintain international market demand for our
products, our results of operations could be materially harmed. Our
international business is subject to the financial and operating risks of
conducting business internationally, including:
- unexpected changes in, or impositions of, legislative or regulatory
requirements;
- fluctuating exchange rates, tariffs and other barriers;
- difficulties in staffing and managing foreign subsidiary operations;
- export restrictions;
- greater difficulties in accounts receivable collection and longer payment
cycles;
- potentially adverse tax consequences; and
- potential hostilities and changes in diplomatic and trade relationships.
All of our sales in international markets are priced in the applicable
local currency and are subject to currency exchange rate fluctuations. We
currently enter into foreign currency exchange contracts on a limited basis in
an attempt to minimize foreign currency exposure, which can be costly or limited
in their effectiveness. If we are faced with significant changes in the
regulatory and business climate in our international markets, our business and
results of operations could suffer.
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In the future, we may expand our international presence in other markets
which may require significant financial and managerial resources. In addition,
expansion into new international markets may involve additional risks, including
uncertainty of market acceptance of our products due to language, cultural or
other barriers, and differences in technologies and computing infrastructures
needed to utilize our products and services. If our international expansion
efforts do not yield anticipated levels of sales, our business and results of
operations could be materially harmed.
WE DEPEND UPON OUR KEY PERSONNEL.
We believe that our success is dependent, to a significant extent, upon the
efforts and abilities of our senior management team, particularly our executive
officers. The loss of services of our executive officers could materially harm
our business. The failure to retain key members of our senior management team,
or to implement a succession plan to prepare qualified individuals to join us
upon the loss of a member of our senior management team, could materially harm
our business.
IF WE ARE UNABLE TO COMPLY WITH EVOLVING INDUSTRY STANDARDS AND GOVERNMENT
REGULATIONS WE MAY BE UNABLE TO SELL OUR SYSTEMS OR BE COMPETITIVE IN THE
MARKETPLACE.
Our systems must comply with current industry standards and government
regulations in the United States and internationally. Any new products and
product enhancements that we introduce in the future must also meet industry
standards and government regulations at the time they are introduced. Failure to
comply with existing or evolving industry standards or to obtain timely domestic
or foreign regulatory approvals on a timely basis could materially harm our
business. In addition, such compliance may be time consuming and costly.
Our systems integrate SAN and NAS technologies into a single storage
architecture. Components of the SAN and NAS must comply with evolving industry
standards. We depend on companies that provide other components of the SAN and
NAS to also meet these standards. If our vendors or customers do not support the
same industry standards that we do, or if competing standards emerge that we do
not support, market acceptance of our products could suffer.
OUR INTELLECTUAL PROPERTY IS CRITICAL TO OUR BUSINESS AND, IF WE ARE UNABLE TO
PROTECT OUR INTELLECTUAL PROPERTY, THE SUCCESS OF OUR BUSINESS AND OUR RESULTS
OF OPERATIONS COULD BE MATERIALLY HARMED.
Our intellectual property includes patents, proprietary technology, trade
secrets, copyrights and trademarks. We rely on a combination of intellectual
property laws and employee and third-party non-disclosure agreements to protect
our intellectual property rights. Third parties may infringe upon our
intellectual property rights, and we may be unable to detect this unauthorized
use or effectively enforce our rights. Any legal action that we may bring to
protect our intellectual property rights could be expensive and distract our
management from day to day operations. In addition, the laws of some countries
in which we sell our products do not protect our intellectual property rights to
the same extent as the laws in the United States. Unauthorized use or
misappropriation of our intellectual property could materially harm our
business.
WE MAY FACE COSTLY DAMAGES OR LITIGATION COSTS IF THIRD PARTIES CLAIM THAT WE
INFRINGE ON THEIR INTELLECTUAL PROPERTY RIGHTS.
Our business activities may infringe upon the proprietary rights of others,
and other parties may assert infringement claims against us. In addition, in the
future, we may receive communications from other parties asserting that our
intellectual property infringes on their proprietary rights. If we become liable
to any third party for infringing its intellectual property rights, we could be
required to pay substantial damage awards and to develop non-infringing
technology, obtain licenses or cease selling the applications that contain the
infringing intellectual property. We could have to redesign our products, which
could be costly and time-consuming and could substantially delay product
shipments, assuming that a redesign is feasible. We may be unable to develop
non-infringing technology or obtain licenses on commercially reasonable terms,
if at all. Litigation is subject to inherent uncertainties, and any outcome
unfavorable to us could materially harm our
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business. Furthermore, we could incur substantial costs in defending against any
intellectual property litigation, and these costs could increase significantly
if any dispute were to go to trial. Our defense of any litigation, regardless of
the merits of the complaint, will likely be time-consuming, costly and a
distraction for our management personnel. Adverse publicity related to any
intellectual property litigation could also harm the sale of our products and
damage our competitive position.
OUR STOCK PRICE MAY BE VOLATILE, WHICH COULD LEAD TO LOSSES BY INVESTORS AND TO
SECURITIES LITIGATION.
The value of your investment in our common stock could decline due to
significant volatility caused by:
- variations between our actual and anticipated earnings;
- the timing and announcement of new products by us or our competitors;
- services or technological innovations by us or our competitors;
- failure of our results of operations to meet the expectations of public
market analysts and investors;
- changes in revenue or earnings estimates by the investment community;
- speculation in the press or investment community about our business or
competitive position;
- the volume of trading in our common stock; and
- market conditions broadly and the trading price of shares of technology
companies generally.
OUR STOCK OWNERSHIP IS CONCENTRATED IN A SINGLE STOCKHOLDER, AND OTHER
STOCKHOLDERS MAY NOT BE ABLE TO INFLUENCE CORPORATE DECISIONS.
Raymond J. Noorda, our Chairman of the Board, is also the Chairman of the
Board of our largest stockholder, The Canopy Group, Inc. ("Canopy"). Canopy
beneficially owns approximately 45% of our outstanding common stock and is able
to substantially affect our actions which require stockholder approval,
including the election of the Board of Directors and the approval of significant
corporate transactions. This concentration of ownership may delay or prevent a
change in control of us and will make some transactions difficult or impossible
without his support.
