-----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, QuQKHIcEeW7stl1l6ddR5mnP9mj5thktVOmBCCbpIEpLaTx5Uw/uBQ9Yz3ZemyY4 +2pxZVzOinhh5xtGr0TUuA== 0000892569-97-001778.txt : 19970708 0000892569-97-001778.hdr.sgml : 19970708 ACCESSION NUMBER: 0000892569-97-001778 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970405 FILED AS OF DATE: 19970707 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 SEC ACT: 1934 Act SEC FILE NUMBER: 000-23418 FILM NUMBER: 97636803 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 1 FORM 10-K FOR THE FISCAL YEAR ENDED APRIL 5, 1997 1 FORM 10-K 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 For the fiscal year ended April 5, 1997 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ____________ Commission file number 0-23418 MTI TECHNOLOGY CORPORATION ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 95-3601802 ------------------------------- ------------------- (State or other jurisdiction of I.R.S. Employer incorporation or organization Identification No.) 4905 East La Palma Avenue Anaheim, California 92807 (Address of principal executive offices, zip code) Registrant's telephone number, including area code: (714) 970-0300 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.001 par value (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (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 $51,040,266 on June 23, 1997, based on the closing sale price of such stock on The Nasdaq SmallCap Market. The number of shares outstanding of Registrant's Common Stock, $0.001 par value, was 25,839,885 on June 23, 1997. DOCUMENTS INCORPORATED BY REFERENCE: Document Form 10-K -------- --------- Proxy Statement for 1997 III Annual Meeting of Stockholders to be held on September 25, 1997 2 PART I ITEM 1. BUSINESS: INTRODUCTION MTI Technology Corporation (the "Registrant") was incorporated in California in March 1981 and reincorporated in Delaware in October 1992. Unless the context indicates otherwise, the "Company" and "MTI" each refer to the Registrant and its consolidated subsidiaries. All references to years refer to the Company's fiscal years ended April 3, 1993, April 2, 1994, April 1, 1995, April 6, 1996 and April 5, 1997, as applicable unless the calendar year is specified. References to dollar amounts are in thousands, except share and per share data and amounts in the Company's Management's Discussion and Analysis of Financial Condition and Results of Operations, unless otherwise specified. The non-historical information in this Form 10-K includes forward-looking statements which involve risks and uncertainties. The actual results for the Company may differ materially from those described in any forward-looking statement. Factors that might cause such a difference include, but are not limited to, those discussed throughout this Form 10-K. OVERVIEW MTI Technology Corporation is a worldwide provider of high-performance data storage solutions for the Open Systems and Digital markets. MTI designs, manufactures, sells and services a fully integrated hierarchy of data storage solutions including solid state disk systems, fault tolerant RAID 5 disk arrays, tape libraries and storage management software. The Company's integrated solutions are compatible with most Open System computing platforms, including those of Sun Microsystems, Hewlett Packard ("HP"), Silicon Graphics, IBM, Digital Equipment ("DEC") and Compaq Computer. The Company's cross-platform capability allows its customers to implement a standardized storage and data management solution across heterogeneous (multi-vendor) computing environments, thus simplifying the management of their on and off-line data. The typical MTI customer operates a data center, where rapid, uninterrupted access to on-line information is critical to the customer's business operations. Historically, this information was centrally managed and maintained. Today many of these customers are in the process of migrating to a distributed client/server computing environment with its application software spread over multiple, cross-platform systems. MTI provides data storage and management solutions that help customers shift from proprietary, single source computing solutions to distributed multi-vendor client/server based computing. The Company's customers represent a cross section of industries and governmental agencies and range from Fortune 500 companies to small businesses. No one customer accounted for more than 10 percent of total revenue during fiscal years 1997, 1996 and 1995. During fiscal year 1997, approximately 76% of the Company's net product revenue was derived from the sale of products that operate in the Open Systems environment, as compared to 43% and 21% for fiscal years 1996 and 1995, respectively. This material increase reflects the Company's commitment to its strategy of expanding the revenue contribution from sales to the Open Systems data storage market. SIGNIFICANT BUSINESS DEVELOPMENTS NFT VENTURES, INC. SOFTWARE NRE AGREEMENT Effective April 7, 1996, the Company entered into an agreement with NFT Ventures, Inc. ("NFT"), an entity affiliated with the Company's major stockholder and Chairman of the Board, whereby NFT agreed to provide the Company with up to $2,400 of non-refundable research and development funding based on actual research and development expenses incurred in connection with new and enhanced Backup-UNET software products, the RLM Software Products Group and the Open Media Products Group. The Company has received $1,628 under this agreement and does not anticipate any additional funding under this agreement. The consideration NFT received for the funding commitment included: (a) an irrevocable, worldwide, nonexclusive license to develop, market and sell certain defined new or substantially enhanced software products developed by the Company; (b) the right to royalty payments based on the revenue recognized by the Company from sale of the defined software products that are sold within four years of the effective date of the agreement; and (c) warrants to purchase up to 750,000 shares of the Company's common stock with 2 3 an exercise price of $2.25 per share. The warrants expire on June 27, 2001. Based on the total of $1,628 of NRE funding received, warrants to purchase up to 508,824 shares of the Company's common stock have been issued. SALE OF PATENTS Effective February 9, 1996, the Company entered into an agreement with EMC Corporation ("EMC"), whereby the Company sold to EMC substantially all of the Company's existing patents, patent applications and rights thereof. The consideration the Company will receive for these rights includes: (a) $30,000 to be received in six equal annual installments of $5,000 each, the first of 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 of control of the Company involving certain identified acquirers. As part of the agreement, the Company and EMC granted to each other the license to exploit, market and sell the technology associated with each of their respective existing and future patents arising from any patent applications in existence as of the effective date of the agreement for a period of five years. See Note 11 of Notes to Consolidated Financial Statements. NATIONAL PERIPHERALS, INC. ACQUISITION Effective April 2, 1995, the Company acquired all the outstanding stock of National Peripherals, Inc. ("NPI"), a privately held provider of cross-platform RAID-based storage solutions for the Open Systems computing environment. Consideration paid in the NPI acquisition included: (a) payments of $2,608 in cash to NPI and its stockholders, (b) promissory notes in the aggregate amount of $2,000 bearing 6% interest per annum and payable in two equal annual installments beginning April 1996, (c) guaranteed earnout payments in the aggregate amount of $3,000 and payable in three equal annual installments beginning in April 1996, and (d) acquisition costs of $406. In addition, the acquisition agreement provided for contingent payments of up to $1,000 payable in April 1998 based on certain performance criteria. The Board of Directors approved the payment of the contingent $1,000 payment during the fourth quarter of fiscal year 1997. The accelerated timing of the payment was based on the over-achievement of the performance criteria as set forth in the amended NPI stock purchase agreement. As a result of the NPI acquisition, MTI increased its presence in the Open Systems marketplace by adding approximately 18 salespeople at the time of acquisition who were exclusively focused on Open Systems sales opportunities. With the inclusion of NPI's sales, approximately 43% of the Company's net product revenue for fiscal year 1996 was derived from the Open Systems market. See Note 11 of Notes to Consolidated Financial Statements. RAXCO, INC. ASSET ACQUISITION In January 1995, the Company acquired certain assets of Raxco, Inc. ("Raxco"), including intellectual properties and source code rights of the UNIX and Open VMS storage management software product lines of Raxco. Additionally, as part of the acquisition, the Company acquired software development and technical support teams located domestically and in the United Kingdom. The Company also acquired access to the existing Raxco storage management software and maintenance contract customer base. Under the terms of the acquisition, Raxco received (a) $1,000 in cash, (b) promissory notes in the aggregate amount of $2,500, bearing 8.5% interest and payable in ten quarterly installments beginning March 31, 1995 and (c) the assumption of certain liabilities in the amount of $1,903, consisting primarily of deferred maintenance contracts. In addition, as part of the consideration paid, the Company issued warrants to purchase 250,000 shares of the Company's common stock with an exercise price of $6.00 per share. The warrants will expire on December 31, 1999. The Raxco and NPI acquisitions were part of the Company's strategy to expand its product lines and increase revenue from the non-DEC marketplace. See Note 11 of Notes to Consolidated Financial Statements. 