-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Cu4Tf+Qp2OqzKDbDj5jBolndOmLQoxyHi84XM4xTK4YHT/VVv/FJwzhoXmJItUWr A0g1XZ/p8RsjsIvKnI4uQA== 0000892569-96-001823.txt : 19960913 0000892569-96-001823.hdr.sgml : 19960913 ACCESSION NUMBER: 0000892569-96-001823 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960406 FILED AS OF DATE: 19960912 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MTI TECHNOLOGY CORP CENTRAL INDEX KEY: 0000901696 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER STORAGE DEVICES [3572] IRS NUMBER: 953601802 STATE OF INCORPORATION: DE FISCAL YEAR END: 0403 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-23418 FILM NUMBER: 96629381 BUSINESS ADDRESS: STREET 1: 4905 E LA PALMA AVE CITY: ANAHEIM STATE: CA ZIP: 92807 BUSINESS PHONE: 7149700300 MAIL ADDRESS: STREET 1: 4905 E LA PALMA AVE CITY: ANAHEIM STATE: CA ZIP: 92807 10-K/A 1 FORM 10-K/A 1 FORM 10-K/A AMENDMENT NO. 2 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark One) /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended April 6, 1996 / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] 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 (Section 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 $25,003,916 on June 21, 1996, 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 25,514,386 on June 21, 1996. The Registrant hereby amends the following items, financial statements, exhibits or other portions of its Annual Report on Form 10-K for the fiscal year ended April 6, 1996, as set forth in the pages attached hereto: Part II, Item 8; Part III, Items 10 and 13; and Part IV, Item 14. 2 PART II 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. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT: Information with respect to the Company's executive officers is set forth in Part I, above, under the caption "Executive Officers of the Registrant." DIRECTORS
NAME AGE POSITION(S) - ---- --- ----------- *Raymond J. Noorda 72 Chairman of the Board of Directors Steven J. Hamerslag 40 Director *Val Kreidel 41 Director *David Proctor 56 Director Earl Pearlman 53 Nominee, President and Chief Executive Officer
- ------------------- * Member of Audit Committee and Compensation Committee. MTI's Bylaws provide for the Board of Directors to be divided into three classes, with each class to be as nearly equal in number of directors as possible. At each annual meeting of stockholders, the successors to the class of directors whose term expires at that time are elected to hold office for a term of three years until their respective successors are elected and qualified, so that the term of one class of directors expires at each such annual meeting. The terms of office expire as follows: Mr. Noorda, 1998; Mr. Hamerslag, 1998; Mr. Proctor, 1997; Ms. Kreidel, 1996; and a vacancy in the 1996 class. Ms. Kreidel is the daughter of Mr. Noorda. There are no other family relationships among the directors or executive officers of MTI. Raymond J. Noorda has been Chairman of the Board of Directors of the Company since 1987. Mr. Noorda previously served as the President, Chief Executive Officer and Chairman of the Board of Directors of Novell, Inc. Prior to joining Novell, Inc., Mr. Noorda served as Chief Executive Officer of Boschert, Inc. and System Industries, Inc. Steven J. Hamerslag has been a Director of the Company since 1987 and served as President and Chief Executive Officer from 1987 until March 1996. Prior to joining the Company, Mr. Hamerslag was Senior Vice President of System Industries, Inc. Mr. Hamerslag presently serves on the Board of Directors of Corvel, Inc., a medical cost containment company. Val Kreidel was elected a Director of the Company in January 1994. Ms. Kreidel has served as a financial analyst for NFT Ventures, Inc. and DSC Ventures, Inc., private investment companies, since May 1989. From May 1985 to May 1989, Ms. Kreidel served as a Vice President of Atlantic Financial Savings Bank in its Real Estate Loan Department. David Proctor was elected a Director of the Company in October 1995. Mr. Proctor has been President and Chief Operating Officer of Platinum Software Corporation, a supplier of financial software application programs, from May 1994 to December 1995. Prior to joining Platinum Software, Mr. Proctor was Vice President of software products for the Personal Software Products Division of IBM from April 1993 to May 1994. From October 1991 to April 1993, Mr. Proctor was a private consultant providing executive management services to technology companies. From May 1990 to October 1991, Mr. Proctor was with Ashton-Tate Corporation, a supplier of business applications software products, and served 2 3 as both the Vice President of the Database Division and as President and Chief Operating Officer. Prior to joining Ashton-Tate, Mr. Proctor spent 23 years with IBM in several executive capacities. Earl Pearlman was named President and Chief Executive Officer of the Company in April 1996. From April 1995 to March 1996, Mr. Pearlman was Vice President, U.S. Sales for the Company. Prior to joining the Company, Mr. Pearlman was the President and Chief Executive Officer of National Peripherals, Inc., a supplier of cross-platform RAID - based storage products, which he founded in 1980, acquired by the Company in 1995. DIRECTORS' FEES The Company's directors did not receive cash compensation for serving on the Board of Directors for the fiscal year ended April 6, 1996, but they were reimbursed for expenses incurred in attending Board meetings. Each non-employee director of the Company is granted a nonqualified option to purchase 10,000 shares of Common Stock under the Directors' Non-Qualified Stock Option Plan and upon the closing of the Company's initial public offering or upon his or her first election or appointment to the Board of Directors, if subsequent to that offering. Pursuant to the provisions of the Directors' Plan, Mr. Noorda and Ms. Kreidel each received an option for 10,000 shares with an exercise price of $9.00 per share following the April 14, 1994 closing of the Company's initial public offering and Mr. Proctor received an option for 10,000 shares with an exercise price of $3.00 per share following his election to office on October 6, 1995. In addition, the Directors' Plan provides that each non-employee director who is a director immediately prior to an annual meeting of the Company's stockholders and who continues to be a director after such meeting (i.e., Mr. Noorda, Mr. Hamerslag and Mr. Proctor, and Ms. Kreidel in the event she is re-elected) will be granted an option to purchase 2,500 shares of Common Stock, provided that such director has served as such for at least one year. Mr. Noorda and Ms. Kreidel each received options to purchase 2,500 shares of Common Stock with an exercise price of $3.00 per share following the Company's 1995 Annual Meeting. Each option granted under the Directors' Plan has an exercise price equal to the fair market value of the Common Stock on the date of grant and vests monthly over a 12-month period. COMMITTEES OF THE BOARD The Company currently has two committees, the Audit Committee and the Compensation Committee. The Audit Committee, currently consisting of Mr. Noorda, Mr. Proctor and Ms. Kreidel, recommends the appointment of the independent public accountants of the Company, reviews and approves the scope of the annual audit and reviews the results thereof with the Company's independent accountants. The Audit Committee also assists the Board in fulfilling its fiduciary responsibilities relating to accounting and reporting policies, practices and procedures, and reviews the continuing effectiveness of the Company's business ethics and conflicts of interest policies. The Company does not have an executive committee. The Compensation Committee, currently consisting of Mr. Noorda, Mr. Proctor and Ms. Kreidel, recommends to the Board of Directors the salaries, bonuses and stock awards received by the officers of the Company. The Compensation Committee is also responsible for administering the Company's Stock Incentive Plan. The Compensation Committee determines the recipients of awards, sets the exercise price of shares granted, and determines the terms, provisions and conditions of all rights granted. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION During fiscal year 1996, the Compensation Committee consisted of Mr. Noorda, Mr. Proctor and Ms. Kreidel. None of these persons is or has been an officer or employee of the Company or any of its subsidiaries. In addition, there are no Compensation Committee interlocks between MTI and other entities involving MTI executive officers and Board members who serve as executive officers of such entities. On July 19, 1995, the Company entered into a Loan Agreement (the "Loan Agreement") with NFT Ventures II, LLC ("NFTII"). Mr. Noorda is the Chairman of the Board of NFTII. Pursuant to the Loan Agreement, NFTII provided the Company $10.0 million at an interest rate of 10-3/4% per annum. Repayment was due in two equal installments, 18 and 24 months after funding. As contemplated by the Loan Agreement, NFTII and the Company have executed 3 4 mutually satisfactory licenses granting NFTII a source code license (with the right of sublicense) for the Company's BACKUP.UNET and XpresServe products within thirty (30) days of the date of the Loan Agreement. Therefore, NFTII has forgiven $650,000 of principal or interest due under the Loan Agreement. On April 11, 1996, the principal and interest accrued under the Loan Agreement was converted, in whole, to Common Stock of the Company at $1.6875 per share, the then-current market price per share (the "Conversion Right") for an aggregate of 5,992,665 shares. The Conversion Right was approved by the Company's stockholders at the 1995 Annual Meeting. Pursuant to an agreement (the "NRE Funding Agreement"), dated as of June 27, 1996, between the Company and NFT Ventures, Inc. ("NFT"), NFT has agreed to fund the non-recoverable direct operating expenses for certain development projects for one year, up to an aggregate of $2.4 million. The development projects consist of the Company's Sterling, Virginia Software Product Development Center, the RLM Software Products Group, and the Open Media Products Group. In return for the development project funding, NFT will receive 40% of the net sales prices of all products arising out of the development projects through April 7, 2000. In addition, the Company has agreed, subject to stockholder approval, to issue NFT a warrant to purchase up to 750,000 shares of Common Stock with an exercise price of $2.25 per share, vesting 25% at each funding date. The aggregate number of shares of Common Stock subject to the warrant will be reduced pro rata, to the extent the maximum funding obligation is not reached. Mr. Noorda is the Chairman of NFT. On May 3, 1996, an affiliate of NFT provided a guaranty (the "Loan Guaranty") for the Company's $10.0 million bank financing with Greyrock Business Credit. As consideration for such Loan Guaranty, the Company has agreed to issue NFT a warrant to purchase up to 500,000 shares of Common Stock at $2.00 per share, subject to approval of the Company's disinterested stockholders. ATTENDANCE AT BOARD AND COMMITTEE MEETINGS During the fiscal year ended April 6, 1996, the Board of Directors met four times. In addition, the Audit Committee and Compensation Committee met one and three times, respectively. No director attended fewer than 75% of the aggregate number of meetings held by the Board of Directors and all committees of the Board on which such director served. COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934 Section 16(a) of the Securities and Exchange Act of 1934, as amended, requires that the Company's executive officers and directors file reports of beneficial ownership on Form 3 and changes in beneficial ownership on Forms 4 and 5 with the Securities and Exchange Commission ("SEC"). Executive officers and directors are also required by the SEC rules to furnish the Company with copies of all Section 16(a) reports they file. As part of a Section 16 compliance program established by the Company for its executive officers and directors, the Company undertakes to file these reports on behalf of such individuals. Based solely on its review of the Forms 3, 4 and 5 filed on behalf of its executive officers and directors, as well as written representations from certain individuals that no Forms 5 are required by such individuals, the Company believes that, during the fiscal year ended April 6, 1996, all Section 16(a) filing requirements applicable to its executive officers and directors were complied with pursuant to the SEC rules, except that Richard L. Hicksted and a related trust were nine days late in filing Form 4s reflecting sales of Common Stock. 