WE HAVE ADOPTED ANTI-TAKEOVER DEFENSES THAT COULD AFFECT THE PRICE OF OUR COMMON
STOCK.
Our restated certificate of incorporation and bylaws contain various
provisions, including notice provisions, provisions for staggered terms of
office of the board of directors, and provisions authorizing us to issue
preferred stock, that may make it more difficult for a third-party to acquire,
or may discourage acquisition bids for, our company. In addition, the rights of
holders of our common stock may be adversely affected by the rights of holders
of any preferred stock that we may issue in the future that would be senior to
the rights of the holders of our common stock. Furthermore, we are subject to
the provisions of Section 203 of the Delaware General Corporation Law regulating
corporate takeovers. These provisions could also limit the price that investors
might be willing to pay in the future for shares of our common stock.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS:
The Company's European operations transact in foreign currencies and may be
exposed to financial market risk resulting from fluctuations in foreign currency
exchange rates, particularly the British Pound sterling and the Euro. The
Company has and may continue to utilize hedging programs, currency forward
contracts, currency options and/or other derivative financial instruments
commonly used to reduce financial market risks, none of which were outstanding
at April 1, 2000. There can be no assurance that such actions will successfully
reduce the Company's exposure to financial market risks.
The Company maintains a $30.0 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
20
21
fluctuations in these rates. However, we believe that a 10% increase in interest
rates would not have a material impact on the Company's results of operations.
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.
21
22
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 2000 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 2000 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 2000 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 2000 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 1, 2000 and April 3, 1999
Consolidated Statements of Income for fiscal years 2000, 1999 and
1998
Consolidated Statements of Stockholders' Equity for fiscal years
2000, 1999 and 1998
Consolidated Statements of Cash Flows for fiscal years 2000, 1999
and 1998
Notes to Consolidated Financial Statements
(2) The following financial statement schedule for fiscal years 2000, 1999
and 1998 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.
22
23
(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,
incorporated by reference to Exhibit 3.1 of the Company's
Registration Statement on Form S-1 (No. 33-75180).
3.2 Restated Bylaws, incorporated by reference to Exhibit 10.51
of the Company's Quarterly Report on Form 10-Q for the
quarterly period ended January 3, 1998.
4.1 Form of Registration Rights Agreement between the Company
and certain Purchasers, and schedule of such Purchasers,
incorporated by reference to Exhibit 4.1 of the Company's
Registration Statement on Form S-1 (No. 33-75180).
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, incorporated by reference to Exhibit 4.2 of the
Company's Registration Statement on Form S-1 (No. 33-75180).
4.3 Registration Rights Agreement between the Company and NFT
Ventures, Inc., dated November 30, 1992, incorporated by
reference to Exhibit 4.3 of the Company's Registration
Statement on Form S-1 (No. 33-75180).
4.4 Registration Rights Agreement between the Company and
Dialogic Systems Corporation, dated November 30, 1992,
incorporated by reference to Exhibit 4.11 of the Company's
Registration Statement on Form S-1 (No. 33-75180).
4.5 Specimen Stock Certificate, incorporated by reference to
Exhibit 4.12 of the Company's Registration Statement on Form
S-1 (No. 33-75180).
10.1 Triple Net Lease between the Company and Catellus
Development Corporation effective December 20, 1991,
incorporated by reference to Exhibit 10.2 of the Company's
Registration Statement on Form S-1 (No. 33-75180).
10.2 Owner Participation Agreement between the Company, Catellus
Development Corporation and Anaheim Redevelopment Agency,
dated as of January 7, 1992, including exhibits,
incorporated by reference to Exhibit 10.3 of the Company's
Registration Statement on Form S-1 (No. 33-75180).
*10.3 Form of Nonqualified Stock Option Agreement under the Stock
Incentive Plan, incorporated by reference to Exhibit 10.14
of the Company's Registration Statement on Form S-1 (No.
33-75180).
*10.4 Form of Indemnification Agreement, incorporated by reference
to Exhibit 10.16 of the Company's Registration Statement on
Form S-1 (No. 33-75180).
*10.5 Micro Technology, Inc. Incentive Stock Option Plan -- 1985,
incorporated by reference to Exhibit 10.20 of the Company's
Registration Statement on Form S-1 (No. 33-75180).
*10.6 1987 Incentive Stock Option and Nonqualified Stock Option
Plan of the Company (the "1987 Stock Option Plan"),
incorporated by reference to Exhibit 10.21 of the Company's
Registration Statement on Form S-1 (No. 33-75180).
*10.7 Form of Incentive Common Stock Option Agreement under the
1987 Stock Option Plan, incorporated by reference to Exhibit
10.22 of the Company's Registration Statement on Form S-1
(No. 33-75180).
*10.8 Form of Nonqualified Common Stock Option Agreement under the
1987 Stock Option Plan, incorporated by reference to Exhibit
10.23 of the Company's Registration Statement on Form S-1
(No. 33-75180).
*10.9 Stock Incentive Plan of the Company, incorporated by
reference to Exhibit 10.24 of the Company's Registration
Statement on Form S-1 (No. 33-75180).
23
24
EXHIBIT
NUMBER DESCRIPTION
------- -----------
*10.10 1988 Stock Option Plan, as amended August 12, 1991, of SF2
Corporation, incorporated by reference to Exhibit 10.25 of
the Company's Registration Statement on Form S-1 (No.
33-75180).
10.11 Form of Consultant/Employee Confidentiality Agreement,
incorporated by reference to Exhibit 10.28 of the Company's
Registration Statement on Form S-1 (No. 33-75180).
10.12 Lease between Oak Creek Delaware, Inc., and the Company,
dated December 18, 1993, incorporated by reference to
Exhibit 10.29 of the Company's Registration Statement on
Form S-1 (No. 33-75180).
*10.13 Form of Incentive Stock Option Agreement under the Stock
Incentive Plan, incorporated by reference to Exhibit 10.30
of the Company's Registration Statement on Form S-1 (No.