3 4 SYSTEM INDUSTRIES ACQUISITION Effective December 17, 1993, the Company purchased substantially all of the assets and assumed certain liabilities of System Industries pursuant to a sale under the United States Bankruptcy Code (the "System Industries Acquisition"). System Industries was a supplier of storage management solutions encompassing data storage and systems software to Open Systems environments, UNIX systems and DEC computing environments. Under the acquisition agreement, System Industries received (a) $4,100 in cash, (b) a note in the amount of $4,000 bearing interest at the rate of 6% per annum and payable quarterly over ten quarters, and (c) 491,710 shares of common stock valued at $7.06 per share. Pursuant to the terms of this note, the Company repaid $2,000 of principal in June 1994 upon completion of the Company's initial public offering. As a result of the System Industries Acquisition, the Company acquired intangible assets, consisting of maintenance service contracts, access to a significant installed customer base, proprietary UNIX software and a subcontracting relationship with Boeing Information Services, Inc., a subsidiary of The Boeing Company for its contract with the U.S. Army Information System Selection and Acquisition Agency relating to the Reserve Component Automation System ("RCAS"). During fiscal year 1997, the Company recognized no revenue related to the Boeing RCAS contract. In fiscal year 1996, revenue relating to Boeing's RCAS contract constituted approximately 2% and 1% of total net product revenue and total revenue, respectively. In fiscal year 1995, revenue related to the RCAS contract constituted approximately 13% and 9% of total net product revenue and total revenue, respectively. The primary reason for the decrease was the discontinuation of that program segment of the RCAS contract under which the Company sold product to Boeing Information Services. PRODUCTS The Company strives to meet its customers' storage management needs by combining its products into a comprehensive, flexible storage solution. The Company's goal is to enable customers to purchase a single, integrated storage system, rather than multiple components requiring integration by the customer. The Company's products include RAID arrays, high performance storage servers, disk and tape library systems, solid state disk database accelerators, and data management software consisting of distributed network backup recovery, HSM and media management products. RAID ARRAYS RAID storage systems provide increased protection and access to data. The Company's RAID array products, which include its 9300, 9500 and 9200 series systems, its recently announced Gladiator 3200, 3100 and 6200 series systems, and its StorageWare RAID products, are utilized primarily within the Sun, HP, Silicon Graphics, IBM, DEC and Intel computing platforms. HIGH PERFORMANCE STORAGE SERVERS MTI storage servers are special purpose computers that incorporate the Company's proprietary imbedded RAID, fault tolerant and caching software in order to manage the recording of data on, and retrieval of data from, a wide variety of storage peripherals. The Company's high performance StingRay storage servers are utilized primarily within the DEC computing platform. TAPE LIBRARY SYSTEMS Tape library systems provide a lower cost, slower access method of recording and retrieving large amounts of data, in comparison to magnetic disk systems. Tape libraries are typically used for recording a secondary backup copy of the data, thus providing extra data protection. The Company's tape library systems are utilized primarily within the Sun, HP, Silicon Graphics, IBM, DEC and Intel computing platforms. 4 5 APPLICATION SOFTWARE PRODUCTS The Company's data management application software has been specifically developed and is employed for the direct support and management of stored data and data storage devices. Certain of the Company's application software products are set forth in the table below:
PRIMARY COMPUTING PRODUCT FUNCTION PLATFORM - ------- -------- -------- Oasis Robotic Library Provides automated backup and DEC, HP, Sun, Manager restoration of data in a IBM, Intel network environment Backup.UNET Provides client/server backup HP, Sun, Silicon Graphics, for cross-platform network IBM, DEC, Intel environments Oasis Net Backup Performs network backup and DEC, Sun, IBM, provides recovery capability HP, Intel utilizing the client/server model Tape Control Automates and manages data DEC backup and retrieval Autostor Migrates and archives expired DEC data to multiple hierarchies automatically or upon user discretion
OPEN SYSTEMS COMPUTING PRODUCTS The Company's Open Systems computing solutions allow its products to be attached to and migrated between most SunOS, Sun Solaris, HP-UNIX, IBM-AIX, Novell Netware and Windows NT servers and workstations. Additionally, the Open Systems computing environment is a key element of the Company's strategy for providing a migration path between these open platforms and other proprietary platforms, including DEC's VMS. The Company's Open Systems computing products are utilized primarily within the Sun, HP, IBM, DEC, Silicon Graphics and Intel computing platforms. SALES AND MARKETING In the United States, the Company sells its products directly to end users through its field sales organization and indirectly through selected distributors. The Company's domestic sales organization consists of approximately 87 persons located in 17 sales offices in 14 states. This sales organization is supported by technical field support personnel consisting of approximately 11 systems consultants who provide consulting services and have experience in the management of complex data and implementing distributed client server systems. The Company markets its products internationally through its 32 person field sales organization with 5 offices located in Germany, France, United Kingdom and Ireland, and indirectly through independent distributors. International sales represented 27%, 27% and 39% of the Company's total revenue in fiscal years 1997, 1996 and 1995, respectively. International sales continue to represent a significant portion of the Company's total revenue. These sales activities are subject to the normal risks of conducting business internationally, including unexpected changes in regulatory requirements, fluctuating exchange rates, tariffs and other barriers, difficulties in staffing and managing foreign subsidiary operations and potentially adverse tax consequences. Other risks inherent in the Company's international business include longer payment cycles, greater difficulties in accounts receivable collection and the burdens of complying with a wide variety of foreign laws. Most of the sales made by the Company in international markets are priced in the applicable local currency and are subject to currency exchange fluctuations. The Company may enter into foreign currency exchange contracts in an attempt to minimize foreign currency exposure. International sales are subject 5 6 to the risk of compliance with laws of various countries and the risk of import/export restrictions and tariff regulations. The Company has not experienced any difficulty in obtaining export licenses from the United States Department of Commerce for international sales. ORDER BACKLOG The Company generally ships products within 30 days after receipt of a purchase order. Historically, MTI has had relatively little backlog at any given time and does not consider backlog to be a significant or important measure of sales for any future period, and as a result, net product revenue in any quarter is dependent on orders booked and products shipped during that quarter. CUSTOMER SERVICE AND SUPPORT The quality and reliability of the Company's products and the ongoing support of these products are important elements of the Company's business. The Company provides direct service for all of its products through an approximately 165 person service organization located in more than 40 service locations in the United States and Europe. The Company currently offers a variety of customer services that include system and software maintenance, consulting services, storage management integration and training. The Company offers on-site service response within four hours, 24 hours a day, seven days per week. The Company provides its customers with a warranty against defects in the Company's systems and software products for one year and 90 days, respectively. Approximately 75% of the Company's customers have historically entered into maintenance contracts with the Company for services during the second year of product ownership. Customer service revenue represented approximately 22%, 26% and 28% of the Company's total revenue in fiscal years 1997, 1996 and 1995, respectively. PRODUCT DEVELOPMENT The computer industry is characterized by rapid technological change and is highly competitive with respect to product innovation and introduction. To develop the many different technologies that support MTI's product development strategy, the Company has assembled several engineering teams with complementary expertise consisting of approximately 67 persons as of June 1, 1997. During fiscal years 1997, 1996 and 1995, the Company's research and development spending was approximately $10,100, $14,400 and $12,800, respectively. Effective April 7, 1996, the Company entered into an agreement with NFT Ventures, Inc. ("NFT"), an entity affiliated with the Company's major stockholder and Chairman of the Board, whereby NFT agreed to provide the Company with up to $2,400 of non-refundable research and development funding based on actual research and development expenses incurred in connection with new and enhanced Backup-UNET software products, the RLM Software Products Group and the Open Media Products Group. The Company has received $1,628 under this agreement and does not anticipate any additional funding under this agreement. The Company has three separate primary product development centers: one is located at its corporate headquarters in Anaheim, California, a second, the RAID Technology Center is located in Sunnyvale, California and a third in Westmont, Illinois. MANUFACTURING The Company's manufacturing operations are primarily located at its Anaheim facility, with an additional facility located in Dublin, Ireland, which was acquired in connection with the Systems Industries Acquisition. During fiscal year 1997, the Ireland facility continued the process of developing its operating infrastructure and production capacity, and currently manufactures over 90% of certain high-end product lines sold by the Company in Europe. During fiscal year 1995, the Company consolidated its two satellite facilities in Sunnyvale and Milpitas, and relocated all domestic manufacturing operations to its main Anaheim facility. Manufacturing operations consist primarily of final 6 7 systems integration and reliability testing, and rely principally on outside production companies for the fabrication and assembly of circuit boards. These outside production companies contract with the Company to produce and assemble products in accordance with the Company's specifications. This "turnkey" approach to product manufacturing reduces the Company's capital and employee requirements and allows it to adopt manufacturing technologies as they emerge. The principal components used in the Company's products include circuit boards, drives and chassis. The Company procures all of its parts from outside suppliers and has established manufacturing relationships with a number of key suppliers, primarily of disk drives, tape and tape library systems. The