4 5 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS NFTII Conversion Right. On July 19, 1995, the Company entered into the Loan Agreement with NFTII. Mr. Noorda is the Chairman of the Board of NFTII. Pursuant to the Loan Agreement, NFTII provided the Company $10.0 million at an interest rate of 10-3/4% per annum. Repayment was due in two equal installments, 18 and 24 months after funding. As contemplated by the Loan Agreement, NFTII and the Company have executed mutually satisfactory licenses granting NFTII a source code license (with the right of sublicense) for the Company's BACKUP.UNET and XpresServe products within thirty (30) days of the date of the Loan Agreement. Therefore, NFTII has forgiven $650,000 of principal or interest due under the Loan Agreement. On April 11, 1996, the principal and interest accrued under the Loan Agreement was converted, in whole, to Common Stock of the Company at $1.6875 per share, the then-current market price per share (the "Conversion Right") for an aggregate of 5,992,665 shares. The Conversion Right was approved by the Company's stockholders at the 1995 Annual Meeting. NRE Funding Agreement. Pursuant to the NRE Funding Agreement, dated as of June 27, 1996, between the Company and NFT, NFT has agreed to fund the non-recoverable direct operating expenses for certain development projects for one year, up to an aggregate of $2.4 million. The development projects consist of the Company's Sterling, Virginia Software Product Development Center, the RLM Software Products Group, and the Open Media Products Group. In return for the development project funding, NFT will receive 40% of the net sales prices of all products arising out of the development projects through April 7, 2000. In addition, the Company has agreed, subject to stockholder approval, to issue NFT a warrant to purchase up to 750,000 shares of Common Stock with an exercise price of $2.25 per share, vesting 25% at each funding date. See "Proposal Three." The aggregate number of shares of Common Stock subject to the warrant will be reduced pro rata, to the extent the maximum funding obligation is not reached. Ray Noorda, the Company's Chairman and a major stockholder, is the Chairman of NFT. Loan Guaranty Warrants. On May 3, 1996, an affiliate of NFT provided the Loan Guaranty for the Company's $10.0 million bank financing with Greyrock Business Credit. As consideration for such Loan Guaranty, the Company has agreed to issue NFT a warrant to purchase up to 500,000 shares of Common Stock at $2.00 per share, subject to approval of the Company's disinterested stockholders. See "Proposal Four." Ray Noorda, the Company's Chairman and a major stockholder is the Chairman of NFT. Option Grants. In June 1996, the Compensation Committee of the Board of Directors approved stock option grants to the following executive officers: Earl Pearlman (250,000); Dale Boyd (70,000); and Venki Venkataraman (35,000). 5 6 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 6, 1996 and April 1, 1995 Consolidated Statements of Operations for fiscal years 1996, 1995 and 1994 Consolidated Statements of Stockholders' Equity (Deficiency) for fiscal years 1996, 1995 and 1994 Consolidated Statements of Cash Flows for fiscal years 1996, 1995 and 1994 (2) The following financial statement schedule for fiscal years 1996, 1995 and 1994 is submitted herewith: Schedule II -- Valuation and Qualifying Accounts (See page S-1) All other schedules are omitted because they are not applicable or the required information is shown in the Consolidated Financial Statements or notes thereto. (3) Exhibits included herewith (numbered in accordance with Item 601 of Regulation S-K): EXHIBIT NUMBER DESCRIPTION - ------- ----------- 2.1 Agreement and Plan of Reorganization between the Company and SF2 Corporation, dated as of January 10, 1992, as amended by Amendment No. 1 dated as of February 24, 1992, and Amendment No. 2 dated as of March 3, 1992. Exhibits and Schedules to this Agreement, generally listing affiliates, capitalization, material contracts requiring consent, financial statements and information, and property, equipment, inventory, patent and employee information concerning SF2 Corporation, and purchase orders distributors and license agreements of the Company, have been omitted. The Company undertakes to furnish supplementary a copy of any omitted exhibit or schedule to the Commission upon request. (1) 2.2 Agreement of Merger pertaining to the Company's reincorporation in Delaware, dated as of September 9, 1992. (1) 2.3 Agreement for Purchase and Sale of Assets between the Company and System Industries, Inc., dated as of November 12, 1993. Exhibits to this Agreement, generally listing the real, personal and intellectual property purchased and the agreements assumed by the Company under this Agreement 6 7 have been omitted. The Company undertakes to furnish supplementary a copy of any omitted exhibit to the Commission upon request. (1) 3.1 Restated Certificate of Incorporation of the Company. (1) 3.2 By-laws of the Company. (1) 4.1 Form of Registration Rights Agreement between the Company and certain Purchasers, and schedule of such Purchasers. (1) 4.2 Registration Rights Agreement among the Company, Dialogic System Corporation and NFT Ventures, Inc., dated June 15, 1992, as amended as of April 1, 1993 and as of February 11, 1994. (1) 4.3 Registration Rights Agreement between the Company and NFT Ventures, Inc., dated November 30, 1992. (1) 4.4 [Intentionally omitted] 4.5 [Intentionally omitted] 4.6 Stock Purchase Warrant of the Company issued to NFT Ventures, Inc., dated April 1, 1993. (1) 4.7 Contingent Stock Purchase Warrant of the Company issued to NFT Ventures, Inc., dated April 1, 1993. (1) 4.8 Contingent Stock Purchase Warrant of the Company issued to NFT Ventures, Inc., issued April 1, 1993. (1) 4.9 Convertible Subordinated Note Purchase Agreements dated as of July 19, 1985. (1) 4.10 Class B Convertible Subordinated Note Purchase Agreement dated as of August 6, 1986. (1) 4.11 Registration Rights Agreement between the Company and Dialogic Systems Corporation, dated November 30, 1992. (1) 4.12 Specimen Stock Certificate. (1) 4.13 Stock Purchase Warrant of the Company issued to NFT Ventures, Inc., dated February 11, 1994. (1) 4.14 Contingent Stock Purchase Warrant of the Company issued to NFT Ventures, Inc., dated February 11, 1994. (1) 4.15 Warrant to Purchase Common Stock of the Company issued to Raxco, Inc., dated as of December 31, 1994. (4) 10.1 Settlement Agreement between the Company and Digital Equipment Corporation, dated as of December 4, 1992. (Confidential treatment granted pursuant to Rule 406) (1) 10.2 Triple Net Lease between the Company and Catellus Development Corporation effective December 20, 1991. (1) 10.3 Owner Participation Agreement between the Company, Catellus Development Corporation and Anaheim Redevelopment Agency, dated as of January 7, 1992, including exhibits. (1) 10.4 Subordinated Promissory Note made by the Company to System Industries, Inc., dated December 20, 1993. (1) 7 8 10.5 Security Agreement between the Company and System Industries, Inc., dated as of December 20, 1993. (1) 10.6 [Intentionally omitted] 10.7 [Intentionally omitted] 10.8 [Intentionally omitted] 10.9 Reimbursement Agreement between the Company and Dialogic Systems Corporation, dated as of June 18, 1992. (1) 10.10 10% Subordinated Promissory Note Due 1993, made by the Company to Dialogic Systems Corporation, dated June 18, 1992. (1) 10.11 Subordinated Reimbursement Agreement between the Company, Micro Technology GmbH, Dialogic Systems Corporation, and NFT Ventures, Inc., dated as of November 20, 1992. (1) 10.12 Stock Purchase Agreement between the Company and NFT Ventures, Inc., dated as of November 20, 1992. (1) 10.13 Form of Stock Purchase Agreement between the Company and certain Purchasers, and schedule of such Purchasers. (1) *10.14 Form of Nonqualified Stock Option Agreement under the Stock Incentive Plan. (1) 10.15 Stock Purchase Agreement between the Company and the shareholders of SCR S.A. and Systems Compatibles et Reseaux Technologies S.A., dated December 10, 1991. (1) *10.16 Form of Indemnification Agreement. (1) 10.17 [Intentionally omitted] 10.18 [Intentionally omitted] 10.19 Subordinated Reimbursement Agreement between the Company and Dialogic Systems Corporation, dated as of April 1, 1993. (1) *10.20 Micro Technology, Inc. Incentive Stock Option Plan -- 1985. (1) *10.21 1987 Incentive Stock Option and Nonqualified Stock Option Plan of the Company (the "1987 Stock Option Plan"). (1) *10.22 Form of Incentive Common Stock Option Agreement under the 1987 Stock Option Plan. (1) *10.23 Form of Nonqualified Common Stock Option Agreement under the 1987 Stock Option Plan. (1) *10.24 Stock Incentive Plan of the Company. (1) *10.25 1988 Stock Option Plan, as amended August 12, 1991, of SF2 Corporation. (1) 10.26 Subordinated Promissory Note of the Company issued to NFT Ventures, Inc., dated February 15, 1994. (1) 10.27 Subordinated Reimbursement Agreement between the Company and NFT Ventures, Inc., dated February 11, 1994. (1) 10.28 Form of Consultant/Employee Confidentiality Agreement. (1) 8 9 10.29 Lease between Oak Creek Delaware, Inc., and the Company, dated December 18, 1993. (1) *10.30 Form of Incentive Stock Option Agreement under the Stock Incentive Plan. (1) *10.31 MTI Technology Corporation 1994 Employee Stock Purchase Plan, as amended. (2) *10.32 MTI Technology Corporation Directors' Non-Qualified Stock Option Plan. (1) 10.33 Stock Purchase Agreement between Earl M. Pearlman, William E. Decker, and the William E. Decker Trust and Registrant, dated as of April 2, 1995. Exhibits and schedules to this Agreement, generally listing stock ownership, form of promissory notes, form of counsel opinions, form of employment agreements, form of stock option agreements, form of indemnification with agreements and initial term sheets have been omitted. Registrant undertakes to furnish supplementary a copy of any omitted exhibit or schedule to the Commission upon request. (3) 10.34 Loan and Security Agreement between the Company and Greyrock Business Credit, dated March 31, 1995, and Schedule thereto. (4) 10.35 Loan Agreement, dated July 19, 1995, between NFT Ventures II, LLC and Registrant. (5) 10.36 Amendment No. 1 to Stock Purchase Agreement and Senior Promissory Notes, dated as of July 31, 1995, between Earl M. Pearlman, William E. Decker, the William E. Decker Trust and Registrant. (5) 10.37 Statement of Work No. 1 under the Master Task Agreement Version 1.0, effective July 27, 1995, between NFT Ventures II, LLC and Registrant, and letter relating thereto. (6) *10.38 Employment Agreement, dated as of May 15, 1995, between Earl M. Pearlman and Registrant. (6) 10.39 Asset Purchase Agreement, dated February 9, 1996, between EMC Corporation and Registrant, dated as of February 9, 1996. (Confidential treatment granted pursuant to Rule 24b-2) (7) 10.40 Amended Loan Agreement and related documents between the Company, Greyrock Business Credit, and Dialogic Systems Corporation, dated May 3, 1996. (8) 10.41 Stock Purchase Warrant of the Company issued to NFT Ventures, Inc., dated July 1, 1996. (8) 10.42 [Intentionally omitted] 10.43 Letter dated April 3, 1996, between the Company and Michael Clemens. 