33-75180).
*10.14 MTI Technology Corporation 1994 Employee Stock Purchase
Plan, as amended, incorporated by reference to Exhibit 10.31
of the Company's Annual Report on Form 10-K for the fiscal
year ended April 2, 1994.
10.15 MTI Technology Corporation Directors' Non-Qualified Stock
Option Plan, incorporated by reference to Exhibit 10.32 of
the Company's Registration Statement on Form S-1 (No.
33-75180).
10.16 Employment Agreement, dated as of May 15, 1995, between Earl
M. Pearlman and Registrant, incorporated by reference to
Exhibit 10.38 of the Company's Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 1995.
10.17 Asset Purchase Agreement, dated February 9, 1995, between
EMC Corporation and the Registrant (confidential treatment
granted pursuant to Rule 24b-2), incorporated by reference
to Exhibit 10.36 of the Company's Quarterly Report on Form
10-Q for the quarterly period ended December 30, 1995.
10.18 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, incorporated by reference to Exhibit 10.47 of
the Company's Quarterly Report on Form 10-Q for the
quarterly period ended October 5, 1996.
10.19 Employment Agreement dated August 1, 1997, between Chuck
Sitzman and Registrant, incorporated by reference to Exhibit
10.50 of the Company's Quarterly Report on Form 10-Q for the
quarterly period ended October 4, 1997.
10.20 Loan and Security Agreement between the Company and Silicon
Valley Bank and General Electric Capital Corporation, as
Co-Lenders, and Schedules thereto, incorporated by reference
to Exhibit 10.28 of the Company's Quarterly Report on Form
10-Q for the quarterly period ended July 4, 1998.
10.21 Severance Agreement dated as of July 15, 1998, between Earl
Pearlman and Registrant, incorporated by reference to
Exhibit 10.28 of the Company's Annual Report on Form 10-K
for the fiscal year ended quarterly period ended April 3,
1999.
*10.22 Severance Agreement dated as of July 15, 1998, between Dale
Boyd and Registrant, incorporated by reference to Exhibit
10.29 of the Company's Annual Report on Form 10-K for the
fiscal year ended quarterly period ended April 3, 1999.
*10.23 Severance Agreement dated as of July 15, 1998, between Tom
Raimondi and Registrant, incorporated by reference to
Exhibit 10.30 of the Company's Annual Report on Form 10-K
for the fiscal year ended quarterly period ended April 3,
1999.
*10.24 Severance Agreement dated as of July 15, 1998, between Gary
Scott and Registrant, incorporated by reference to Exhibit
10.31 of the Company's Annual Report on Form 10-K for the
fiscal year ended quarterly period ended April 3, 1999.
24
25
EXHIBIT
NUMBER DESCRIPTION
------- -----------
*10.25 Severance Agreement dated as of July 15, 1998, between Chuck
Sitzman and Registrant, incorporated by reference to Exhibit
10.32 of the Company's Annual Report on Form 10-K for the
fiscal year ended quarterly period ended April 3, 1999.
*10.26 Severance Agreement dated as of July 15, 1998, between Venki
Venkataraman and Registrant, incorporated by reference to
Exhibit 10.33 of the Company's Annual Report on Form 10-K
for the fiscal year ended quarterly period ended April 3,
1999.
*10.27 Amendment to the 1996 Stock Incentive Plan, incorporated by
reference to Exhibit 10.29 of the Company's Quarterly Report
on Form 10-Q for the quarterly period ended October 2, 1999.
21.1 Subsidiaries of the Company.
23.2 Consent of KPMG LLP.
24 Power of Attorney (see page 26)
- ---------------
* Management or compensatory plan or arrangement.
(b) Reports on Form 8-K
None.
25
26
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 22nd day of
June 2000.
MTI TECHNOLOGY CORPORATION
By: /s/ THOMAS P. RAIMONDI
------------------------------------
Thomas P. Raimondi
(President and Chief Executive
Officer)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below, constitutes and appoints Thomas P. Raimondi 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/ THOMAS P. RAIMONDI President and Chief Executive June 22, 2000
- -------------------------------------------------------- Officer
(Thomas P. Raimondi)
/s/ DALE R. BOYD Senior Vice President, Chief June 22, 2000
- -------------------------------------------------------- Financial Officer
(Dale R. Boyd) (Principal Financial Officer)
/s/ STEPHANIE M. BRAUN Corporate Controller, Chief June 22, 2000
- -------------------------------------------------------- Accounting Officer
(Stephanie M. Braun)
/s/ RAYMOND J. NOORDA Chairman of the Board June 22, 2000
- --------------------------------------------------------
(Raymond J. Noorda)
/s/ VAL KREIDEL Director June 22, 2000
- --------------------------------------------------------
(Val Kreidel)
/s/ AL MELROSE Director June 22, 2000
- --------------------------------------------------------
(Al Melrose)
/s/ JOHN REPP Director June 22, 2000
- --------------------------------------------------------
(John Repp)
/s/ RALPH YARRO Director June 22, 2000
- --------------------------------------------------------
(Ralph Yarro)
26
27
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets as of April 1, 2000 and April 3,
1999...................................................... F-3
Consolidated Statements of Income for the fiscal years ended
April 1, 2000, April 3, 1999 and April 4, 1998............ F-4
Consolidated Statements of Stockholders' Equity for the
fiscal years ended April 1, 2000,
April 3, 1999 and April 4, 1998........................... F-5
Consolidated Statements of Cash Flows for the fiscal years
ended April 1, 2000, April 3, 1999 and April 4, 1998...... F-6
Notes to Consolidated Financial Statements.................. F-7
FINANCIAL STATEMENT SCHEDULE
Schedule II -- Valuation and Qualifying Accounts............ S-1
F-1
28
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 auditing standards generally
accepted in the United States of America. 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 1, 2000 and April 3, 1999,
and the results of their operations and their cash flows for each of the years
in the three-year period ended April 1, 2000, in conformity with accounting
principles generally accepted in the United States of America. 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 23, 2000
F-2
29
MTI TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
APRIL 1, APRIL 3,
2000 1999
-------- --------
Current assets:
Cash...................................................... $ 8,791 $ 7,213
Accounts receivable, less allowance for doubtful accounts
and sales returns of $7,210 in 2000 and $3,250 in
1999................................................... 74,289 53,005
Inventories............................................... 25,515 16,987
Deferred income tax benefit............................... 1,020 3,960
Prepaid expenses and other receivables.................... 6,407 7,312
-------- --------
Total current assets.............................. 116,022 88,477
Property, plant and equipment, net.......................... 14,464 13,802
Deferred income tax benefit................................. 26,715 --
Investment in affiliate..................................... 14,304 --
Intangible assets and goodwill, less accumulated
amortization of $9,330 in 2000 and $7,438 in 1999......... 8,998 10,890
Other....................................................... 444 609
-------- --------
$180,947 $113,778
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings..................................... $ -- $ 5,824
Note payable.............................................. 1,500 --
Accounts payable.......................................... 22,008 18,632
Accrued liabilities....................................... 20,372 16,043
Deferred income........................................... 20,708 17,981
-------- --------
Total current liabilities......................... 64,588 58,480
Other....................................................... 2,864 1,157
-------- --------
Total liabilities................................. 67,452 59,637
-------- --------
Stockholders' equity:
Preferred stock, $.001 par value; authorized 5,000 shares;
issued and outstanding, none........................... -- --
Common stock, $.001 par value; authorized 80,000 shares;
issued (including treasury shares) and outstanding
32,352 and 29,212 shares in 2000 and 1999,
respectively........................................... 32 29
Additional paid-in capital................................ 133,007 98,539
Accumulated deficit....................................... (14,609) (39,929)
Less cost of treasury stock (479 and 575 shares in 2000
and 1999, respectively)................................ (1,745) (2,108)
Accumulated other comprehensive loss...................... (3,190) (2,390)
-------- --------
Total stockholders' equity........................ 113,495 54,141
Commitments and contingencies
-------- --------
$180,947 $113,778
======== ========
See accompanying notes to consolidated financial statements.
F-3
30
MTI TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
FISCAL YEARS ENDED APRIL 1, 2000, APRIL 3, 1999 AND APRIL 4, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2000 1999 1998
-------- -------- --------
Net product revenue, including $4,920 from related parties
in 2000................................................... $177,770 $157,456 $163,707
Service revenue............................................. 49,327 44,193 36,304
-------- -------- --------
Total revenue..................................... 227,097 201,649 200,011
Product cost of revenue..................................... 106,568 106,767 106,960
Service cost of revenue..................................... 30,456 27,917 22,042
-------- -------- --------
Total cost of revenue............................. 137,024 134,684 129,002
-------- -------- --------
Gross profit...................................... 90,073 66,965 71,009
Operating expenses:
Selling, general and administrative....................... 64,829 46,326 41,055
Research and development.................................. 16,017 12,765 12,475
-------- -------- --------
Total operating expenses.......................... 80,846 59,091 53,530
-------- -------- --------
Operating income.................................. 9,227 7,874 17,479
Other income (expense):
Equity in net loss of affiliate........................... (2,824) -- --
Interest expense.......................................... (598) (716) (2,069)
Interest income........................................... 110 66 176
Other income.............................................. 4,310 4,389 4,450
-------- -------- --------
Income before income taxes.................................. 10,225 11,613 20,036
Income tax expense (benefit).............................. (15,095) 1,521 2,020
-------- -------- --------
Net income................................................ $ 25,320 $ 10,092 $ 18,016
======== ======== ========
Net income per share:
Basic..................................................... $ 0.84 $ 0.35 $ 0.68
======== ======== ========
Diluted................................................... $ 0.76 $ 0.34 $ 0.62
======== ======== ========
Weighted average shares used in per share computation:
Basic..................................................... 30,268 28,451 26,674
======== ======== ========
Diluted................................................... 33,232 29,710 29,112
======== ======== ========
See accompanying notes to consolidated financial statements.
F-4
31
MTI TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FISCAL YEARS ENDED APRIL 1, 2000, APRIL 3, 1999 AND APRIL 4, 1998
(IN THOUSANDS)
ACCUMULATED TOTAL TOTAL
COMMON STOCK ADDITIONAL RETAINED OTHER STOCK- COMPREHENSIVE
--------------- PAID-IN EARNINGS COMPREHENSIVE HOLDERS' INCOME
SHARES AMOUNT CAPITAL (DEFICIT) LOSS EQUITY (LOSS)
------ ------ ---------- --------- ------------- ------------ -------------
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
Net income...................... -- -- -- 25,320 -- 25,320 $25,320
Foreign currency translation
adjustments................... -- -- -- -- (800) (800) (800)
-------
Comprehensive income for the
year ended April 1, 2000...... $24,520
=======
Sale of stock by affiliate...... -- -- 6,194 -- -- 6,194
Issuance of warrant............. -- -- 1,894 -- -- 1,894
Exercise of stock options and
warrants (including income tax
benefit of $9,941)............ 3,140 3 26,084 -- -- 26,087
Treasury shares issued under
Employee Stock Purchase
Plan.......................... 96 -- 659 -- -- 659
------ --- -------- -------- ------- --------
Balance at April 1, 2000........ 31,873 $32 $131,262 $(14,609) $(3,190) $113,495
====== === ======== ======== ======= ========
See accompanying notes to consolidated financial statements.