Company generally utilizes parts and components available from multiple vendors. However, components critical to the current design of the Company's 9000 and 3000 series of products, a RAID controller board manufactured by Mylex Corporation, is available to the Company only from this source. The Company also uses a proprietary power supply in its StorageWare product line which is manufactured by Modular Devices, Inc., the Company's sole source for this component. To date, the Company has been able to obtain supplies of these parts and believes that adequate quantities are available to meet its needs. Disruptions in supply or material increases in the cost of these components would have an adverse effect on the Company's operations. COMPETITION The market for the Company's products is extremely competitive. The Company has a number of competitors in various markets, including EMC Corporation, HP, Sun, IBM, Silicon Graphics, Compaq and DEC, each of which has substantially greater name recognition, engineering, manufacturing and marketing capabilities, and greater financial and personnel resources than the Company. The Company expects to experience increased competition from established and emerging computer storage hardware and management software companies, particularly DEC, HP, Sun, IBM, Silicon Graphics, Compaq and EMC Corporation. In addition, increased competitive pressure could lead to intensified price-based competition, which could have a material adverse effect on the Company's results of operations. There also has been, and may continue to be, a willingness on the part of certain large competitors to reduce prices in order to preserve or gain market share, which cannot be foreseen by the Company. The Company believes that pricing pressures are likely to continue as competitors develop more competitive product offerings. The principal elements of competition in the Company's markets include rapid introduction of new technology, product quality and reliability, price and performance characteristics, service and support, and responsiveness to customers. The Company believes that, in general, it competes favorably with respect to these factors. However, there can be no assurance that the Company will be able to compete successfully or that competition will not have a material adverse effect on the Company's results of operations. PROPRIETARY RIGHTS The Company relies on a combination of patent, copyright, trademark and trade secret laws, employee and third-party non-disclosure agreements and technical measures to protect its proprietary rights in its products. Although the Company continues to take appropriate measures to protect its proprietary rights, there can be no assurance that these measures will be successful. In addition, the laws of certain foreign countries may not protect the Company's intellectual property to the same extent as the laws of the United States. Effective February 9, 1996, the Company entered into an agreement with EMC whereby the Company sold to EMC substantially all of the Company's existing patents, patent applications, and rights thereof. The Company has an irrevocable, non-cancelable, perpetual and royalty-free license to exploit, market and sell the technology protected under the aforementioned patents. Pursuant to the terms and conditions of the agreement, this license will terminate in the event of a change of control of the Company involving certain identified acquirers. As part of the agreement, the Company and EMC grant to each other the license to exploit, market and sell the technology associated with each of their respective existing and future patents arising from any patent applications in existence as of the effective date of the agreement for a period of five years. Although the Company often seeks patents on its products, the Company believes that patents are of less significance in its industry than such factors as innovative skills and technical expertise, frequency of product enhancements and timeliness and quality of support services provided by the Company. 7 8 Although the Company believes that its products and trade designations do not infringe on the proprietary rights of third parties, there can be no assurance that third parties will not assert infringement claims against the Company in the future. If such a claim is made, the Company will evaluate the claim as it relates to its products and, if appropriate, may seek a license to use the protected technology. There can be no assurance that the Company would be able to obtain a license to use such technology or that such a license could be obtained on terms that would not have a material adverse effect on the Company. If the Company or its suppliers are unable to license protected technology, the Company could be prohibited from incorporating or marketing products incorporating that technology. The Company could also incur substantial costs to redesign its products or to defend any legal action taken against it. Should the Company's products be found to infringe protected technology, the Company could be required to pay damages to the infringed party or be enjoined from manufacturing and selling such products. EMPLOYEES As of June 1, 1997, the Company had approximately 511 full-time employees worldwide, including 289 in marketing, sales and service support, 95 in manufacturing and quality assurance, 67 in engineering and research and development and 60 in general administration and finance. None of the Company's employees is represented by a labor union, and the Company considers its relations with its employees to be good. ITEM 2. DESCRIPTION OF PROPERTY: The Company's corporate offices, including marketing, sales and support, manufacturing, research and development, and general administration and finance functions, are located in Anaheim, California, in a leased facility consisting of approximately 131,000 square feet. These premises are occupied under a lease agreement that expires in January 2003. The Company also has a 21,700 square foot facility located in Sunnyvale under a lease agreement that expires in July 1998. The Company has an 11,000 square foot facility in Dublin, Ireland where it performs assembly and testing on a limited number of products, with the lease expiring in 2016. In addition, the Company has a 14,300 square foot facility in Westmont, Illinois, used for sales and sales technical support under a lease expiring in June 1999. The Company believes that its existing facilities are adequate to meet its requirements for at least the next twelve months. The Company also leases approximately 23 sales and support offices located in the U.S. and Europe. ITEM 3. LEGAL PROCEEDINGS: 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 final approval for the settlement was granted by the court on August 5, 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. 8 9 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS: No matters were submitted to a vote of the security holders of the Company during the fourth quarter of 1997. EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth the names and ages of all executive officers of the Registrant as of June 23, 1997. A summary of the background and experience of each of these individuals is set forth below.
NAME AGE POSITION(S) - ---- --- ----------- Earl M. Pearlman 53 President and Chief Executive Officer Dale R. Boyd 39 Vice President, Chief Financial Officer John M. Hiett 50 Senior Vice President, Customer Service Thomas P. Raimondi 39 Senior Vice President, General Manager Gary M. Scott 41 Senior Vice President, European Operations Venki Venkataraman 48 Vice President, Operations Frank H. Yoshino 35 Treasurer
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. Dale R. Boyd has been the Chief Financial Officer of the Company since April 1996. Mr. Boyd joined the Company in February 1995 as Corporate Controller, and was elected as Chief Accounting Officer the same month. Prior to joining the Company, Mr. Boyd was Corporate Controller of Emulex Corporation, a manufacturer of software and hardware-based networking products, from May 1992 to January 1995. Prior to this time, from June 1991 to May 1992, Mr. Boyd was Manager of Business Development at Toshiba America, a manufacturer of computer and imaging products. From November 1988 until June 1991, Mr. Boyd was Director of Financial Operations of Ashton-Tate, a supplier of business applications software products. John M. Hiett has been Senior Vice President, Customer Service, of the Company since January 1994. From October 1992 to December 1993, Mr. Hiett served as Senior Vice President, Operations. Mr. Hiett joined the Company in 1990 as Director of Customer Service and was promoted to Vice President, Customer Service, in July 1991. Prior to that time, Mr. Hiett served as Service Manager for Sun MicroSystems from 1989 to 1990, and Operations Director for Wang Labs from 1983 until 1989. Thomas P. Raimondi has been Senior Vice President and General Manager of the Company since May 1996. Mr. Raimondi had been Vice President, Strategic Planning, Product Marketing, and Director of Marketing of the Company since 1987. Prior to joining the Company, Mr. Raimondi served as Sales Manager for System Industries, Inc. for seven years. Gary M. Scott has been Senior Vice President, European Operations, of the Company since October 1992. Mr. Scott had been Vice President, European Operations, for the Company starting in 1988. Prior to joining MTI, Mr. Scott served as General Manager of the German subsidiary of System Industries, Inc. 9 10 Venki Venkataraman joined the Company in April 1996 as Vice President, Operations. Prior to joining the Company, Mr. Venkataraman served in several capacities for The Foxboro Company, a division of Siebe PLC, from 1988 to 1996. His most recent position with Foxboro was as Manager of Product Development for the systems products division, a post he held for two years. Frank H. Yoshino has been Treasurer of the Company since July 1996. Prior to joining the Company, Mr. Yoshino was Treasury Director of Emulex Corporation from March 1992 to July 1996. Prior to this time, Mr. Yoshino served as Senior Financial Analyst for Ashton-Tate. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS: PRINCIPAL MARKET AND PRICES The Company's common stock commenced trading on The Nasdaq National Market under the symbol "MTIC" on April 7, 1994. Effective September 3, 1996, the Company's common stock began trading on The Nasdaq SmallCap Market and ceased trading on The Nasdaq National Market. The following table sets forth the range of high and low sales prices per share of common stock of the Company for each quarterly period as reported on The Nasdaq National Market and the Nasdaq SmallCap Market for the periods indicated. The price of MTI's common stock at the close of business on June 23, 1997 was $4.3125.