10.44 NRE Funding Agreement between the Company and NFT Ventures, Inc., dated June 27, 1996. (8) 10.45 Contingent Stock Purchase Warrant of the Company issued to NFT Ventures, Inc., dated June 27, 1996. (8) 21.1 Subsidiaries of the Company. (8) 23.1 Consent of KPMG Peat Marwick LLP. 24 Power of Attorney. (8) 27.1 Financial Data Schedule (9) - ------------------------ (1) Filed as an Exhibit to the Registrant's Registration Statement on Form S-1 (No. 33-75180). (2) Filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the fiscal year ended April 2, 1994. 9 10 (3) Filed as an Exhibit to the Registrant's Current Report on Form 8-K dated May 15, 1995. (4) Filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the fiscal year ended April 1, 1995. (5) Filed as an Exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ending July 1, 1995. (6) Filed as an Exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1995. (7) Filed as an Exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended December 30, 1995. (8) Filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the fiscal year ended April 6, 1996. (9) Filed as an Exhibit to Amendment No. 1 to the Registrant's Annual Report on Form 10-K/A for the fiscal year ended April 6, 1996. - ------------------ * Management or compensatory plan or arrangement. (b) Reports on Form 8-K Registrant filed a report on Form 8-K dated March 29, 1996, regarding the settlement of a class action lawsuit. Registrant filed a report on Form 8-K dated April 8, 1996, regarding the conversion of debt to common stock and changes in senior management of the Company. 10 11 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 12th day of September 1996. MTI TECHNOLOGY CORPORATION By: /s/ Dale R. Boyd ----------------------------------------- Dale R. Boyd Vice President, Chief Financial Officer (Principal Financial and Accounting Officer) POWER OF ATTORNEY 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/ * President and Chief Executive September 12, 1996 - ------------------------- Officer (Earl M. Pearlman) /s/ Dale R. Boyd Vice President, Chief Financial September 12, 1996 - ------------------------- Officer (Principal Financial and (Dale R. Boyd) Accounting Officer) /s/ * Chairman of the Board September 12, 1996 - ------------------------- (Raymond J. Noorda) /s/ * Director September 12, 1996 - ------------------------- (Val Kreidel) /s/ * Director September 12, 1996 - ------------------------- (David Proctor) *By: /s/ Dale R. Boyd Attorney-in-Fact September 12, 1996 -------------------- (Dale R. Boyd)
11 12
INDEX TO FINANCIAL STATEMENTS HISTORICAL FINANCIAL STATEMENTS OF THE COMPANY Page ---- Independent Auditors' Report............................................................. F-2 Consolidated Balance Sheets as of April 6, 1996 and April 1, 1995........................ F-3 Consolidated Statements of Operations for the fiscal years ended April 6, 1996, April 1, 1995, and April 2, 1994.................................................... F-4 Consolidated Statements of Stockholders' Equity (Deficiency) for the fiscal years ended April 6, 1996, April 1, 1995, and April 2, 1994............................... F-5 Consolidated Statements of Cash Flows for the fiscal years ended April 6, 1996, April 1, 1995 and April 2, 1994..................................................... F-6 Notes to Consolidated Financial Statements............................................... F-7 FINANCIAL STATEMENT SCHEDULE OF THE COMPANY Schedule II - Valuation and Qualifying Accounts.......................................... S-1
F-1 13 INDEPENDENT AUDITORS' REPORT The Board of Directors MTI Technology Corporation: We have audited the consolidated financial statements of MTI Technology Corporation and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of MTI Technology Corporation and subsidiaries at April 6, 1996 and April 1, 1995, and the results of their operations and their cash flows for the fiscal years ended April 6, 1996, April 1, 1995, and April 2, 1994, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG Peat Marwick LLP Orange County, California May 29, 1996 F-2 14 MTI TECHNOLOGY CORPORATION CONSOLIDATED BALANCE SHEETS (in thousands)
April 6, April 1, 1996 1995 -------- -------- ASSETS Current assets: Cash and cash equivalents $ 4,055 $ 5,562 Accounts receivable, less allowance for doubtful accounts and sales returns of $5,437 in 1996 and $9,986 in 1995 21,101 26,769 Inventories 21,499 22,420 Deferred income tax benefit 784 784 Prepaid expenses and other receivables 3,750 6,171 -------- -------- Total current assets 51,189 61,706 Property, plant and equipment, net 16,323 15,239 Intangible assets and goodwill, less accumulated amortization of $1,880 in 1996 and $3,218 in 1995 15,852 24,754 Other 659 752 -------- -------- $ 84,023 $102,451 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) Current liabilities: Short-term borrowings $ 20,613 $ - Current maturities of long-term debt 8,297 2,527 Accounts payable 14,580 16,540 Accrued liabilities 18,724 13,118 Deferred income 14,941 11,880 -------- -------- Total current liabilities 77,155 44,065 Long-term debt, less current maturities 5,966 6,927 Deferred income 550 555 Other 539 1,766 -------- -------- Total liabilities 84,210 53,313 -------- -------- Stockholders' equity (deficiency): Preferred stock, $.001 par value; authorized 5,000 shares; issued and outstanding, none - - Common stock, $.001 par value; authorized 40,000 shares; issued (including treasury shares) and outstanding 20,243 and 20,214 shares in 1996 and 1995, respectively 20 20 Additional paid-in capital 77,762 77,606 Accumulated deficit (73,645) (24,343) Less cost of treasury stock (794 and 859 shares in 1996 and 1995, respectively) (2,938) (3,201) Cumulative foreign currency translation adjustments (1,386) (944) -------- -------- Total stockholders' equity (deficiency) (187) 49,138 Commitments and contingencies (notes 6, 9 and 11) Subsequent events (notes 6, 8, 12, and 16) -------- -------- $ 84,023 $102,451 ======== ========
See accompanying notes to the consolidated financial statements. F-3 15 MTI TECHNOLOGY CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS FISCAL YEARS ENDED APRIL 6, 1996, APRIL 1, 1995 AND APRIL 2, 1994 (in thousands, except per share data)
1996 1995 1994 --------- --------- --------- Net product revenue $ 97,682 $ 91,140 $ 95,401 Service revenue 34,232 36,177 28,067 --------- --------- --------- Total revenue 131,914 127,317 123,468 Product cost of revenue 74,057 72,082 56,623 Service cost of revenue 22,162 23,590 17,098 --------- --------- --------- Total cost of revenue 96,219 95,672 73,721 --------- --------- --------- Gross profit 35,695 31,645 49,747 Operating expenses: Selling, general and administrative 65,715 39,812 33,256 Research and development 14,384 12,825 11,451 --------- --------- --------- Total operating expenses 80,099 52,637 44,707 Operating income (loss) (44,404) (20,992) 5,040 Other income (expense): Interest expense (4,090) (966) (1,386) Interest income 99 339 225 Other expense (645) (381) -- --------- --------- --------- Income (loss) before income taxes (49,040) (22,000) 3,879 Income tax expense 179 3,540 980 --------- --------- --------- Net income (loss) $ (49,219) $ (25,540) $ 2,899 ========= ========= ========= Income (loss) per common and common equivalent share $ (2.54) $ (1.34) $ .18 ========= ========= ========= Weighted average common and common equivalent shares 19,400 19,029 15,925 ========= ========= =========
See accompanying notes to the consolidated financial statements. F-4 16 MTI TECHNOLOGY CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY) FISCAL YEARS ENDED APRIL 6, 1996, APRIL 1, 1995 AND APRIL 2, 1994
Cumulative Total Foreign Stock- Common Stock Additional Retained Currency holders' ------------------- Paid-in Earnings Translation Equity Shares Amount Capital (Deficit) Adjustments (Deficiency) ------ ------ ------- --------- ----------- ------------ Balance at April 3, 1993 14,239 $ 14 $ 37,112 $ (1,685) $ (1,751) $ 33,690 Common stock issued; acquisition and other (note 11) 495 1 3,486 -- -- 3,487 Exercise of stock options (including compensation expense of $224) 301 -- 402 -- -- 402 Common stock repurchased and retired (27) -- (134) -- -- (134) Foreign currency translation adjustments -- -- -- -- (149) (149) Net income -- -- -- 2,899 -- 2,899 ------ -------- -------- -------- -------- -------- Balance at April 2, 1994 15,008 15 40,866 1,214 (1,900) 40,195 Common stock issued in connection with initial public offering, net of offering expenses 4,455 4 36,090 -- -- 36,094 Exercise of stock options (including compensation expense of $239) 751 1 650 -- -- 651 Purchase of treasury shares (875) -- (3,263) -- -- (3,263) Treasury shares issued under Employee Stock Purchase Plan 16 -- 62 (17) -- 45 Foreign currency translation adjustments -- -- -- -- 956 956 Net loss -- -- -- (25,540) -- (25,540) ------ -------- -------- -------- -------- -------- Balance at April 1, 1995 19,355 20 74,405 (24,343) (944) 49,138 Exercise of stock options (including compensation expense of $129) 30 -- 155 -- -- 155 Treasury shares issued under Employee Stock Purchase Plan and other 64 -- 264 (83) -- 181 Foreign currency translation adjustments -- -- -- -- (442) (442) Net loss -- -- -- (49,219) -- (49,219) ------ -------- -------- -------- -------- -------- Balance at April 6, 1996 19,449 $ 20 $ 74,824 $(73,645) $ (1,386) $ (187) ====== ======== ======== ======== ======== ========
See accompanying notes to the consolidated financial statements. F-5 17 MTI TECHNOLOGY CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS FISCAL YEARS ENDED APRIL 6, 1996, APRIL 1, 1995 AND APRIL 2, 1994 (in thousands)
1996 1995 1994 ---- ---- ---- Cash flows from operating activities: Net income (loss) $ (49,219) $(25,540) $ 2,899 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 28,255 9,918 4,795 Provision for sales returns and losses on accounts receivable, net 154 99 1,093 Provision for inventory obsolescence 4,056 10,600 3,457 Loss on disposal of fixed assets 923 3,297 -- Deferred income tax expense -- 5,123 431 Deferred income 3,056 (71) (1,567) Compensation related to stock options 129 239 224 Change in assets and liabilities, net of effect of acquisitions: Accounts receivable 8,404 11,841 (1,284) Inventories (2,531) (13,465) (6,482) Prepaid expenses, other receivables and other assets 2,199 (2,368) (1,495) Accounts payable (5,799) 163 2,467 Accrued and other liabilities 3,299 (2,604) (3,482) --------- -------- -------- Net cash provided by (used in) operating activities (7,074) (2,768) 1,056 --------- -------- -------- Cash flows from investing activities: Capital expenditures for property, plant and equipment (8,910) (8,001) (4,086) Proceeds from sale of property, plant and equipment, net 340 -- -- Acquisition of assets and liabilities of businesses, net of cash acquired (2,690) (1,628) (2,707) Long term investments -- (250) -- --------- -------- -------- Net cash used in investing activities (11,260) (9,879) (6,793) --------- -------- -------- Cash flows from financing activities: Borrowings under notes payable, net of acquisitions 129,887 20,984 35,050 Borrowings under notes payable to fund acquisition of NPI 2,608 -- -- Proceeds from issuance of common stock and exercise of options and warrants 66 36,551 193 Repayment of notes payable (115,807) (40,466) (28,781) Repurchase of common stock -- (3,263) (134) --------- -------- -------- Net cash provided by financing activities 16,754 13,806 6,328 --------- -------- -------- Effect of exchange rate changes on cash 73 427 32 --------- -------- -------- Net increase (decrease) in cash and cash equivalents (1,507) 1,586 623 Cash and cash equivalents at beginning of year 5,562 3,976 3,353 --------- -------- -------- Cash and cash equivalents at end of year $ 4,055 $ 5,562 $ 3,976 ========= ======== ======== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 2,330 $ 923 $ 1,152 Income taxes 481 1,438 791 Supplemental schedule of noncash investing and financing activities: Capital leases of property, plant and equipment -- -- 950 Revaluation on acquired SI fixed assets -- 1,347 -- Issuance of common stock, notes, options and warrants in connection with acquisitions (see note 11) 5,000 2,500 7,472