F-5
32
MTI TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED APRIL 1, 2000, APRIL 3, 1999 AND APRIL 4, 1998
(IN THOUSANDS)
2000 1999 1998
-------- --------- ---------
Cash flows from operating activities:
Net income................................................ $ 25,320 $ 10,092 $ 18,016
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization............................. 6,932 8,281 7,920
Provision for sales returns and losses on accounts
receivable, net....................................... 479 434 1,107
Provision for inventory obsolescence.................... 2,281 2,239 1,968
Loss on disposal of fixed assets........................ 165 39 69
Deferred income tax expense (benefit)................... (17,169) 1,305 (899)
Deferred income......................................... 4,433 2,591 3,260
Net loss in equity of affiliate......................... 2,824 -- --
Non-cash compensation from issuance of warrant.......... 379 -- --
Compensation related to stock options................... -- -- 18
Gain on sale of product lines........................... -- -- (246)
Changes in assets and liabilities, net of effect of
acquisitions:
Accounts receivable....................................... (22,138) (9,424) (13,565)
Inventories............................................... (10,923) (451) (6,538)
Prepaid expenses, other receivables and other assets...... 1,399 (2,841) (1,449)
Accounts payable.......................................... 3,283 (1,719) 5,926
Accrued and other liabilities............................. 4,118 (2,284) 3,527
-------- --------- ---------
Net cash provided by operating activities................. 1,383 8,262 19,114
-------- --------- ---------
Cash flows from investing activities:
Capital expenditures for property, plant and equipment.... (6,253) (8,148) (4,759)
Equity investment in affiliate............................ (4,554) -- --
Payments received on notes receivables.................... -- -- 246
Short term investments.................................... -- -- 850
-------- --------- ---------
Net cash used in investing activities..................... (10,807) (8,148) (3,663)
-------- --------- ---------
Cash flows from financing activities:
Borrowings under notes payable............................ 80,871 99,543 148,779
Proceeds from issuance of common stock and exercise of
options and warrants.................................... 16,805 1,318 4,596
Repayments of notes payable............................... (86,695) (101,624) (164,485)
-------- --------- ---------
Net cash provided by (used in) financing activities..... 10,981 (763) (11,110)
-------- --------- ---------
Effect of exchange rate changes on cash..................... 21 94 (60)
-------- --------- ---------
Net increase (decrease) in cash and cash equivalents........ 1,578 (555) 4,281
Cash at beginning of year................................... 7,213 7,768 3,487
-------- --------- ---------
Cash at end of year......................................... $ 8,791 $ 7,213 $ 7,768
======== ========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest................................................ $ 599 $ 1,046 $ 2,392
Income taxes............................................ 466 1,616 719
Supplemental schedule of noncash investing and financing
activities:
Income tax benefit from exercise of stock options......... 9,941 988 3,495
Note issued in connection with equity investment in
affiliate............................................... 1,500 -- --
Valuation of warrant issued............................... 1,894 -- --
Sale of stock by affiliate................................ 6,194 -- --
See accompanying notes to consolidated financial statements.
F-6
33
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 2000, 1999 and 1998 ended on April 1, April 3, and April 4, 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 ("SOP") 97-2, "Software Revenue
Recognition" as amended by SOP 98-9, "Modification of SOP 97-2 with Respect to
Certain Transactions," 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 1, 2000 or April 3, 1999.
Inventories
Inventories are valued at the lower of cost (first-in, first-out) or
market, net of an allowance for obsolete, slow-moving and non-salable inventory.
The allowance is periodically adjusted based upon management's review of
inventories on-hand, historic product sales and forecasts.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Depreciation is
calculated using the straight-line method over the estimated useful lives of two
to seven years. Leasehold improvements are amortized using the straight-line
method over the lesser of the useful life of the improvement or the term of the
related lease. Maintenance and repairs are expensed as incurred.
F-7
34
MTI TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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 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 $323,
$669 and $237 were realized in fiscal years 2000, 1999 and 1998, respectively,
and are included in selling, general and administrative expense in the
accompanying consolidated statements of income.
F-8
35
MTI TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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, for the Vivant product line, the Company currently purchases
disk drives solely from Seagate Technology, Inc., chipsets solely from Qlogic
Corporation and fibre channel switches solely from Ancor Communications, Inc. 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.
Adoption of SOP 98-1
In March 1998, the American Institute of Certified Public Accountants
issued SOP 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use," which provides guidance on accounting for the costs
of computer software intended for internal use. The adoption of SOP 98-1 did not
have a material impact on the Company's consolidated results of operations or
financial position during the year ended April 1, 2000.
Sale of Common Stock by Affiliate
At the time a subsidiary or affiliate, accounted for under the equity
method of accounting, sells existing or newly issued common stock to unrelated
parties at a price in excess of its book value, the Company's policy is to
record its share of the change in the subsidiary's or affiliate's equity
resulting from the sale as an increase to additional paid-in-capital net of the
tax effect.
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 1, 2000,
the fair value of all financial instruments approximated their carrying value.
F-9
36
MTI TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Reclassifications
Certain reclassifications have been made to the fiscal years 1999 and 1998
financial statements to conform to the fiscal year 2000 presentation.
(2) INVENTORIES
Inventories consist of the following:
APRIL 1, APRIL 3,
2000 1999
-------- --------
Raw materials............................................ $13,408 $ 8,262
Work-in-process.......................................... 595 367
Finished goods........................................... 11,512 8,358
------- -------
$25,515 $16,987
======= =======
(3) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, at cost, are summarized as follows:
APRIL 1, APRIL 3,
2000 1999
-------- --------
Plant equipment, office furniture and fixtures........... $15,252 $14,062
Computer equipment....................................... 20,394 17,914
Field service spares..................................... 11,155 10,238
Leasehold improvements................................... 2,361 2,097
------- -------
49,162 44,311
Less accumulated depreciation and amortization........... 34,698 30,509
------- -------
$14,464 $13,802
======= =======
(4) INVESTMENT IN AFFILIATE
In August 1999, the Company purchased 5,333,333 shares of Caldera Systems,
Inc. ("Caldera"), representing approximately 25% of the outstanding capital
stock of Caldera upon completion of the purchase. Caldera develops and markets
software based on the Linux operating system and provides related services. The
Canopy Group, Inc. ("Canopy"), a major stockholder of the Company, owned all the
issued and outstanding shares of Caldera prior to this transaction. Raymond J.
Noorda, Chairman of the Board of Directors of the Company, is the sole
shareholder and Chairman of the Board of Directors of Canopy.