Sales Prices ------------ Fiscal Year 1996 High Low - ---------------- ---- --- First Quarter $3.3750 $1.6250 Second Quarter 4.6250 2.6875 Third Quarter 3.1250 1.3750 Fourth Quarter 3.6250 1.6250 Fiscal Year 1997 First Quarter 3.2500 1.4375 Second Quarter 2.6250 1.6875 Third Quarter 3.7500 1.9375 Fourth Quarter 4.5000 3.2500
The Company's stock price, like that of other technology companies, is subject to significant volatility. The announcement of new products, services or technological innovations by the Company or its competitors, quarterly variations in the Company's results of operations, changes in revenue or earnings estimates by the investment community are among the factors affecting the Company's stock price. In addition, the stock price may be affected by general market conditions and domestic and international economic factors unrelated to the Company's performance. Because of these reasons, recent trends should not be considered reliable indicators of future stock prices or financial results. NUMBER OF COMMON STOCKHOLDERS The approximate number of record holders of common stock of the Company as of June 23, 1997 was 288. DIVIDENDS MTI has never declared or paid dividends. The Company presently intends to retain earnings for use in its business and, therefore, does not anticipate declaring or paying any cash dividends in the foreseeable future. In addition, the terms of the Company's bank line of credit prohibits the declaration or payment of any cash dividends by the Company. 10 11 ITEM 6. SELECTED FINANCIAL DATA:
FISCAL YEAR ENDED ----------------- APRIL 5, APRIL 6, APRIL 1, APRIL 2, APRIL 3, 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- SELECTED STATEMENT OF OPERATIONS DATA: Net product revenue $120,359 $ 97,682 $ 91,140 $ 95,401 $ 97,034 Service revenue 33,368 34,232 36,177 28,067 18,644 -------- --------- --------- --------- --------- Total revenue 153,727 131,914 127,317 123,468 115,678 Product gross profit 36,752 23,625(1) 19,058(6) 38,778 37,276 Service gross profit 13,172 12,070(2) 12,587(7) 10,969 8,529 -------- --------- --------- --------- --------- Gross profit 49,924 35,695 31,645 49,747 45,805 Operating expenses: Selling, general and administrative 34,936 65,715(3) 39,812(8) 33,256 35,614 Research and development 10,103 14,384 12,825(9) 11,451 9,012 Non-recurring charges -- -- -- -- 10,124(10) -------- --------- --------- --------- --------- Total operating expenses 45,039 80,099(4) 52,637 44,707 54,750 -------- --------- --------- --------- --------- Operating income (loss) 4,885 (44,404) (20,992) 5,040 (8,945) Other income (expense), net 1,483 (4,636)(5) (1,008) (1,161) (1,667) Income tax expense (benefit) 664 179 3,540 980 (4,936) -------- --------- --------- --------- --------- Net income (loss) $ 5,704 $ (49,219) $ (25,540) $ 2,899 $ (5,676) ======== ========= ========= ========= ========= Income (loss) per share $ 0.21 $ (2.54) $ (1.34) $ 0.18 $ (0.45) ======== ========= ========= ========= ========= Weighted average common and common equivalent shares 26,723 19,400 19,029 15,925 12,572
APRIL 5, APRIL 6, APRIL 1, APRIL 2, APRIL 3, 1997 1996 1995 1994 1993 -------- --------- --------- --------- --------- SELECTED BALANCE SHEET DATA: Cash and cash equivalents $ 3,487 $ 4,055 $ 5,562 $ 3,976 $ 3,353 Working capital (deficit) (12,267) (25,966) 17,641 4,955 16,064 Total assets 83,592 84,023 102,451 110,354 78,537 Long-term debt, less current maturities 6 5,966 6,927 1,231 254 Total stockholders' equity (deficiency) 16,377 (187) 49,138 40,195 33,690
11 12 Notes: (1) Reflects a charge of $2,056 to increase excess and obsolete reserves on certain slower-moving or obsolete product inventories that support the DEC market. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." (2) Reflects a charge of $504 to write-down to estimated net realizable value certain field service spares inventories that support the DEC market. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." (3) Reflects a charge of $16,591 to write-down goodwill and a $2,088 charge for settlement of a shareholder lawsuit and related legal costs. See "Management's Discussion and Analysis of Financial Condition and Results of Operation." (4) Reflects a charge of $1,777 for restructuring and severance costs, a charge of $655 to write-off certain idle fixed assets and a charge of $1,855 for sales and use tax liability. See "Management's Discussion and Analysis of Financial Condition and Results of Operation." (5) Reflects a charge of $1,450 for interest and penalties related to sales and use tax liability. See "Management's Discussion and Analysis of Financial Condition and Results of Operation." (6) Reflects a charge of $7,209 to write-down slower-moving product inventories associated with a discontinued product line, and to reserve against increased obsolescence of certain inventories that support the DEC market. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." (7) Reflects a charge of $3,297 to write-down to estimated net realizable value certain field service spares inventories that support the DEC market. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." (8) Reflects a charge of $1,355 to write-down certain idle fixed assets and goodwill. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 11 of Notes to Consolidated Financial Statements. (9) Reflects a charge of $564 to write-down certain idle fixed assets. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." (10) Reflects a non-recurring charge for the cessation of the Company's network management software product and the settlement of outstanding litigation. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." 12 13 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: OVERVIEW MTI's historic revenues have been achieved through introductions of new or updated products, expansion of the Company's international operations, and through acquisitions. The Company has attempted to increase its focus on expanding its product and service offerings for the Open Systems computing environment and decrease its historic dependence on sales and service from Digital Equipment Corporation ("DEC") computing environment. Product revenue from the Open Systems marketplace (as compared to DEC) increased from approximately 21% for fiscal year 1995, to approximately 76% for fiscal year 1997, reflecting the Company's commitment to its strategy of expanding the revenue contribution from sales to the Open Systems data storage market. Effective April 2, 1995, the Company acquired National Peripherals, Inc. ("NPI"), a privately-held provider of cross-platform RAID based storage solutions for the Open Systems computing environment. Consideration paid in the NPI acquisition included: (a) payments of $2.6 million in cash to NPI and its stockholders, (b) promissory notes in the aggregate amount of $2.0 million bearing 6% interest per annum and payable in two equal annual installments beginning April 1996, (c) guaranteed earnout payments in the aggregate amount of $3.0 million and payable in three equal annual installments beginning in April 1996, and (d) acquisition costs of $0.4 million. In addition, the acquisition agreement provides for contingent payments of up to $1.0 million payable in April 1998 based on certain performance criteria. The Board of Directors approved the payment of the contingent $1.0 million payment during the fourth quarter of fiscal year 1997. The accelerated timing of the payment was based on the over-achievement of the performance criteria as set forth in the amended NPI stock purchase agreement. As a result of the NPI acquisition, MTI increased its presence in the Open Systems marketplace by adding approximately 18 salespeople at the time of acquisition who were exclusively focused on Open Systems sales opportunities. In January 1995, the Company acquired certain assets, including intellectual properties and source code rights, of the UNIX and Open VMS storage management software product lines of Raxco, Inc. ("Raxco"). The purchase price of the acquired assets consisted of $1.0 million in cash, notes in the amount of $2.5 million, assumption of $1.9 million of certain liabilities, primarily deferred service maintenance contracts, and the issuance of warrants to purchase 250,000 shares of the Company's common stock at a price of $6.00 per share. The warrants will expire on December 31, 1999. As part of the transaction the Company also acquired software development and technical support teams located domestically and in the United Kingdom. In addition, the Company acquired access to the existing Raxco storage management software customer base. In connection with the acquisition, the Company recorded an accrual of $0.8 million to reflect the anticipated costs related to the closure of excess facilities in the United Kingdom and the estimated costs to satisfy certain preexisting product development obligations. In the fourth quarter of fiscal year 1996, the Company recorded an additional $0.3 million associated with the Company's satisfaction of the preexisting product development obligations. The Company recorded goodwill in the amount of approximately $6.1 million which is being amortized on a straight-line basis over ten years, and will result in quarterly and annual operating charges of $0.2 million and $0.6 million, respectively. The NPI and Raxco acquisitions are part of the Company's strategy to expand its product lines and increase revenue from the non-DEC marketplace. See Note 11 of Notes to Consolidated Financial Statements. Effective April 7, 1996, the Company entered into an agreement NFT, an entity affiliated with the Company's major stockholder and Chairman of the Board, whereby NFT agreed to provide the Company with up to $2.4 million of non-refundable research and development funding based on actual research and development expenses incurred in connection with new and enhanced Backup-UNET software products, the RLM Software Products Group and the Open Media Products Group. The Company has received $1.6 million under this agreement and does not anticipate any additional funding under this agreement. The consideration NFT received for the funding commitment included: (a) an irrevocable, worldwide, nonexclusive license to develop, market and sell certain defined new or substantially enhanced software products developed by the Company; (b) the right to royalty payments based on the revenue recognized by the Company from sale of the defined software products that are sold within four years of the effective date of the agreement; and (c) warrants to purchase up to 750,000 shares of the Company's common stock with an exercise price of $2.25 per share. The warrants expire on June 27, 2001. Based on the total of $1.6 million of NRE funding received, warrants to purchase up to 508,824 shares of the Company's common stock have been issued. 