See accompanying notes to the consolidated financial statements. F-6 18 MTI TECHNOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT 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 year 1996 ended April 6 and consisted of 53 weeks. Fiscal years 1995 and 1994 ended on April 1, and April 2, respectively, and each year consisted of 52 weeks. Revenue Recognition Sales of the Company's computer equipment are recorded upon shipment, net of an allowance for estimated returns. Revenue from equipment maintenance contracts is recorded as deferred income when billed and is recognized as earned over the period in which the services are provided, primarily straight-line over the term of the contract. The Company maintains a warranty accrual for the estimated future warranty obligation, based on the relationship of historical and anticipated warranty costs and sales volumes. The Company recognizes revenue from software licenses, provided there are no significant Company obligations related to the sale and the resulting receivable is deemed collectible, at the time the software is shipped, net of an allowance for returns, cancellations and maintenance, including vendor and post-contract support obligations. Revenue from maintenance agreements, including the allowance for maintenance bundled with software licenses, is recognized ratably over the term of the related agreement. Revenue from consulting and other software-related services is recognized as the services are rendered. Cash and Cash Equivalents At April 6, 1996 and April 1, 1995, $1,102 and $1,381, respectively, of short term commercial paper investments and money market fund investments are included in 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. Inventories Inventories are valued at the lower of cost (first-in, first-out) or market (net realizable value), net of an allowance for obsolete, slow-moving and non-salable inventory. The allowance is periodically adjusted based upon management's review of inventories on-hand, historic product sales and forecasts. F-7 19 Property, Plant and Equipment Property, plant and equipment are recorded at cost. Depreciation is calculated using the straight-line method over the estimated useful lives of two to seven years. Leasehold improvements are amortized using the straight-line method over the lesser of the useful life of the improvement or the term of the related lease. Maintenance and repairs are expensed as incurred. Accounting for Stock Options In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("Statement 123") which encourages, but does not require, a fair value based method of accounting for employee stock options. Statement 123 will be effective for fiscal years beginning after December 15, 1995. While the Company is still evaluating Statement 123, it currently expects to elect to continue to measure compensation cost under APB Opinion No. 25, "Accounting for Stock Issued to Employees." Management does not believe that the adoption of this new standard will have a material effect on the consolidated financial statements of the Company. 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 The Company applies the provisions of Statement of Financial Accounting Standard No. 109, "Accounting for Income Taxes" ("Statement 109") (see note 7). Under the asset and liability method of Statement 109, 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. Under the deferred method, deferred taxes were recognized using the tax rate applicable to the year of the calculation and were not adjusted for subsequent changes in tax rates. 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. Management had regularly evaluated the continuing recoverability of intangible assets and goodwill based upon the historical and projected revenue and profitability of the related acquisitions and continuing benefits of the underlying assets. Based upon these evaluations, the Company believes that the established estimated useful lives are reasonable based on the economic factors and continuing benefits applicable to the acquired businesses and/or assets. In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", ("Statement 121"). Statement 121 requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Under the provisions of Statement 121, if the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset, an impairment loss is recognized. The amount of impairment, if any, is measured based on projected discounted cash flows. The Company adopted Statement 121 in the fourth quarter of fiscal 1996. Prior to the adoption of Statement 121, the Company had used a similar approach for assessing the recoverability of goodwill based on operating income. F-8 20 Intangible assets and goodwill, net of related amortization, are summarized as follows:
APRIL 6, APRIL 1, 1996 1995 -------- -------- Intangible assets $ -- $16,112 Goodwill 15,852 8,642 ------- ------- $15,852 $24,754 ======= =======
During the fourth quarter of fiscal 1996, the Company wrote off $14,244, representing the remaining unamortized intangible assets related to the purchase of substantially all the assets and assumption of certain liabilities from System Industries, Inc., and $2,347, representing the remaining unamortized goodwill related to the acquisition of SCR Technologies (see note 11) based on management's evaluation of the recovery of the acquired net assets. The Company has evaluated the recoverability of the remaining goodwill by analyzing forecasted undiscounted cash flows and found no further impairment exists at April 6, 1996. Accordingly, as of April 6, 1996, goodwill represents intellectual property rights, access to an installed customer base and research and development capacity related to Raxco and NPI (see note 11) and is being amortized over 10 years. Foreign Currency Translation The Company follows the principles of Statement of Financial Accounting Standards No. 52, "Foreign Currency Translation," using the local currencies as the functional currencies of its foreign subsidiaries. Accordingly, all assets and liabilities outside the United States are translated into dollars at the rate of exchange in effect at the balance sheet date. Income and expense items are translated at the weighted average exchange rates prevailing during the period. Net foreign currency translation adjustments accumulate as a separate component of stockholders' equity. Net foreign transaction exchange gains (losses) of $(262), $593 and $(171) were realized in 1996, 1995, and 1994, respectively, and are included in selling, general and administrative expense in the accompanying consolidated statements of operations. Concentration of Credit Risk Credit is extended for all customers based on financial condition and, generally, collateral is not required. Concentrations of credit risk with respect to trade receivables are limited due to the large number of customers comprising the Company's customer base and dispersion across many different industries and geographies. Income (Loss) per Common and Common Equivalent Share Income (loss) per share of common stock is computed using the weighted average number of common and common equivalent shares of stock outstanding during the period. Common stock equivalents consist of dilutive outstanding stock options and warrants calculated using the treasury stock method. Primary income (loss) per share approximates fully diluted income (loss) per share for all periods presented. Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No. 83, common stock and warrants issued and stock options granted during the 12-month period preceding the date of the initial filing of the Registration Statement in connection with the Company's initial public offering have been included in the calculation of common stock equivalents, using the treasury stock method, as if they were outstanding for all years presented. Fourth Quarter 1996 Adjustments During the fourth quarter of fiscal 1996, the Company made a determination that it would not seek to continue its participation as a subcontractor relating to the U.S. Army's RCAS contract; settled its shareholder lawsuit; completed its audit by the State of California and received a determination of sales and use tax liability therefrom; and, experienced a substantial increase in its mix of revenues from the Open Systems marketplace, partially offset by a corresponding decrease in revenues from the DEC market. As a consequence of these events, during the fourth quarter of fiscal 1996, the Company reevaluated the future recoverability and economic usefulness of certain assets, the composition of its operating infrastructure, and recorded certain charges to reflect its liability related to these events. F-9 21 During the fourth quarter of fiscal 1996, the Company recorded approximately $19,806 of charges related to asset write-downs and increased inventory reserves. The charges included a $14,244 charge to write-off the remaining unamortized intangible assets related to the purchase of substantially all of the assets and assumption of certain liabilities from System Industries, Inc. (see note 11) based on management's evaluation of the recoverability of the acquired net assets; a $2,347 charge to write-off the remaining goodwill related to the acquisition of SCR Technologies (see note 11) based on management's evaluation of the recoverability of the acquired net assets; a $2,056 charge to increase excess and obsolete reserves on certain slower-moving or obsolete product inventories that support the DEC market; a $504 charge to record the write-down of field service spares inventory that support the DEC market to estimated net realizable value; and, a $655 charge to write-off certain idle fixed assets. In addition to the above charges, the Company accrued $2,088 for the settlement of a shareholder lawsuit and related legal costs (see note 9), $1,855 for sales and use tax liability and $1,450 for related interest and penalties, and $1,777 for restructuring and severance costs. At April 6, 1996, accrued restructuring and severance costs were $1,777 which included $1,265 and $512 for severance costs and office closures, respectively, charged to operating expenses. These restructuring activities resulted in the termination of approximately 46 employees and 4 office closures. The following table summarizes the fiscal 1996 fourth quarter charges and the impact to the Company's results of operations:
Product cost of goods sold Charge to increase excess and obsolete reserves on product inventories $ 2,056 ------- Service cost of goods sold Write-down of field service spares inventory $ 504 ------- Operating expenses Write-off of unamortized System Industries, Inc. - related intangible assets $14,244 Write-off of unamortized SCR Technologies - related goodwill 2,347 Reserve for shareholder lawsuit settlement and related legal costs 2,088 Reserve for sales and use tax liability 1,855 Restructuring and severance costs 1,777 Write-off of idle fixed assets 655 ------- 22,966 ------- Other expenses Reserve for interest and penalties related to sales and use tax liability 1,450 ------- Total fiscal 1996 fourth quarter adjustments $26,976 =======
Fourth Quarter 1995 Adjustments During the latter half of fiscal 1995, the Company experienced increased competition from DEC and other competitors, expanded its efforts to implement its strategy to undertake efforts to increase revenues from the open system marketplace through in-house product development efforts and acquisitions, and experienced certain product performance and manufacturing quality issues. As a consequence of these events the Company reevaluated the future recoverability and economic usefulness of certain of its assets during the fourth quarter of fiscal 1995. During the fourth quarter of fiscal 1995, the Company recorded approximately $12,400 of charges related to asset write-downs and increased inventory reserves. The charges included a $4,069 write-off of certain product inventory based on management's evaluation of recent and estimated future sales levels for the product; a $2,975 charge to increase excess and obsolete reserves on offsite inventories of loaner, replacement, beta and evaluation units; a $3,266 F-10 22 charge to record the write-down of field service spares inventory to estimated net realizable value; a $990 charge to write-off certain idle fixed assets; a $714 charge to write-down the value of demonstration equipment located at various field sales offices and customer sites due to revised estimates of obsolescence and impairment; and, a $411 charge to write-off the remaining unamortized goodwill related to the acquisition of SF2 Corporation (see note 11) based on management's evaluation of the recoverability of the acquired product line. In addition to the above charges, the Company accrued an additional returns reserve of $2,454 against the possibility of product returns due to product performance issues at certain large customer installations. During fiscal 1996, the product performance issues were resolved and the $2,454 returns reserve was reversed. Additionally, the Company took a charge of $3,261 to tax expense to adjust its valuation allowance to a level whereby the Company believed it would be more likely than not realizable (see note 7). The following table summarizes the fiscal 1995 fourth quarter charges and the impact to the Company's results of operations: Product cost of goods sold Write-off of product inventory $ 4,069 Charge to increase excess and obsolete reserves on offsite inventories 2,975 Write-off of idle fixed assets 165 ------- $ 7,209 ------- Service cost of goods sold Write-down of field spares inventory $ 3,266 Write-off of idle fixed assets 31 ------- $ 3,297 ------- Operating expenses Write-off of idle fixed assets $ 794 Write-down of demonstration equipment 714 assets Write-off of unamortized SF2-related 411 goodwill ------- $ 1,919 ------- Total fourth quarter adjustments due to asset write-downs and increased inventory $12,425 reserves ------- Additional returns reserves $ 2,454 Adjustments to deferred tax valuation $ 3,261 allowance ------- Total fiscal 1995 fourth quarter $18,140 adjustments =======
Reclassifications Certain reclassifications have been made to the fiscal 1995 and 1994 financial statements to conform to the fiscal 1996 presentation. (2) PUBLIC OFFERING OF COMMON STOCK In April 1994, the Company completed an initial public offering of 4,455,000 shares (including 455,000 shares representing partial exercise of proceeds of the underwriters' over-allotment options) of newly issued common stock for approximately $37,300, before offering costs. F-11 23 (3) INVENTORIES Inventories consist of the following:
APRIL 6, APRIL 1, 1996 1995 -------- -------- Raw materials $13,090 $11,642 Work-in-process 2,106 1,902 Finished goods 6,303 8,876 ------- ------- $21,499 $22,420 ======= =======
(4) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment, at cost, are summarized as follows:
APRIL 6, APRIL 1, 1996 1995 -------- -------- Plant equipment, office furniture and fixtures $12,327 $12,096 Computer equipment 13,064 12,006 Field service spares 9,294 7,188 Leasehold improvements 1,176 1,675 ------- ------- 35,861 32,965 Less accumulated depreciation and amortization 19,538 17,726 ------- ------- $16,323 $15,239 ======= =======
Property, plant and equipment include assets held under capital leases of $350 and $766 (net of accumulated depreciation of $364 and $376, respectively) at April 6, 1996 and April 1, 1995, respectively. (5) ACCRUED LIABILITIES Accrued liabilities consist of the following:
APRIL 6 APRIL 1, 1996 1995 ------- -------- Salaries, wages and commissions $ 5,265 3,887 Taxes 4,970 2,840 Accrued warranty costs 1,142 1,157 Other 7,347 5,234 ------- ------- $18,724 $13,118 ======= =======
6) DEBT Credit Agreement and Lines of Credit On March 31, 1995, the Company entered into an agreement with Greyrock Business Credit whereby under an asset secured domestic line of credit the Company may borrow up to $20,000, limited by the value of pledged collateral. The agreement allows the Company to borrow at the prime rate plus 2%. Borrowings outstanding under this line at April 6, 1996 were $20,613 which is classified as short-term borrowings. The initial term of the agreement is for two years and automatically and continuously renews for a subsequent year, unless terminated by either party per the agreement. The bank line of credit agreement contains certain restrictive covenants. At April 6, 1996, the Company was in compliance with all such covenants. In May 1996 the agreement with Greyrock Business Credit was amended to increase the line of credit to $30,000 based on additional pledged collateral by an affiliate of NFT Ventures, Inc.("NFT"), an entity affiliated with the Company's major stockholder and Chairman of the Board. As consideration for the guaranty, the Company has agreed to issue warrants to purchase up to 500,000 shares of the Company's common stock at a price of $2.00 per share, subject to approval of the Company's disinterested stockholders. F-12 24 The above noted agreement replaced an existing agreement entered in December 1994 whereby the Company negotiated a renewal of a $12,000 asset secured domestic line of credit with CoastFed Business Credit Corporation and Silicon Valley Bank. There were $5,394 of borrowings outstanding against this line of credit at April 1, 1995, which is classified under long-term debt. Subsequent to April 1, 1995, the outstanding balance was repaid utilizing proceeds from the facility discussed above. Long-term Debt A summary of long-term debt is as follows:
APRIL 6, APRIL 1, 1996 1995 -------- -------- Capital lease obligations $ 273 $ 607 Notes payable 13,990 3,453 Bank line of credit borrowings -- 5,394 ------- ------ $14,263 $9,454 Less current installments 8,297 2,527 ------- ------ $ 5,966 $6,927 ======= ======
Principal maturities of long-term debt are as follows: 1997 $ 8,297 1998 5,960 1999 6 ------- $14,263 =======
The Company leases equipment under capital leases. These leases have imputed interest rates of 9% to 14% and extend through 1999. In addition, the Company issued a note in connection with the acquisition of substantially all of the assets and certain liabilities of Systems Industries, Inc. (see note 11) in December 1993. The note originally bore interest at 6.0% and was payable in 10 quarterly installments. Pursuant to the terms of the note, the Company repaid $2,000 of principal in fiscal 1995 upon completion of the Company's initial public offering, and the remaining unpaid balance bears interest at 8.0%. In January 1995, the Company issued two notes as part of the consideration paid in the Company's acquisition of certain assets and the assumption of certain liabilities of Raxco, Inc. (see note 11). The first note is for the principal amount of $2,150, bears interest at 8.5% per annum, and is payable in ten quarterly installments beginning March 31, 1995. The second note is for the principal amount of $350, bears interest at 8.5% per annum, and is payable in its entirety at the earlier of December 31, 1996, or upon completion of certain activities by the Company. In May 1995, the Company issued notes in the aggregate principal amount of $2,000 in connection with the acquisition of National Peripherals, Inc. The notes bear interest at 6.0% per annum, and are payable in two installments over a two year period (see note 11). Of these notes, $1,285 is payable to an individual who became an officer of the Company in April 1996. This individual was not an officer at the date of acquisition. On July 19, 1995 the Company entered into an agreement whereby it received a loan of approximately $10,000 from NFT Ventures II, LLC ("NFT V2"), an entity affiliated with the Company's major stockholder and Chairman of the Board. Pursuant to the loan agreement, the Company issued a long-term, secured subordinated note to NFT V2, which bears annual interest of 10.75% and is repayable in two equal installments, the first installment being due and payable in January 1997, the second in July 1997. Pursuant to the terms of the agreement, the note was convertible at the lender's option into common stock of the Company 90 days after the date of the agreement at a price per common share equal to the then fair market value of such stock. Proceeds from the loan are being used for working capital purposes. F-13 25 During the second quarter of fiscal 1996, the Company entered into an agreement with NFT V2, whereby, pursuant to the terms of the agreement, the Company licensed certain software products to NFT V2 for commercial use and resale. As consideration for the licenses, the Company received $650 credit against amounts owing to NFT V2 under the $10,000 Loan Agreement, dated July 19, 1995, between NFT V2 and the Company, and will have access to certain product enhancements to be developed by NFT V2. On April 11, 1996, NFT V2 exercised its right to convert current principal and accrued interest outstanding of $10,113 into 5,992,665 common shares of the Company (see note 12). (7) INCOME TAXES The components of income (loss) before income taxes are as follows:
FISCAL YEARS ENDED ----------------------------------------- APRIL 6, APRIL 1, APRIL 2, 1996 1995 1994 -------- ------- -------- U.S. $(44,178) $(24,125) $2,448 Foreign (4,862) 2,125 1,431 -------- -------- ------ $(49,040) $(22,000) $3,879 ======== ======== ======
Income tax expense (benefit) consists of the following:
CURRENT DEFERRED TOTAL ------- -------- ----- 1996: Federal $ -- $ -- $ -- State -- -- -- Foreign 179 -- 179 ------- ------- ------- $ 179 $ -- $ 179 ======= ======= ======= 1995: Federal $(1,862) $ 5,123 $ 3,261 State -- -- -- Foreign 279 -- 279 ------- ------- ------- $(1,583) $ 5,123 $ 3,540 ======= ======= ======= 1994: Federal $ -- $ 583 $ 583 State -- (152) (152) Foreign 549 -- $ 549 ------- ------- ------- $ 549 $ 431 $ 980 ======= ======= =======
F-14 26 Reconciliations of the federal statutory tax rate to the effective tax rate are as follows:
FISCAL YEARS ENDED ------------------------------------ APRIL 6, APRIL 1, APRIL 2, 1996 1995 1994 ------- ------- ------- Federal statutory rate (35.0)% (34.0)% 34.0% Tax effect of net operating loss carryforwards -- -- 1.1 Effect of foreign operations (3.1) 4.6 1.6 State taxes, net of federal benefit -- -- (4.2) Change in valuation allowance 38.2 44.7 (18.1) Non-deductible expenses 3.2 2.2 10.4 Other (2.9) (1.4) 0.5 ----- ----- ----- 0.4% 16.1% 25.3% ===== ===== =====
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:
1996 1995 1994 ---- ---- ---- Deferred tax assets: Tax operating loss carryforwards $ 24,626 $ 10,162 $ 9,560 Tax basis of intangibles assets greater than book basis 4,904 -- -- Accrued expenses not deductible for tax purposes 2,996 3,552 2,926 Inventory reserves 1,715 3,795 1,351 Book depreciation greater than tax depreciation 758 -- -- Recognition of income reported on different methods for tax purposes than for financial reporting 188 186 406 Other 140 (17) -- -------- -------- -------- 35,327 17,678 14,243 Less valuation allowance 34,543 15,828 5,985 -------- -------- -------- 784 1,850 8,258 -------- -------- -------- Deferred tax liabilities: Tax depreciation greater than book depreciation -- (364) (1,845) Book basis of intangible assets greater than tax basis -- (702) (441) Other -- -- (65) -------- -------- -------- -- (1,066) (2,351) -------- -------- -------- Net deferred tax asset $ 784 $ 784 $ 5,907 ======== ======== ========
At April 6, 1996, the Company had federal net operating loss ("NOL") carryforwards arising from the acquisition of SF2 (see note 11), available to offset future taxable income of $15,067, subject to alternative minimum tax limitations. The utilization of these carryforwards is limited to approximately $1,000 annually, as a result of the Internal Revenue Code's restrictive change of ownership rules. At April 6, 1996, the Company had federal NOL carryforwards, exclusive of the $15,067 SF2 NOL discussed above, of $55,292. These carryforwards expire beginning in fiscal year 2008. F-15 27 During fiscal 1995, management evaluated the valuation allowance and adjusted it to a level whereby it believed the remaining net deferred tax asset would more likely than not be realizable. The realization of the Company's remaining net deferred tax asset is more likely than not due to the Company's ability to carry back losses generated by the realization of the tax effects of existing current temporary differences to taxes paid in previous periods. Management believes that it is more likely than not that the Company will realize the benefits of the remaining net deferred tax asset existing at April 6, 1996. The change in the valuation allowance from fiscal 1995 to fiscal 1996 was $18,715. The Internal Revenue Service is conducting an examination of the Company's fiscal years 1991, 1992, and 1993 federal income tax returns, but has yet to issue any findings. The Company believes the ultimate resolution of the examination will not result in a material impact on either the Company's future consolidated results of operations or consolidated financial position. (8) STOCKHOLDERS' EQUITY 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 and its Stock Incentive Plan, generally at prices equal to the estimated fair market value of the Company's common stock at date of grant. Going forward, the Company intends to grant options only under its 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 aggregate, respectively. In addition, in connection with the acquisition of SF2 (see note 11) the Company assumed outstanding options to purchase 236,000 shares under the 1988 Stock Option Plan of SF2. The 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, 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. In fiscal years 1994, 1992 and 1991, certain options were granted below the then determined fair value of the Company's common stock, resulting in compensation expense. Such compensation expense is being amortized through a charge to operations over the vesting period of four years and amounted to $129, $239, and $224 for fiscal years 1996, 1995, and 1994, respectively. In May 1995, options to purchase 1,789,000 shares with exercise prices ranging from $3.375 to $5.00 per share were repriced to an exercise price of $1.75, the then determined fair value of the Company's common stock. All shares repriced were not exercisable until the earlier of May 1996 or 30 days prior to their expiration. In May 1993, options to purchase 456,000 shares with exercise prices ranging from $8.00 to $8.78 per share were repriced to an exercise price of $5.00, the then determined fair value of the Company's common stock. The options granted typically vest over a period of four years from the date of grant. At April 6, 1996, 779,000 options were exercisable at prices ranging from $.098 to $9.00 per share. F-16 28 A summary of all stock option transactions follows (in thousands, except per share data):
SHARES OPTION PRICE ------ ------------ Options outstanding at April 3, 1993 1,966 $ .098- 8.78 Granted 458 5.00 Exercised (301) .098- 5.00 Canceled (224) .098- 8.78 ----- Options outstanding at April 2, 1994 1,899 $ .098- 5.00 Granted 1,011 3.375- 9.00 Exercised (751) .098- 5.00 Canceled (218) .475- 5.00 ----- Options outstanding at April 1, 1995 1,941 $ .098- 9.00 Granted 2,262 1.75 - 3.00 Exercised (29) .098- 1.75 Canceled (938) 1.75 - 5.00 ----- Options outstanding at April 6, 1996 3,236 $ .098- 9.00 =====
Stock Purchase Warrants At April 6, 1996, warrants to purchase 250,000 shares of the Company's common stock at a price of $6.00 per share were outstanding. The warrants were issued in fiscal 1995 in connection with the acquisition of certain assets and the assumption of certain liabilities of Raxco, Inc. (see note 11), and expire December 31, 1999. At April 6, 1996, all such warrants under this agreement were exercisable. At April 6, 1996 warrants to purchase 20,000 shares of the Company's common stock at a price of $8.50 per share were outstanding. The warrants were issued in fiscal 1994 to a principal stockholder in connection with the unsecured loan of $2,000 from the stockholder (see note 6). At April 6, 1996, all such warrants were exercisable. At April 6, 1996, warrants to purchase 325,000 shares of the Company's common stock at $4.25 to $5.00 per share were outstanding. The warrants were issued in fiscal 1993 to a principal stockholder in connection with collateralizing the Company's line of credit and expire in March 1997. At April 6, 1996, all such warrants were exercisable. In May 1996, the Company amended its line of credit to increase its available borrowing capacity by $10,000 as a result of a collateralized guarantee made to the bank by an affiliate of NFT, an entity affiliated with the Company's major stockholder and Chairman of the Board. As consideration for the guaranty, the Company has agreed to issue warrants to purchase up to 500,000 shares of the Company's common stock at a price of $2.00 per share, subject to approval of the Company's disinterested stockholders. 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 1996 and 1995, 35,102 and 16,297 shares of stock, respectively, were issued pursuant to this plan. Directors' Non-Qualified Stock Option Plan On March 31, 1994, the Company adopted the Directors' Non-Qualified Stock Option Plan (the "Director Plan"). A total of 150,000 shares of the Company's common stock are reserved for issuance under the Director Plan. Under the Director Plan non-qualified options to purchase 10,000 shares were granted to each non-employee director of the Company upon the closing of the Company's initial public offering. Non-employee directors appointed to the Board of Directors after the initial public offering also receive a non-qualified option to purchase 10,000 shares of common stock. In addition, each non-employee director who has served as a director for at least one year will receive an option F-17 29 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 6, 1996, options to purchase 35,000 shares of common stock were outstanding, of which 27,500 were exercisable. Stock Repurchase Program In July 1994, the Company announced a stock repurchase program, pursuant to which it would purchase up to 1,000,000 shares of the Company's common stock in open market, negotiated, or block transactions. Purchased shares will be issued to meet existing and future requirements of the Company's employee stock option and stock purchase plans. During fiscal year 1995, the Company repurchased approximately 875,000 shares of its common stock at an approximate aggregate purchase price of $3,263 under this program. Subsequent Event On April 11, 1996, NFT V2 exercised its right to convert current principal and accrued interest outstanding of $10,113 into 5,992,665 shares of the Company's common stock at the current market price of $1.6875 per share on the day of conversion. After giving effect to the conversion, NFT V2 and related entities hold approximately 13,699,461 shares of the Company's common stock, or approximately 54 percent of shares outstanding at the date of conversion. The common stock provided to NFT V2 as part of the conversion was not registered under the Securities Act of 1933, and NFT V2 has indicated that it is acquiring the shares for investment purposes only. The following table sets forth the capitalization of the Company as of April 6, 1996, and as adjusted to reflect the conversion of the note payable to 5,992,665 shares of the Company's common stock, as noted above:
APRIL 6, 1996 ---------------------- ACTUAL ADJUSTED -------- -------- Short-term borrowings and current maturities of long-term debt $ 28,910 $ 24,235 Accrued liabilities 18,724 17,961 Long - term debt, less current maturities 5,966 1,291 Stockholders' equity (deficiency): Preferred stock, $.001 par value; authorized 5,000 shares; issued and outstanding, none -- -- Common stock, $.001 par value; authorized 40,000 shares; issued (including treasury shares) and outstanding 20,243 (26,363 shares adjusted) 20 26 Additional paid-in capital 77,762 87,869 Accumulated deficit (73,645) (73,645) Less cost of treasury stock (794 shares) (2,938) (2,938) Cumulative foreign currency translation adjustments (1,386) (1,386) -------- -------- Total stockholders' equity (deficiency) (187) 9,926 -------- -------- Total capitalization $ 53,413 $ 53,413 ======== ========
(9) COMMITMENTS AND CONTINGENCIES Leases The Company leases facilities and certain equipment under noncancelable 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. F-18 30 Future minimum lease payments at April 6, 1996 under all noncancelable operating facility and equipment leases for subsequent fiscal years are as follows: 1997 3,834 1998 3,181 1999 2,484 2000 2,056 2001 1,744 Thereafter 3,520 ------- $16,819 =======