Also in August 1999, subsequent to the Company's initial investment in
Caldera, the Company's percentage ownership was diluted to approximately 20% as
a result of Canopy exercising a convertible note payable from Caldera.
Additionally, on March 21, 2000, Caldera completed its initial public offering,
further diluting the Company's percentage ownership to approximately 14%. The
investment in Caldera is accounted for under the equity method as the Company
has significant influence, but not control, of the operations of Caldera.
The investment in Caldera was $7,598 and included: (a) cash payment of
$3,000, (b) note payable of $3,000 bearing interest at the prime rate plus one
percent per annum and payable in two equal semi-annual payments beginning
February 2000 and (c) investment costs of $1,598, including the issuance of a
warrant to purchase 150,000 shares of the Company's common stock. In November
1999, the Company accelerated the first $1,500 payment on the note payable in
exchange for the cancellation of any interest charges on the note
F-10
37
MTI TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
payable. The excess of the Company's investment in Caldera over the related
underlying equity in net assets of $6,931 is being amortized on a straight-line
basis over seven years.
On March 21, 2000, Caldera completed its initial public offering. The
Company recorded its share of the change in the affiliate's equity resulting
from the public offering as an increase to additional paid-in-capital of $6,194,
net of the tax impact of $3,336. At April 1, 2000, after the effect of this
adjustment, the excess of the Company's investment in Caldera over the related
underlying equity in net assets was $2,878.
Effective with the fourth quarter of fiscal year 2000, the Company records
its share of the results of Caldera on a two month lag to coincide with
Caldera's fiscal reporting as a publicly traded company. The unaudited financial
information for Caldera is summarized below:
APRIL 30,
2000
---------
Current assets.............................................. $94,183
Non-current assets.......................................... 5,244
Current liabilities......................................... (3,479)
Non-current liabilities..................................... --
-------
Net assets.................................................. $95,948
=======
APRIL 1,
2000
---------
Company's equity investment................................. $14,304
=======
SIX MONTHS
ENDED
JANUARY 31,
2000
-----------
Total revenue............................................... $ 1,201
Operating loss.............................................. (10,891)
Net loss.................................................... (10,711)
Company's equity in net loss................................ (2,824)
Caldera's unaudited net loss for the three month period ended April 30,
2000 was $6,992. The Company would have recorded an additional two months of
their proportionate share of this net loss if it were not recorded on a two
month lag.
(5) ACCRUED LIABILITIES
Accrued liabilities consist of the following:
APRIL 1, APRIL 3,
2000 1999
-------- --------
Salaries and wages....................................... $ 5,766 $ 5,122
Commissions.............................................. 5,466 1,833
Taxes.................................................... 6,236 5,096
Accrued warranty costs................................... 792 804
Other.................................................... 2,112 3,188
------- -------
$20,372 $16,043
======= =======
F-11
38
MTI TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(6) 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. Effective July 22, 1999, the Company renewed
its agreement with Silicon Valley Bank and General Electric Capital Corporation.
The agreement allows the Company to borrow at a rate equal to 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 1, 2000, the Company was in compliance with all such
covenants. The term of the renewed agreement is for one year, expiring July 31,
2000. The Company has begun negotiations for a renewal of its existing credit
facility. There were no borrowings outstanding under this agreement at April 1,
2000.
(7) INCOME TAXES
The components of income before income taxes are as follows:
FISCAL YEARS ENDED
--------------------------------
APRIL 1, APRIL 3, APRIL 4,
2000 1999 1998
-------- -------- --------
U.S........................................... $ 7,833 $ 3,965 $11,659
Foreign....................................... 2,392 7,648 8,377
------- ------- -------
$10,225 $11,613 $20,036
======= ======= =======
Income tax expense (benefit) consists of the following:
CURRENT DEFERRED TOTAL
------- -------- --------
2000:
Federal............................................ $6,452 $(20,841) $(14,389)
State.............................................. 1,459 (2,107) (648)
Foreign............................................ (58) -- (58)
------ -------- --------
$7,853 $(22,948) $(15,095)
====== ======== ========
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
====== ======== ========
F-12
39
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 1, APRIL 3, APRIL 4,
2000 1999 1998
-------- -------- --------
Federal statutory rate................................ 35.0% 35.0% 35.0%
Effect of foreign operations.......................... 6.9 (4.6) (0.9)
State taxes, net of federal benefit................... (3.8) -- 0.7
Change in valuation allowance......................... (184.6) (20.1) (26.0)
Non-deductible expenses............................... 7.4 5.2 2.9
Other................................................. (8.5) (2.4) (1.6)
------ ----- -----
(147.6)% 13.1% 10.1%
====== ===== =====
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:
2000 1999 1998
------- ------- -------
Tax operating loss carryforwards............................ $18,013 $15,436 $14,096
Tax basis of intangible assets greater than book basis...... 4,989 5,370 5,752
Accrued expenses not deductible for tax purposes............ 2,249 1,187 3,571
Inventory reserves.......................................... 1,144 885 1,346
Book depreciation greater than tax depreciation............. 2,805 3,185 2,682
Recognition of income reported on different methods for tax
purposes than for financial reporting..................... (693) 1,982 1,564
Other....................................................... (772) (444) 1,241
------- ------- -------
27,735 27,601 30,252
Less valuation allowance.................................... -- 23,641 25,975
------- ------- -------
$27,735 $ 3,960 $ 4,277
======= ======= =======
At April 1, 2000, the Company had federal net operating loss ("NOL")
carryforwards arising from the acquisition of SF2, available to offset future
taxable income of $15,662, subject to alternative minimum tax limitations. These
carryforwards begin to expire in fiscal year 2004. 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 1, 2000, the Company had federal NOL carryforwards, exclusive of
the $15,662 SF2 NOL discussed above, of $34,161. These carryforwards expire
beginning in fiscal year 2011.
Management believes that it is more likely than not that the Company will
realize the benefits of the deferred tax asset existing at April 1, 2000 based
on projected financial results and available tax planning strategies. The change
in the valuation allowance from fiscal year 1999 to fiscal year 2000 was
($23,641) and the change in the valuation allowance from fiscal year 1998 to
fiscal year 1999 was $2,334.