13 14 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) $30.0 million to be received in six equal annual installments of $5.0 million each, the first of 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 $30.0 million over the term of the agreement, of which a minimum of $10.0 million will be received in five annual installments, beginning within thirty days of the first anniversary of the effective date of the agreement, and within thirty days of each subsequent anniversary thereof. In addition, the Company also received an irrevocable, non-cancelable, perpetual and royalty-free license to exploit, market and sell the technology protected under the aforementioned patents. Pursuant to the terms and conditions of the agreement, this license will terminate in the event of a change in control of the Company involving certain acquirers. As part of the agreement, the Company and EMC granted to each other the license to exploit, market and sell the technology associated with each of their respective existing and future patents arising from any patent applications in existence as of the effective date of the agreement for a period of five years. The Company's primary reasons for entering into this agreement with EMC were to realize a guaranteed minimum return on its historical research and development investment, and to do so in such a manner as to provide the Company with a predictable stream of both revenue and cash over several years. Pursuant to the terms and conditions of this agreement, the Company will record a quarterly benefit to income of $1.8 million, and will receive a minimum of $7.0 million cash on an annual basis, which includes $2.0 million of royalty payments and $5.0 million from the sale of patents and associated rights. In December 1993, the Company purchased substantially all the assets and assumed certain liabilities of Systems Industries ("SI"), a competitor of the Company, pursuant to a sale of SI's assets under the United States Bankruptcy Code. The purchase price for the acquired assets consisted of $4.1 million of cash, a note in the amount of $4.0 million, and 491,710 shares of the Company's common stock valued at $7.06 per share. The assets acquired included a European manufacturing facility, intangible assets, consisting of maintenance service contracts, access to an installed customer base, proprietary UNIX software to support expansion of the Company's product lines and a subcontracting relationship with Boeing Information Services, Inc., a subsidiary of the Boeing Company, for a contract with the U.S. Army Information System Selection and Acquisition Agency relating to RCAS. The intangibles totaled approximately $16.3 million at the time of the acquisition and were originally amortized on a straight-line basis over ten years, which resulted in quarterly and annual operating charges of $0.4 million and $1.6 million, respectively. In the fourth quarter of fiscal year 1996, the Company took a charge of $14.2 million to write-off the remaining unamortized intangible assets associated with the SI acquisition. This impairment was based on management's current estimates of the remaining economic value and life of the specific acquired assets related to the intangible asset. As part of the SI acquisition, the Company accrued a $3.7 million reserve to cover the costs of integration. This integration has been completed, and the Company has utilized the full reserve for specific integration costs. See Notes 1 and 11 of Notes to Consolidated Financial Statements. In December 1992, the Company reached an agreement with DEC to settle all patent litigation and related proceedings between the two companies. DEC commenced the initial litigation in June 1991. As part of the settlement, the Company entered into perpetual cross licenses to develop, manufacture and sell products utilizing certain patented DEC technology, and five patents of the Company were licensed to DEC. The Company will not receive any payment from DEC for these licenses under the terms of the settlement agreement. The Company also agreed to discontinue sales of products utilizing DEC's SDI/STI interfaces since July 1, 1993. Separately, in December 1992, the Company ceased the development and sales activities relating to its Lexcel network management software. The Company determined that the resources required to develop and support Lexcel would be better utilized for the Company's product transition to high-end storage management systems. Accordingly, the Company recorded a non-recurring charge in fiscal year 1993 of $10.1 million for the DEC settlement and the Lexcel restructuring. This charge included approximately $2.4 million of software development costs previously capitalized. Capitalizable software development costs incurred subsequent to the write-off have been immaterial. 14 15 RESULTS OF OPERATIONS The following table sets forth selected items from the Consolidated Statements of Operations as a percentage of total revenues for the periods indicated, except for product gross profit and service gross profit, which are expressed as a percentage of the related revenue. This information should be read in conjunction with the Selected Financial Data and Consolidated Financial Statements included elsewhere herein:
FISCAL YEAR ENDED ----------------- APRIL 5, APRIL 6, APRIL 1, 1997 1996 1995 ---- ---- ---- Net product revenue 78.3% 74.0% 71.6% Service revenue 21.7 26.0 28.4 ----- ----- ----- Total revenue 100.0 100.0 100.0 Product gross profit 30.5 24.2 20.9 Service gross profit 39.5 35.3 34.8 ----- ----- ----- Gross profit 32.5 27.0 24.9 Selling, general and administrative 22.7 49.8 31.3 Research and development 6.6 10.9 10.1 ----- ----- ----- Operating income (loss) 3.2 (33.7) (16.5) Other income (expense), net 1.0 (3.5) (0.8) Income tax expense 0.5 0.1 2.8 ----- ----- ----- Net income (loss) 3.7% (37.3)% (20.1)% ===== ===== =====
Net Product Revenue: Net product revenue increased $22.7 million, or 23%, over fiscal year 1996. This increase was primarily due to increased revenue of $12.3 million from optical/tape products, primarily the mid-range 1500 series of automated DLT tape libraries. In addition, software revenue and server revenue increased $1.4 million and $10.6 million, respectively, over fiscal year 1996. These increases were partially offset by decreased sales of $1.6 million to Boeing Information Services, Inc. relating to Boeing's RCAS contract with the federal government. Net product revenue increased $6.5 million, or 7%, over fiscal year 1995. This increase was primarily due to $32.4 million of sales of server products acquired as part of the acquisition of NPI. This increase was partially offset by a reduction in sales of $16.0 million of the Company's historical high performance server product line revenues. The $16.0 million reduction included $2.3 million relating to the discontinuation of the FailSafe server and $10.0 million related to the termination of the Company's involvement in the Boeing RCAS contract with the federal government. In addition, tape library product line revenues decreased $1.3 million, as compared to the prior fiscal year. Revenues from data management software product increased $1.8 million and revenues of other miscellaneous products decreased $0.6 million from fiscal year 1995. Service Revenue: Service revenue was $33.4 million for fiscal year 1997, a decrease of $0.9 million, or 3%, from the prior year. This decrease is primarily due to fewer post-warranty service contracts sold as a result of lower product revenues from the DEC market from the same period of the prior fiscal year. Service revenue was $34.2 million for fiscal year 1996, a decrease of $1.9 million, or 5%, from the prior year. This decrease was primarily due to fewer service contracts sold as a result of a lower mix of high performance server product revenues from the same period of the prior fiscal year. Product Gross Profit: Product gross profit was $36.8 million for fiscal year 1997, an increase of $13.2 million, or 56%, over fiscal year 1996, and the gross profit percentage of net product sales was 31% for fiscal year 1997 as compared to 24% for fiscal year 1996. Cost of goods sold for product revenue included a charge of $2.1 million recorded in the fourth quarter of fiscal year 1996 to increase reserves on slower-moving and obsolete product inventories primarily related to the DEC market. Before the impact of this charge, product gross profit would have been $25.7 million for fiscal year 1996, and the gross profit percentage of net product sales would have been 26%. The increase in gross profit percentage, excluding the fourth quarter of fiscal year 1996 charges, was primarily due to increased operating efficiencies in the manufacturing process as a result of improved inventory management and increased product throughput, and resulted in increased gross profit of approximately $9.6 million. In addition, there was increased 15 16 royalty revenue recorded in fiscal year 1997 of $1.5 million related to the February 1996 sale to EMC of substantially all of the Company's existing patents, patent applications and rights thereunder. Product gross profit was $23.6 million for fiscal year 1996, an increase of $4.5 million, or 24%, over fiscal year 1995, and the gross profit percentage of net product sales was 24% as compared to 21% for fiscal year 1995. Cost of goods sold for product revenue included charges of $2.1 million and $7.2 million recorded in the fourth quarter of fiscal year 1996 and 1995, respectively, to increase reserves on slower-moving and obsolete product inventories primarily related to the DEC market. Before the impact of these charges, product gross profit would have been $25.7 million for fiscal year 1996, a decrease of $0.6 million, or 2% from fiscal year 1995, and the gross profit percentage of net product sales would have been 26%, a decrease of 3% from the prior year. The decrease in gross profit percentage, excluding the fourth quarter charges, was primarily due to the higher mix of Open Systems product revenue, which carries a lower margin percentage, and reduced higher-margin product revenues related to the Boeing RCAS contract relationship. Service Gross Profit: Service gross profit for fiscal year 1997 increased $1.1 million, or 9%, over fiscal year 1996. The gross profit percentage for service revenue was 40% in fiscal year 1997 as compared to 35% for fiscal year 1996. Cost of goods sold for service revenue included a charge of $0.5 million recorded in the fourth quarter of fiscal year 1996 to record the write-down of field service spares inventory to net realizable. Before the impact of this charge, service gross profit would have been $3.3 million for fiscal year 1996, and the gross profit percentage of net service revenue would have been 37%. The increase in gross profit percentage, excluding the fourth quarter of fiscal year 1996 charge, was primarily due to reduced costs as a result of restructuring activities begun in the fourth quarter of fiscal year 1996 and completed in the first quarter of fiscal year 1997. Service gross profit for fiscal year 1996 decreased $0.5 million, or 4%, from fiscal year 1995. The gross profit percentage for service revenue was 35% for both fiscal years 1996 and 1995. Cost of service revenue included charges of $0.5 million and $3.3 million for fiscal years 1996 and 1995, respectively, to record the write-down of field service spares inventory to net realizable value. Before the impact of these charges, service gross profit for fiscal year 1996 would have decreased $3.3 million, or 21% from fiscal year 1995, and the gross profit percentage of net service revenue for fiscal year 1996 would have been 37%, a decrease of 7% from fiscal year 1995. The decrease in the gross profit percentage, excluding the fourth quarter charges, was primarily due to decreased post-warranty contract service revenue of $1.9 million as a result of a decrease in mix of DEC market product revenues and an increase in the service organization's cost structure of $1.4 million to support expansion into the Open Systems market. Selling, General and Administrative Expenses: Selling, general and administrative expenses decreased $30.8 million, or 47%, from fiscal year 1996. This decrease is primarily due to charges recorded in the fourth quarter of fiscal year 1996. In the fourth quarter of fiscal year 1996, the Company recorded a $14.2 million charge to write-off the remaining unamortized intangible assets related to the SI acquisition and recorded a $2.3 million charge to write-off the remaining unamortized goodwill associated with the acquisition of SCR Technologies. These charges were based on management's evaluation in the fourth quarter of the recoverability of the acquired net assets. Additionally, the Company accrued $2.1 million in the fourth quarter of fiscal year 1996 for the settlement of a shareholder lawsuit and related legal costs, a $1.0 million charge for sales and use tax liability and $1.5 million for restructuring activities. In addition, payroll and related expenses decreased approximately $3.2 million as a result of restructuring actions begun in the fourth quarter of fiscal year 1996 and completed in the first quarter of fiscal year 1997, goodwill amortization decreased $2.2 million due to the write-off of goodwill in the fourth quarter of fiscal year 1996, depreciation expense decreased $1.0 million due to the write-off of certain assets in the fourth quarter of fiscal year 1996, travel expenses, supplies and services decreased $0.8 million due to the restructuring actions noted above, legal expense decreased $0.8 million, primarily as a result of the settlement of shareholder litigation, and other expense categories decreased $1.7 million. Selling, general and administrative expenses increased $25.9 million, or 65%, over fiscal year 1995. In fiscal year 1996, the Company recorded a $14.2 million charge to write-off the remaining unamortized intangible assets related to the SI acquisition and recorded a $2.3 million charge to write-off the remaining unamortized goodwill associated with the acquisition of SCR Technologies. These charges were based on management's evaluation in the fourth quarter of the recoverability of the acquired net assets. In addition, the Company accrued $2.1 million in the fourth quarter of fiscal year 1996 for the settlement of a shareholder lawsuit and related legal costs and a $1.0 million charge for sales and use tax liability. In the fourth quarter of fiscal year 1995, the Company recorded $1.3 million of asset write-downs. Before the impact of these charges in each of the respective years, selling, general and administrative 16 17 expenses increased $7.6 million, or 20%, primarily as a result of additional selling and administrative costs related to the acquisition of NPI. Research and Development Expenses: Research and development expenses in fiscal year 1997 decreased $4.3 million, or 30%, from fiscal year 1996. The decrease is primarily due to reduced payroll and related expenses of approximately $1.3 million as a result of restructuring actions begun in the fourth quarter of fiscal year 1996 and completed in the first quarter of fiscal year 1997, and non-refundable research and development funding from NFT in fiscal year 1997, of $1.6 million. Additionally, in the fourth quarter of fiscal year 1996, the Company took a charge of $0.9 million for sales and use tax liability and a charge of $0.5 million to write-off certain idle fixed assets. Research and development expenses in fiscal year 1996 increased $1.6 million, or 12%, over fiscal year 1995. The increase is primarily due to a charge of $0.9 million for sales and use tax liability and a charge of $0.5 million to write-off certain idle fixed assets. Other Income (Expense), Net: Other income, net increased $6.1 million, or 132% over fiscal year 1996. This increase is primarily due to an additional $3.8 million of income recognized on the sale of substantially all of the Company's existing patents, patent applications and rights thereof to EMC in February 1996. Additionally, other expense decreased due to charges recorded in fiscal year 1996 of $2.3 million related to a sales and use tax liability, including interest. Other income (expense) in fiscal year 1996 consisted primarily of interest expense on outstanding bank line borrowings and notes payable. Interest expense for fiscal year 1996 increased $3.1 million over the prior year, primarily as a result of increased bank line borrowings. Included in interest expense in fiscal year 1996 was a $0.9 million charge for interest related to a sales and use tax liability Income Taxes: The Company recorded a net tax expense of $0.7 million for fiscal year 1997, as compared to an expense of $0.2 million in fiscal year 1996. The increase is primarily a result of the net income for fiscal year 1997 as compared to a net loss for fiscal year 1996. See Note 7 of Notes to Consolidated Financial Statements. The Company recorded a net tax expense of $0.2 million for fiscal year 1996, as compared to an expense of $3.5 million in fiscal year 1995. The decrease is primarily due to a charge of $3.3 million taken in fiscal year 1995 to reduce the Company's net deferred tax asset to an amount that would more likely than not be realizable. See Note 7 of Notes to Consolidated Financial Statements. NEW ACCOUNTING STANDARDS Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("Statement 128") issued in February 1997 specifies new standards designed to improve the earnings per share ("EPS") information provided in financial statements by simplifying the existing computational guidelines, revising the disclosure requirements and increasing the comparability of EPS data on an international basis. Some of the changes made to simplify the EPS computations include: (a) eliminating the presentation of primary EPS and replacing it with basic EPS, with the principal difference being that common stock equivalents are not considered in computing basic EPS, (b) eliminating the modified treasury stock method and the three percent materiality provision and (c) revising the contingent share provisions and the supplemental EPS data requirements. Statement 128 also makes a number of changes to existing disclosure requirements. Statement 128 is effective for financial statements issued for periods ending after December 15, 1997, including interim periods. The Company does not believe the implementation of Statement 128 will have a material effect on net income per share. LIQUIDITY AND CAPITAL RESOURCES The Company has financed its capital requirements principally through public and private equity financing and bank borrowings, including approximately $15.2 million of net bank borrowings and $10.0 million of private equity funding in fiscal year 1996, and approximately $36.6 million in equity funding for fiscal year 1995 (of which $19.5 million was used to pay down existing debt at the time of the Company's initial public offering). The Company had cash and cash equivalents of $3.5 million at April 5, 1997. 