Rent expense was approximately $4,373, $3,374 and $3,877, for fiscal years 1996, 1995, and 1994, respectively. Litigation During July 1994, the Company and certain directors and officers were served with four purported stockholder class-action lawsuits alleging certain improprieties surrounding the April 1994 initial public offering and subsequent decrease in the Company's stock price. Subsequently, these four actions were consolidated into a single case (In re MTI Technology Securities Litigation) in the United States District Court, Central District of California. This litigation was a class action complaint for alleged violation of the federal securities laws. Plaintiffs sought compensatory damages and other relief as permitted by applicable law. The claims related to the Company's initial public offering in April 1994 and the Company's announcements for financial results for the quarter ended July 2, 1994. In March 1996, the Company agreed to settle with plaintiffs. A Memorandum of Understanding was signed providing for a total settlement amount of $5,500, and the Claims Receipt and Policy Release agreement became effective March 29, 1996. The Company's unreimbursed portion of the aggregate settlement was $1,655. Preliminary approval for the settlement was granted by the Court on June 3, 1996, and a settlement hearing is scheduled for August 6, 1996. In addition to the above disclosed item, the Company is from time to time subject to claims and suits arising in the ordinary course of business. In the opinion of management, the ultimate resolution of these matters will not have a material adverse effect on the Company's financial position or results of operations. (10) BUSINESS SEGMENT AND INTERNATIONAL INFORMATION The Company is engaged in one business segment, the design, manufacture, sale and service of high-performance storage systems, software and related products. The Company's operations are structured to achieve consolidated objectives. As a result, significant interdependence and overlap exists among the Company's geographic areas. Accordingly, revenue, operating profit and identifiable assets shown for each geographic area may not be indicative of the amount which would have been reported if the geographic areas were independent of one another. Revenue and transfers between geographic areas are generally priced to recover cost plus an appropriate mark-up for profit. Operating income is revenue less cost of revenues and direct operating expenses. F-19 31 A summary of the Company's operations by geographic area is presented below:
1996 1995 1994 --------- --------- --------- Revenue: United States $ 105,153 $ 94,879 $ 98,532 Europe 35,795 49,104 38,241 Transfers between areas (9,034) (16,666) (13,305) --------- --------- --------- Total net revenue $ 131,914 $ 127,317 $ 123,468 ========= ========= ========= Operating income (loss): United States $ (43,005) $ (26,405) $ 3,093 Europe (1,399) 5,413 1,947 --------- --------- --------- Total operating income (loss) $ (44,404) $ (20,992) $ 5,040 ========= ========= ========= Identifiable assets: United States $ 65,513 $ 73,244 $ 88,118 Europe 18,510 29,207 22,236 --------- --------- --------- Total assets $ 84,023 $ 102,451 $ 110,354 ========= ========= =========
No single customer accounted for more than 10% of revenue. (11) ACQUISITIONS AND DISPOSITIONS Sale of Patents Effective February 9, 1996, the Company entered into an agreement with EMC Corporation ("EMC"), whereby the Company sold to EMC substantially all of the Company's existing patents, patent applications and rights thereof. The consideration the Company will receive for these rights include: (a) $30,000 to be received in six equal annual installments of $5,000 each, the first which was received upon closing of the agreement on February 9, 1996, the remaining payments to be received beginning January 1997 and in each of the subsequent four years; and (b) royalty payments in the aggregate of up to a maximum of $30,000 over the term of the agreement, of which a minimum of $10,000 will be received in five annual installments, beginning within thirty days of the first anniversary of the effective date of the agreement, and within thirty days of each subsequent anniversary thereof. In addition, the Company also received an irrevocable, non-cancelable, perpetual and royalty-free license to exploit, market, and sell the technology protected under the aforementioned patents. Pursuant to the terms and conditions of the agreement, this license will terminate in the event of a change in control of the Company involving certain acquirors. As part of the agreement, the Company and EMC granted to each other the license to exploit, market and sell the technology associated with each of their respective existing and future patents arising from any patent applications in existence as of the effective date of the agreement for a period of five years. National Peripherals, Inc. Effective April 2, 1995, the Company acquired all the outstanding stock of National Peripherals, Inc. ("NPI"), a privately held provider of cross-platform RAID-based storage solutions for the Open Systems computing environment. Consideration paid in the NPI acquisition included: (a) payments of $2,608 in cash to NPI and its stockholders, (b) promissory notes in the aggregate amount of $2,000 bearing 6% interest per annum and payable in two equal annual installments beginning April 1996 (see note 6), (c) guaranteed earnout payments in the aggregate amount of $3,000 and payable in three equal annual installments beginning in April 1996, and (d) acquisition costs of $406. In addition, the acquisition agreement provides for contingent payments of up to $1,000 payable in April 1998 based on certain performance criteria. The allocation of the purchase price at the time of acquisition is summarized as follows: Net tangible assets acquired $ 7,073 Liabilities assumed (8,715) Goodwill 9,656 ------- Purchase price $ 8,014 =======
F-20 32 Tangible assets acquired and liabilities assumed as part of the transaction were recorded at their estimated fair market value. The acquisition was accounted for using the purchase method of accounting, and accordingly, the results of operations of the acquired assets and assumed liabilities have been included with those of the Company since the effective date of acquisition. Goodwill acquired as part of the transaction is being amortized on a straight-line basis over 10 years, based on management's estimate of the economic lives of the assets acquired. During fiscal 1996, the Company increased goodwill related to the acquisition of NPI in the amount $1,962. The increase was primarily due to the further evaluation of the net assets acquired in the transaction. The amortization of the goodwill will result in quarterly and annual operating charges of approximately $293 and $1,172, respectively. Raxco Inc. Asset Purchase In January 1995, the Company acquired certain assets, including intellectual properties and source code rights, of the UNIX and OpenVMS storage management software product lines of Raxco, Inc. ("Raxco"). The purchase price of the acquired assets included payment of $1,000 in cash, notes in the amount of $2,500, assumption of certain liabilities of $1,903, primarily deferred service maintenance contracts, and acquisition costs of $58. In connection with the acquisition, the Company recorded an accrual of $825 to reflect the anticipated costs related to the closure of excess facilities in the United Kingdom and the estimated costs to satisfy certain preexisting product development obligations. In the fourth quarter of fiscal year 1996, the Company recorded an additional $282 associated with the Company's satisfaction of the preexisting product development obligations. In addition, as part of the consideration paid, the Company issued warrants to purchase 250,000 shares of the Company's common stock with an exercise price of $6.00 per share. The warrants expire on December 31, 1999. In management's opinion, based on the current market value of the Company's common stock, the fair market value of these warrants is not material, and no value was assigned to the warrants. The allocation of the purchase price is summarized as follows: Tangible assets $ 100 Purchased technology licenses 75 Goodwill 6,111 ------ Purchase price $6,286 ======
As part of the transaction the Company also acquired software development and technical support teams located domestically and in the United Kingdom. In addition, the Company acquired access to the existing Raxco storage management software customer base. This acquisition was accounted for using the purchase method of accounting, and accordingly, the results of operations of the acquired assets and assumed liabilities have been included with those of the Company since the effective date of acquisition. Goodwill acquired as part of the transaction is being amortized on a straight-line basis over 10 years, based on management's estimate of the economic lives of the assets. During fiscal 1996, the Company increased goodwill related to the acquisition of the Raxco assets and assumed liabilities in the amount of $82. The increase was primarily due to the further evaluation of the assumed liabilities. The amortization of the goodwill will result in quarterly and annual operating charges of $153 and $612, respectively. F-21 33 System Industries, Inc. On December 17, 1993, the Company purchased substantially all of the assets and assumed certain liabilities from System Industries, Inc. ("SI"), a former competitor of the Company, for an aggregate purchase price of $11,572. The purchase price included a cash payment of $4,100, a note payable of $4,000 (see note 6) and 491,710 shares of Company common stock which the Company valued at $3,472. At the date of acquisition, the Company recorded an accrual of $3,747 in order to cover the anticipated costs related to the SI integration, including the elimination of an excess SI manufacturing facility and approximately 10 SI sales facilities. At April 1, 1995, the integration was essentially complete and there was no remaining liability relating to the SI integration. The allocation of the purchase price is summarized as follows: Current assets $ 8,653 Net equipment and improvements and other assets 3,222 -------- Tangible assets acquired 11,875 Current liabilities (11,455) Other (1,389) -------- Liabilities assumed (12,844) Accrual for severance and facility closing costs (3,747) Intangible assets 16,288 -------- Purchase price $ 11,572 ========
Tangible assets acquired from SI are net of approximately $4,250 in reserves for inventory resulting from the acquisition, which the Company did not plan to use in its ongoing business, and $1,223 of assets not acquired pursuant to the acquisition agreement. Liabilities assumed from SI are net of approximately $21,761 of liabilities not assumed pursuant to the acquisition agreement. In addition the Company reclassified approximately $1,389 of certain assumed deferred income amounts from current to non-current liabilities. The acquisition was accounted for using the purchase method of accounting and, accordingly, the results of operations of SI have been included with those of the Company since the date of acquisition. Intangible assets relate to the maintenance service contracts, installed customer base, proprietary UNIX software and contract opportunities acquired from SI. These intangible assets were aggregated, as the Company believes it is not possible to accurately measure or allocate specific values to the individual components of the intangible assets acquired in the acquisition. Intangible assets were being amortized on a straight-line basis over 10 years. Within twelve months of the acquisition, the Company completed its evaluation of the acquired assets which resulted in an increase to goodwill of $1,891. The reallocation was primarily attributable to changes in the preliminary valuation of field spares inventory. In the fourth quarter of fiscal 1996, the Company took a charge of $14,244 to write-off the remaining unamortized goodwill associated with the SI acquisition. This impairment was based on management's current estimates of the remaining economic value and life of the acquired assets related to the goodwill. SCR Technologies/SF2 Corporation During fiscal 1992, the Company completed two acquisitions: on December 10, 1991, the Company purchased all of the capital stock of SCR Technologies ("SCR") for 118,000 shares of the Company's common stock aggregating $1,000 excluding a performance based contingency payment of $736. As the performance criteria were not met, no contingent payment was required. Prior to the acquisition, SCR was the Company's distributor