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 year 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-13
40
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.
(8) 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):
2000 1999 1998
------- ------- -------
Numerator:
Net income, basic and diluted....................... $25,320 $10,092 $18,016
======= ======= =======
Denominator:
Denominator for net income per share,
basic -- weighted-average shares outstanding..... 30,268 28,451 26,674
------- ------- -------
Effect of dilutive securities:
Dilutive options outstanding..................... 2,917 1,259 2,002
Dilutive warrants outstanding.................... 47 -- 436
------- ------- -------
Dilutive potential common shares.................... 2,964 1,259 2,438
------- ------- -------
Denominator for net income per share,
diluted -- adjusted weighted-average shares...... 33,232 29,710 29,112
======= ======= =======
Net income per share, basic........................... $ 0.84 $ 0.35 $ 0.68
======= ======= =======
Net income per share, diluted......................... $ 0.76 $ 0.34 $ 0.62
======= ======= =======
Options to purchase 2,864,100 shares of common stock at prices in excess of
$22.95 per share were outstanding at April 1, 2000, 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 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.
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 connection with the acquisition of SF2 the Company assumed outstanding
options to purchase 236,000 shares under the 1988 Stock Option Plan of SF2.
F-14
41
MTI TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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.
Stock Purchase Warrants
At April 1, 2000, a warrant to purchase 150,000 shares of the Company's
common stock at a price of $18.75 per share was outstanding. The warrant was
issued in August 1999 to an individual affiliated with Canopy in connection with
services provided to the Company and expires in August 2009. At April 1, 2000,
the warrant was not exercisable. The warrant is exercisable in August 2000.
At April 1, 2000, a warrant to purchase 57,240 shares of the Company's
common stock at a price of $12.00 per share was outstanding. The warrant was
issued in February 1998 in connection with a French distribution agreement and
expires in February 2008. At April 1, 2000, the warrant was exercisable to
purchase 28,620 shares of the Company's common stock. The remaining shares
become exercisable ratably through February 2002.
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 1, 2000, options to purchase 55,000 shares
of common stock were outstanding, of which 50,417 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 has been fully amortized through
a charge to operations over the vesting period of four years and amounted to $0,
$0 and $18 for fiscal years 2000, 1999 and 1998, respectively.
Options granted typically vest over a period of four years from the date of
grant. At April 1, 2000 and April 3, 1999, the number of options exercisable was
946,000 and 2,341,000, respectively, and the weighted-average exercise price of
those options was $7.40 and $4.72, respectively.
F-15
42
MTI TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The per share weighted-average fair value of stock options granted during
fiscal years 2000, 1999 and 1998 was $16.85, $4.11 and $6.40, respectively, on
the date of grant using the Black-Scholes option pricing model with the
following weighted average assumptions: 2000 -- expected dividend yield of 0%,
risk-free interest rate of 6.32%, volatility of its stock over the expected life
of the options of 1.0 and an expected life of five years; 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.
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:
2000........................................... $25,320 $0.76
1999........................................... $10,092 $0.34
1998........................................... $18,016 $0.62
Pro forma:
2000........................................... $12,992 $0.37
1999........................................... $ 4,912 $0.17
1998........................................... $15,169 $0.52
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 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
Granted............................................... 4,424 22.29
Exercised............................................. (3,138) 5.16
Canceled.............................................. (267) 11.95
------
Options outstanding at April 1, 2000.................. 6,971 $16.90
======
F-16
43
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 1, 2000 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 - 4.5625.. 698 6.4 $ 2.93 346 $ 2.66
5.0625 - 5.0625.. 1,404 9.0 5.06 -- --
5.5000 - 5.6875.. 132 8.9 5.67 92 5.67
8.3125 - 8.3125.. 1,195 8.3 8.31 208 8.31
9.0000 - 22.3750.. 864 7.9 13.80 300 12.77
30.0625 - 30.0625.. 2,033 9.7 30.06 -- --
31.8750 - 52.3440.. 645 9.8 38.68 -- --
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 2000, 1999 and 1998, 95,914, 90,645 and 88,664 shares of stock,
respectively, were issued pursuant to this plan.
(9) 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 1, 2000 under all noncancelable
operating facility and equipment leases for subsequent fiscal years are as
follows:
2001....................................................... $ 4,633
2002....................................................... 3,938
2003....................................................... 3,488
2004....................................................... 2,035
2005....................................................... 1,520
Thereafter................................................. 2,803
-------
$18,417
=======
Rent expense totaled $5,782, $5,422 and $4,575, for fiscal years 2000, 1999
and 1998, respectively.
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
F-17
44
MTI TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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 and was
recorded in the fiscal year 1999 consolidated financial statements. An order
preliminarily approving the settlement was signed by the court on May 17, 1999.
The final judgment was entered by the court on December 1, 1999.
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.
(10) 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:
2000 1999 1998
-------- -------- --------
Revenue:
United States.................................... $174,156 $145,185 $157,215
Europe........................................... 64,303 66,960 54,356
Transfers between areas.......................... (11,362) (10,496) (11,560)
-------- -------- --------
Total revenue............................ $227,097 $201,649 $200,011
======== ======== ========
Operating income:
United States.................................... $ 6,735 $ 136 $ 9,066
Europe........................................... 2,492 7,738 8,413
-------- -------- --------
Total operating income................... $ 9,227 $ 7,874 $ 17,479
======== ======== ========
Identifiable assets:
United States.................................... $147,101 $ 75,830 $ 72,069
Europe........................................... 34,764 37,948 33,022
-------- -------- --------
Total assets............................. $181,865 $113,778 $105,091
======== ======== ========
F-18
45
MTI TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The Company's revenues by product type and are summarized below:
2000 1999 1998
-------- -------- --------
Server:
Vivant........................................... $ 67,700 $ 1,000 $ --
Other............................................ 64,093 89,992 100,147
Tape libraries..................................... 35,719 52,550 50,783
Tape related software.............................. 10,258 13,914 12,777
Service............................................ 49,327 44,193 36,304
-------- -------- --------
$227,097 $201,649 $200,011
======== ======== ========
No single customer accounted for more than 10% of revenue in fiscal years
2000, 1999 and 1998.