17 18 Cash and cash equivalents decreased $0.6 million at April 5, 1997 as compared with the prior fiscal year end. Net operating activities provided $6.3 million in fiscal year 1997, primarily due to $17.0 million of operating losses adjusted for non-cash items, partially offset by a $11.0 million increase in accounts receivable primarily due to increased volume resulting from increased revenue. The Company has increased its efforts in the first quarter of fiscal year 1998 to reduce accounts receivable. Cash and cash equivalents decreased $1.5 million at April 6, 1996 as compared with the prior fiscal year end. Net operating activities used $7.1 million in fiscal year 1996, primarily due to a $12.6 million of operating losses adjusted for non-cash items, a $5.8 million reduction in accounts payable, and a $2.5 million increase in inventories. These increases were partially offset by a $8.4 million reduction in accounts receivable and a $3.2 million increase in accrued and other liabilities. The Company's investing activities during these periods included acquisitions and capital expenditures to support research and development, sales and operations. Effective April 2, 1995, the Company acquired all the outstanding stock of NPI. As part of the acquisition the Company paid $2.6 million in cash to NPI, issued notes in the aggregate amount of $2.0 million payable in two equal annual installments beginning April 1, 1996 and guaranteed earnout payments in the aggregate amount of $3.0 million payable in three equal annual installments beginning in April 1996. In addition, the acquisition agreement provided for contingent payments of up to $1.0 million payable in April 1998. The Board of Directors approved the payment of the contingent $1.0 million payment during the fourth quarter of fiscal year 1997. The accelerated timing of the payment was based on the over-achievement of the performance criteria as set forth in the amended NPI stock purchase agreement. In fiscal year 1995, the Company acquired certain assets and assumed certain liabilities of Raxco. As part of the acquisition, the Company paid $1.0 million in cash to Raxco, and issued notes payable in the total principal amount of $2.5 million, to be paid in ten quarterly installments beginning in April 1995. During fiscal year 1993, the Company incurred and accrued non-recurring charges relating to the DEC settlement and the Lexcel restructuring totaling $10.1 million. The cash outlays relating to these charges amounted to $1.0 million each in fiscal years 1997, 1996, 1995 and 1994 and one semi-annual cash payment of $0.5 million is due June 1997. See Notes 11 and 14 of Notes to Consolidated Financial Statements. At April 5, 1997, the Company's days sales outstanding were 76 days, as compared to 60 days at April 6, 1996. The Company's average days sales outstanding is impacted by the high percentage of sales occurring within the last month of each quarter and the large percentage of international sales, which historically have slower payment patterns. The increase is primarily due to increased volume resulting from increased revenue. The Company has increased its efforts in the first quarter of fiscal year 1998 to reduce accounts receivable. On March 31, 1995, the Company entered in to an agreement whereby the Company had available asset secured bank lines of credit of up to $20.0 million, limited by the value of the pledged collateral which consists of the Company's accounts receivable and inventories. In May 1996, the agreement was amended to increase the line of credit to $30.0 million as a result of a collateralized guarantee made to the bank by an affiliate of NFT, an entity affiliated with the Company's major stockholder and Chairman of the Board. At April 5, 1997, borrowings outstanding were $22.1 million under this agreement. At June 23, 1997, the outstanding balance under this line was approximately $19.4 million. This line replaced an existing agreement with two separate banks whereby the Company had an asset-secured line of credit of up to $12.0 million. There were $5.4 million of borrowings outstanding against that bank line of credit at April 1, 1995, which was paid off under the Company's new credit arrangement subsequent to April 1, 1995. Effective June 12, 1997, the Company entered into an agreement with Greyrock Business Credit whereby under an asset secured domestic line of credit, the Company may borrow up to $30.0 million limited by the value of pledged collateral. As part of the agreement, Silicon Valley Bank has a participation interest. The agreement allows the Company to borrow at a blended rate of prime rate plus 1.67%. The initial term of the agreement is for one year and automatically and continuously renews for a subsequent year, unless terminated by either party per the agreement. During April and May 1994, the Company received $36.1 million, net of expenses, in connection with its initial public offering in which it sold approximately 4.5 million shares of common stock. See Note 2 of Notes to Consolidated Financial Statements. The initial public offering closed on April 14, 1994 with a second closing on May 11, 1994 for the partial exercise of the underwriters' overallotment option. 18 19 On July 19, 1995, the Company entered into an agreement whereby it received a loan of approximately $10.0 million from an entity affiliated with the Company's major stockholder and Chairman of the Board. Pursuant to the terms of the agreement, the Company issued a long-term subordinated note to the lender which was convertible into common stock of the Company at a price per common share equal to the fair market value of such stock on the date of the conversion. On April 11, 1996, the lender exercised its right to convert the current principal and accrued interest outstanding thereunder of $10.1 million into common stock of the Company. See Notes 8 and 12 of Notes to Consolidated Financial Statements. Effective February 9, 1996, the Company entered into an agreement with EMC, whereby the Company sold to EMC substantially all of the Company's existing patents, patent applications and rights thereof. The consideration the Company will receive for these rights include: (a) $30.0 million to be received in six equal annual installments of $5.0 million each, the first of 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 $30.0 million over the term of the agreement, of which a minimum of $10.0 million will be received in five annual installments, beginning within thirty days of the first anniversary of the effective date of the agreement, and within thirty days of each subsequent anniversary thereof. Effective April 7, 1996, the Company entered into an agreement with NFT whereby NFT was to provide the Company with up to $2.4 million of non-refundable research and development funding based on actual research and development expenses incurred in connection with new and enhanced Backup-UNET software products, RLM Software Products Group, and the Open Media Products Group. The Company received $1.6 million in fiscal year 1997 under this agreement and does not anticipate any additional funding under this agreement. Management believes that the Company's working capital, bank lines of credit and cash flow from operating activities will be sufficient to meet the Company's operating and capital expenditure requirements for the next twelve months; however, in the longer term, the Company may require additional funds to support its working capital requirements including financing of accounts receivable and inventory, or for other purposes, and may seek to raise such funds through public or private equity financing, bank lines of credit or from other sources. No assurance can be given that additional financing will be available or that, if available, will be on terms favorable to the Company. INFLATION AND FOREIGN CURRENCY EXCHANGE Inflation and foreign currency exchange rate fluctuations have not had a material impact on the Company's results of operations in the past. There can be no assurance, however, that they will not have a material adverse effect on the Company's results of operations in future periods. ITEM 7A. QUANITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS: Not applicable. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA: The information required by this Item is incorporated herein by reference to the consolidated financial statements and supplementary data listed in Item 14 of Part IV of this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH INDEPENDENT AUDITORS ON ACCOUNTING AND FINANCIAL DISCLOSURE: None. 19 20 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT: Information with respect to directors of the Company is incorporated by reference to the information set forth in the Company's Proxy Statement under the caption "Directors and Executive Officers." Information with respect to the Company's executive officers is set forth in Part I, above, under the caption "Executive Officers of the Registrant." ITEM 11. EXECUTIVE COMPENSATION: The information set forth under the caption "Compensation of Directors and Executive Officers and Other Information" in the Company's Proxy Statement is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT: The information set forth under the caption "Voting Securities and Principal Holders Thereof" in the Company's Proxy Statement is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS: The information set forth under the caption "Compensation of Directors and Executive Officers and Other Information" in the Company's Proxy Statement is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K: The following Consolidated Financial Statements of MTI and the Independent Auditors' Report are attached hereto beginning on pages F-1 and S-1. (a)(1) Consolidated Financial Statements: Independent Auditors' Report Consolidated Balance Sheets as of April 5, 1997 and April 6, 1996 Consolidated Statements of Operations for fiscal years 1997, 1996 and 1995 Consolidated Statements of Stockholders' Equity (Deficiency) for fiscal years 1997, 1996 and 1995 Consolidated Statements of Cash Flows for fiscal years 1997, 1996 and 1995 Notes to Consolidated Financial Statements (2) The following financial statement schedule for fiscal years 1997, 1996 and 1995 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. 20 21 (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 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)