in France. The purchase price of $1,000 was allocated as follows: $2,637 to tangible assets, $5,326 to liabilities and $3,689 to goodwill. In the fourth quarter of fiscal 1996, the Company took a charge of $2,347 to write-off the remaining unamortized goodwill associated with the SCR Technologies acquisition. This impairment was based on management's current estimates of the remaining economic value and life of the assets acquired. In March 1992, the Company also acquired all of the capital stock of SF2 Corporation ("SF2"), a development stage company, which had incurred research and development costs approximating $18,258. The acquired research and development had not reached technological feasibility and had no alternative future use at the time of acquisition, F-22 34 and was therefore charged to operations. The purchase price included 1,589,000 shares of the Company's common stock, the assumption of SF2 stock options to purchase 236,000 shares of the Company's common stock (see note 8), the assumption of SF2 warrants to purchase 6,100 shares of the Company's common stock (see note 8) and acquisition costs aggregating $15,616. In the fourth quarter of fiscal 1995, the Company took a charge of $411 to write-off the remaining unamortized goodwill associated with the SF2 acquisition. This impairment was based on management's current estimates of the remaining economic value and life of the acquired assets related to the goodwill. (12) RELATED PARTY TRANSACTIONS On July 19, 1995 the Company entered into an agreement whereby it received a loan of approximately $10,000 from NFT V2, an entity affiliated with the Company's major stockholder and Chairman of the Board. Pursuant to the loan agreement, the Company issued a long-term, secured subordinated note to NFT V2, which bears annual interest of 10.75% and is repayable in two equal installments, the first installment being due and payable in January 1997, the second in July 1997. Pursuant to the terms of the agreement, the loan was convertible at the lender's option into common stock of the Company 90 days after the date of the agreement at a price per common share equal to the then fair market value of such stock. Proceeds from the loan are being used for working capital purposes. During the second quarter of fiscal 1996, the Company entered into an agreement with NFT V2, whereby pursuant to the terms of the agreement, the Company licensed certain software products to NFT V2 for commercial use and resale. As consideration for the licenses, the Company received $650 credit against amounts owing to NFT V2 under the $10,000 loan agreement, dated July 19, 1995, between NFT V2 and the Company, and will have access to certain product enhancements to be developed by NFT V2. On April 11, 1996, NFT V2 exercised its right to convert current principal and accrued interest outstanding thereunder of $10,113 into 5,992,665 shares of the Company's common stock at the current market price of $1.6875 per share on the day of conversion. After giving effect to the conversion, NFT V2 and related entities hold approximately 13,699,461 shares of the Company's common stock, or approximately 54 percent of shares outstanding at the date of conversion. The common stock provided to NFT V2 as part of the conversion was not registered under the Securities Act of 1933, and NFT V2 has indicated that it is acquiring the shares for investment purposes only. On March 31, 1995, the Company entered into an agreement with Greyrock Business Credit whereby under an asset secured domestic line of credit the Company may borrow up to $20,000, limited by the value of pledged collateral. The agreement allows the Company to borrow at the prime rate plus 2%. Borrowings outstanding under this line at April 6, 1996 were $20,613 which is classified as short-term borrowings. The initial term of the agreement is for two years and automatically and continuously renews for a subsequent year, unless terminated by either party per the agreement. The bank line of credit agreement contains certain restrictive covenants. At April 6, 1996, the Company was in compliance with all such covenants. In May 1996 the agreement with Greyrock Business Credit was amended to increase the line of credit to $30,000 based on additional pledged collateral by an affiliate of NFT, an entity affiliated with the Company's major stockholder and Chairman of the Board. As consideration for the guaranty, the Company has agreed to issue warrants to purchase up to 500,000 shares of the Company's common stock at a price of $2.00 per share, subject to approval of the Company's disinterested stockholders. (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 1996, 1995, and 1994, the Company made no contributions to the plan. (14) NON-RECURRING CHARGES In December 1992, the Company reached an agreement with Digital Equipment Corporation which settled all outstanding litigation between the two companies. The settlement resulted in the Company agreeing to pay to DEC a fixed royalty payment of $500 semiannually over 4 1/2 years for certain technology used by the Company in its products through December 31, 1992. The fixed royalty related to past product sales and was therefore expensed at the time of settlement. The total payments, which were fixed and determinable, were discounted at 6 1/2% per annum, the Company's cost of capital at the date of settlement, and recorded as a non-recurring charge. In addition, the Company F-23 35 entered into a perpetual cross license with DEC for current products and future products to be developed. The Company will not receive any payment from DEC for these licenses under the terms of the settlement agreement. At April 6, 1996, the Company's total remaining obligations relating to the non-recurring charges were $1,494 of which $969 was included in accrued liabilities, with the balance included in other liabilities. F-24 36 (15) QUARTERLY FINANCIAL DATA (UNAUDITED) Selected quarterly financial data for continuing operations for fiscal 1996 and 1995 are as follows:
Net Income (loss) Net Per Common & Common- Total Revenues Gross Profit Income (Loss) Equivalent Share -------------- ------------ ------------- -------------------- 1996: Fourth quarter $ 28,939 $ 2,848 $(38,344) $(1.97) Third quarter 35,077 11,262 (3,238) (0.17) Second quarter 34,346 10,660 (3,380) (0.17) First quarter 33,552 10,925 (4,257) (0.22) Total $131,914 $35,695 $(49,219) 1995: Fourth quarter $ 25,103 $(5,029) $(25,383) $(1.33) Third quarter 34,349 12,548 208 0.01 Second quarter 34,227 12,497 317 0.02 First quarter 33,638 11,629 (682) (0.04) Total $127,317 $31,645 $(25,540)
During the fourth quarter of fiscal 1996, the Company recorded approximately $19,806 of charges related to asset write-downs and increased inventory reserves. In addition, the Company accrued $2,088 for the settlement of a shareholder lawsuit and related legal costs, $1,855 for sales and use tax liability and $1,450 for related interest and penalties, and $1,777 for restructuring and severance costs. During the fourth quarter of fiscal 1995, the Company recorded approximately $12,400 of charges related to asset write-downs and increased inventory reserves. Additionally, the Company accrued an additional returns reserve of $2,454 against the possibility of product returns due to product performance issues at certain large customer installations. In addition, the Company took a $3,261 charge to tax expense to adjust its valuation reserve to a level whereby it believed the remaining net deferred tax asset would more likely than not be realizable. 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. Furthermore, 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. 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 the timing of customer orders (a large majority of which have historically been placed in the last month of each quarter), the introduction of new versions of the Company's products, 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. There can be no assurance that the Company will be profitable on a quarter-to-quarter or annual basis. (16) SUBSEQUENT EVENTS (UNAUDITED) Effective April 7, 1996, the Company entered into an agreement with NFT, an entity affiliated with the Company's major stockholder and Chairman of the Board, whereby NFT will provide the Company with up to $2,400 of F-25 37 non-refundable research and development funding based on actual research and development expenses incurred in connection with new and enhanced Backup-UNET software products, the RLM software Products Group and the Open Media Products Group. The funding payments will be received in essentially four equal quarterly installments of approximately $600 each, the first of which will be received within ten days of submission by the Company of a statement setting forth the amount and description of the applicable research and development expenses incurred during the first quarter of fiscal 1997, the remaining installments within ten days of submission of a statement of incurred expenses for each of the next three successive quarters. The consideration NFT will receive for the funding includes: (a) an irrevocable, worldwide, nonexclusive license to develop, market and sell certain defined new or substantially enhanced software products developed by the Company; (b) royalty payments based on the revenue recognized by the Company from sale of the defined software products that are sold within four years of the effective date of the agreement; and, subject to stockholder approval, (c) warrants to purchase 750,000 shares of the Company's stock with an exercise price of $2.25 per share. The warrants expire on June 27, 2001. F-26 38 SCHEDULE II MTI TECHNOLOGY CORPORATION VALUATION AND QUALIFYING ACCOUNTS FOR THE FISCAL YEARS ENDED APRIL 6, 1996, APRIL 1, 1995, APRIL 2, 1994 (IN THOUSANDS)
CHARGED TO BALANCE BALANCE AT REVENUE, AT BEGINNING COSTS AND END OF DESCRIPTION OF PERIOD EXPENSES (1) DEDUCTIONS PERIOD ----------- --------- ------------ ---------- ------- Year ended April 6, 1996 Allowance for doubtful accounts and sales returns $9,986 $(4,395)(2) $ (154) $5,437 ====== ======= ======= ====== Allowance for inventory obsolescence $8,613 $ 4,056 $(8,725) $3,944 ====== ======= ======= ====== Year ended April 1, 1995 Allowance for doubtful accounts and sales returns $2,315 $ 7,770 $ (99) $9,986 ====== ======= ======= ====== Allowance for inventory obsolescence $2,476 $10,600 $(4,463) $8,613 ====== ======= ======= ====== Year ended April 2, 1994 Allowance for doubtful accounts and sales returns $1,305 $ 1,093 $ (83) $2,315 ====== ======= ======= ====== Allowance for inventory obsolescence $1,072 $ 3,457 $(2,053) $2,476 ====== ======= ======= ======
(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 1996. S-1 39 EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION - ------- ----------- 23.1 Consent of KPMG Peat Marwick LLP.
EX-23.1 2 INDEPENENT AUDITORS' CONSENT 1 INDEPENDENT AUDITORS' CONSENT EXHIBIT 23.1 The Board of Directors MTI Technology Corporation: We consent to incorporation by reference in the registration statement (No. 33-80438) on Form S-8 of MTI Technology Corporation of our report dated May 29, 1996, relating to the consolidated balance sheets of MTI Technology Corporation and subsidiaries as of April 6, 1996 and April 1, 1995 and the related consolidated statements of operations, stockholders' equity (deficiency) and cash flows for the fiscal years ended April 6, 1996, April 1, 1995 and April 2, 1994, and related schedule, which report appears in the April 6, 1996 annual report on Form 10-K/A of MTI Technology Corporation. KPMG Peat Marwick LLP Orange County, California September 12, 1996
-----END PRIVACY-ENHANCED MESSAGE-----