(11) SALE OF PATENTS
Effective February 9, 1996, the Company entered into an agreement (the "EMC
Agreement") with EMC Corporation ("EMC"), selling EMC substantially all of the
Company's existing patents, patent applications and related rights. Pursuant to
the terms of the EMC Agreement, the Company is entitled to receive $30,000 over
the life of this agreement, in six equal annual installments of $5,000 each. The
Company has received five of the six installments. The sixth and final
installment is due January 2001. The Company will also receive royalty payments
in the aggregate of up to a maximum of $30,000 over the term of the EMC
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 EMC Agreement, and
within thirty days of each subsequent anniversary thereof. The first four annual
installments were received in March 1997, March 1998, March 1999 and March 2000.
Also, pursuant to the terms of the EMC Agreement, $10,000 of the maximum $30,000
of royalties, will be received in five equal annual installments as a result of
a computer and technology agreement between EMC and IBM announced in March 1999.
The first annual installment was received in March 2000. The EMC Agreement
provides that the remaining four payments will be received annually beginning in
March 2001. Included in net product revenue and other income for fiscal years
2000, 1999 and 1998 are $4,348, $4,000 and $2,000, and $5,000, $5,000 and
$5,000, respectively, related to this agreement. Included in deferred income at
April 1, 2000 and April 3, 1999, is $3,750 related to this agreement. In
addition, pursuant to the terms of the EMC Agreement, the Company also received
an irrevocable, non-cancelable, perpetual and royalty-free license to exploit,
market, and sell the technology protected under the applicable patents. Pursuant
to the terms and conditions of the EMC Agreement, this license will terminate in
the event of a change in control of the Company involving certain acquirers. As
part of the EMC 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 EMC Agreement for a period of five
years expiring in February 2001.
(12) RELATED PARTY TRANSACTIONS
In the normal course of business, the Company sold goods and services to a
subsidiary of Canopy. Goods and services sold to the subsidiary of Canopy in
fiscal year 2000 was $4,920. The Company made no sales to the subsidiary of
Canopy prior to fiscal year 2000. At April 1, 2000, there were no amounts due
from the subsidiary of Canopy.
F-19
46
MTI TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(13) 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 2000, 1999 and 1998, the Company contributed $306, $243 and $393,
respectively.
(14) QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial data for continuing operations for fiscal
years 2000 and 1999 are as follows:
NET
INCOME
NET PER SHARE,
TOTAL REVENUES GROSS PROFIT INCOME DILUTED
-------------- ------------ ------- ----------
2000:
Fourth quarter............................. $ 60,574 $25,093 $14,152 $0.41
Third quarter.............................. 58,958 23,341 2,533 0.08
Second quarter............................. 54,325 22,430 5,077 0.16
First quarter.............................. 53,240 19,209 3,558 0.12
-------- ------- -------
Total.............................. $227,097 $90,073 $25,320
======== ======= =======
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
======== ======= =======
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 2000, the Company recognized a net tax
benefit of $15.1 million. This benefit is a one time benefit primarily a result
of the reversal of valuation allowances held against certain net operating loss
carryforwards. The reversal of the valuation allowance was a result of
management's determination that it was more likely than not that the related
deferred tax assets would be realized based on projected financial results and
available tax planning strategies.
In the fourth quarter of fiscal years 2000 and 1999, the Company recognized
$2,000 from royalty revenue resulting from the sale of patents to EMC (see note
11). Based on the agreement, the Company will receive $10,000 of royalties in
five equal annual installments, the first of which was paid in March 2000. The
Company will continue to recognize $2,000 of royalty revenue in the fourth
quarter for fiscal years 2001, 2002 and 2003.
F-20
47
MTI TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The Company has operated historically without a significant backlog of
orders and, as a result, net product revenue in any quarter is dependent on
orders booked and products shipped during that quarter. A significant portion of
the Company's operating expenses are relatively fixed in nature and planned
expenditures are based primarily on sales forecasts. If revenue does not meet
the Company's expectations in any given quarter, the adverse impact on the
Company's liquidity position and net income may be magnified by the Company's
inability to reduce expenditures quickly enough to compensate for the revenue
shortfall. Further, as is common in the computer industry, the Company
historically has experienced an increase in the number of orders and shipments
in the latter part of each quarter and the Company expects this pattern to
continue in the future. The Company's failure to receive anticipated orders or
to complete shipments in the latter part of a quarter could have a material
adverse effect on the Company's results of operations for that quarter.
Due to all of the foregoing factors, the Company believes that
period-to-period comparisons of its operating results are not necessarily
meaningful and that such comparisons cannot be relied upon as indicators of
future performance. There can be no assurance that the Company will remain
profitable on a quarter-to-quarter basis or that future revenues and operating
results will not be below the expectations of public market analysts and
investors which could result in a material adverse effect on the Company's
common stock.
F-21
48
SCHEDULE II
MTI TECHNOLOGY CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
FOR THE FISCAL YEARS ENDED APRIL 1, 2000, APRIL 3, 1999 AND APRIL 4, 1998
(IN THOUSANDS)
CHARGED TO
BALANCE AT REVENUE, BALANCE AT
BEGINNING COSTS AND END OF
DESCRIPTION OF PERIOD EXPENSES(1) DEDUCTIONS PERIOD
----------- ---------- ----------- ---------- ----------
Year ended April 1, 2000
Allowance for doubtful accounts and sales
returns................................. $3,250 $ 4,439 $ (479) $7,210
====== ======= ======= ======
Allowance for inventory obsolescence....... $3,249 $ 2,281 $(2,000) $3,530
====== ======= ======= ======
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
====== ======= ======= ======
- ---------------
(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.
49
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION PAGE
- ------- ----------- ----
21.1 Subsidiaries of the Company................................. 45
23.2 Consent of KPMG LLP......................................... 46
27 Financial Data Schedule..................................... 47