21 22 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 [Intentionally omitted] 10.2 Triple Net Lease between the Company and Catellus Development Corporation effective December 20, 1991. (1) 10.3 Owner Participation Agreement between the Company, Catellus Development Corporation and Anaheim Redevelopment Agency, dated as of January 7, 1992, including exhibits. (1) 10.4 Subordinated Promissory Note made by the Company to System Industries, Inc., dated December 20, 1993. (1) 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)
22 23 *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) 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)
23 24 10.42 [Intentionally omitted] 10.43 Letter dated April 3, 1996, between the Company and Michael Clemens. (8) 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) 10.46 1996 Stock Incentive Plan (9) 10.47 Amendment No. 2 to Stock Purchase Agreement and Senior Promissory Notes dated as of October 3, 1996 between Earl M. Pearlman, William E. Decker, the William E. Decker Trust and Registrant. (9) 10.48 Loan and Security Agreement between the Company and Greyrock Business Credit, dated May 23, 1997, and Schedule thereto. 21.1 Subsidiaries of the Company. 23.1 Consent of KPMG Peat Marwick LLP. 24 Power of Attorney (see page 25) 27 Financial Data Schedule
- ---------- (1) Filed as an Exhibit to the Registrant's Registration Statement on Form S-1 (No. 33-75180). (2) Filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the fiscal year ended April 2, 1994. (3) Filed as an Exhibit to the Registrant's 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 the Registrant's Quarterly Report on Form 10-Q for the quarterly period ending October 6, 1995. * Management or compensatory plan or arrangement. (b) Reports on Form 8-K None. 24 25 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 1st day of July 1997. MTI TECHNOLOGY CORPORATION By: /s/Earl M. Pearlman ------------------------------------------ Earl M. Pearlman (President and Chief Executive Officer) POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below, constitutes and appoints Earl M. Pearlman and Dale R. Boyd, jointly and severally, attorneys-in-fact and agents, each with full power of substitution, for him in any and all capacities to sign any and all amendments to this Report, and to file the same, and all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact and agents, and his or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ Earl M. Pearlman President and Chief Executive July 1, 1997 - ------------------------------------ Officer (Earl M. Pearlman) /s/ Dale R. Boyd Vice President, Chief Financial July 1, 1997 - ------------------------------------ Officer (Principal Financial and (Dale R. Boyd) Accounting Officer) /s/ Raymond J. Noorda Chairman of the Board July 1, 1997 - ------------------------------------ (Raymond J. Noorda) /s/ Steven J. Hamerslag Vice Chairman of the Board July 1, 1997 - ------------------------------------ (Steven J. Hamerslag) /s/ Val Kreidel Director July 1, 1997 - ------------------------------------ (Val Kreidel) /s/ David Proctor Director July 1, 1997 - ------------------------------------ (David Proctor)
25 26 INDEX TO FINANCIAL STATEMENTS
PAGE ---- Independent Auditors' Report .................................................... F-2 Consolidated Balance Sheets as of April 5, 1997 and April 6, 1996 ............... F-3 Consolidated Statements of Operations for the fiscal years ended April 5, 1997, April 6, 1996 and April 1, 1995 ............................................ F-4 Consolidated Statements of Stockholders' Equity (Deficiency) for the fiscal years ended April 5, 1997, April 6, 1996 and April 1, 1995 ....................... F-5 Consolidated Statements of Cash Flows for the fiscal years ended April 5, 1997, April 6, 1996 and April 1, 1995 ............................................ 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 27 INDEPENDENT AUDITORS' REPORT The Board of Directors MTI Technology Corporation: We have audited the consolidated financial statements of MTI Technology Corporation and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of MTI Technology Corporation and subsidiaries as of April 5, 1997 and April 6, 1996, and the results of their operations and their cash flows for the fiscal years ended April 5, 1997, April 6, 1996, and April 1, 1995, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG Peat Marwick LLP Orange County, California May 20, 1997 F-2 28 MTI TECHNOLOGY CORPORATION CONSOLIDATED BALANCE SHEETS (in thousands)
April 5, April 6, 1997 1996 -------- -------- ASSETS Current assets: Cash and cash equivalents $ 3,487 $ 4,055 Short-term investments 850 -- Accounts receivable, less allowance for doubtful accounts and sales returns of $9,283 in 1997 and $5,437 in 1996 31,899 21,101 Inventories 14,637 21,499 Deferred income tax benefit 960 784 Prepaid expenses and other receivables 2,862 3,750 -------- -------- Total current assets 54,695 51,189 Property, plant and equipment, net 13,220 16,323 Intangible assets and goodwill, less accumulated amortization of $3,680 in 1997 and $1,880 in 1996 15,027 15,852 Other 650 659 -------- -------- $ 83,592 $ 84,023 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) Current liabilities: Short-term borrowings $ 22,102 $ 20,613 Current maturities of long-term debt 1,851 8,297 Accounts payable 14,347 14,580 Accrued liabilities 15,622 18,724 Deferred income 13,040 14,941 -------- -------- Total current liabilities 66,962 77,155 Long-term debt, less current maturities 6 5,966 Deferred income 242 550 Other 5 539 -------- -------- Total liabilities 67,215 84,210 -------- -------- 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 26,537 and 20,243 shares in 1997 and 1996, respectively 26 20 Additional paid-in capital 88,780 77,762 Accumulated deficit (68,010) (73,645) Less cost of treasury stock (755 and 794 shares in 1997 and 1996, respectively) (2,788) (2,938) Cumulative foreign currency translation adjustments (1,631) (1,386) -------- -------- Total stockholders' equity (deficiency) 16,377 (187) Commitments and contingencies Subsequent event $ 83,592 $ 84,023 ======== ========
See accompanying notes to the consolidated financial statements. F-3 29 MTI TECHNOLOGY CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS FISCAL YEARS ENDED APRIL 5, 1997, APRIL 6, 1996 AND APRIL 1, 1995 (in thousands, except per share data)
1997 1996 1995 ---- ---- ---- Net product revenue $ 120,359 $ 97,682 $ 91,140 Service revenue 33,368 34,232 36,177 --------- --------- --------- Total revenue 153,727 131,914 127,317 Product cost of revenue 83,607 74,057 72,082 Service cost of revenue 20,196 22,162 23,590 --------- --------- --------- Total cost of revenue 103,803 96,219 95,672 --------- --------- --------- Gross profit 49,924 35,695 31,645 Operating expenses: Selling, general and administrative 34,936 65,715 39,812 Research and development 10,103 14,384 12,825 --------- --------- --------- Total operating expenses 45,039 80,099 52,637 Operating income (loss) 4,885 (44,404) (20,992) Other income (expense): Interest expense (2,993) (4,090) (966) Interest income 87 99 339 Other income (expense) 4,389 (645) (381) --------- --------- --------- Income (loss) before income taxes 6,368 (49,040) (22,000) Income tax expense 664 179 3,540 --------- --------- --------- Net income (loss) $ 5,704 $ (49,219) $ (25,540) ========= ========= ========= Income (loss) per common and common equivalent share $ 0.21 $ (2.54) $ (1.34) ========= ========= ========= Weighted average common and common equivalent shares 26,723 19,400 19,029 ========= ========= =========
See accompanying notes to the consolidated financial statements. F-4 30 MTI TECHNOLOGY CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY) FISCAL YEARS ENDED APRIL 5, 1997, APRIL 6, 1996 AND APRIL 1, 1995 (in thousands)
Cumulative Total Foreign Stock- Additional Retained Currency holders' Common Stock Paid-in Earnings Translation Equity Shares Amount Capital (Deficit) Adjustments (Deficiency) ------ ------ ------- --------- ----------- ------------ 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) Exercise of stock options (including compensation expense of $14) 300 -- 529 -- -- 529 Treasury shares issued under Employee Stock Purchase Plan and other 40 -- 150 (69) -- 81 Conversion of secured subordinated note 5,993 6 10,107 -- -- 10,113 Issuance of warrants -- -- 382 -- -- 382 Foreign currency translation adjustments -- -- -- -- (245) (245) Net income -- -- -- 5,704 -- 5,704 ------- --- -------- -------- ------- -------- Balance at April 5, 1997 25,782 $26 $ 85,992 $(68,010) $(1,631) $ 16,377 ======= === ======== ======== ======= ========
See accompanying notes to the consolidated financial statements. F-5 31 MTI TECHNOLOGY CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS FISCAL YEARS ENDED APRIL 5, 1997, APRIL 6, 1996 AND APRIL 1, 1995 (in thousands)
1997 1996 1995 --------- --------- -------- Cash flows from operating activities: Net income (loss) $ 5,704 $ (49,219) $(25,540) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 9,854 28,255 9,918 Provision for sales returns and losses on accounts receivable, net 319 154 99 Provision for inventory obsolescence 3,238 4,056 10,600 Loss on disposal of fixed assets 259 923 3,297 Deferred income tax expense (benefit) (176) -- 5,123 Deferred income (2,208) 3,056 (71) Compensation related to stock options 14 129 239 Change in assets and liabilities, net of effect of acquisitions: Accounts receivable (11,087) 8,404 11,841 Inventories 1,984 (2,531) (13,465) Prepaid expenses, other receivables and other assets 1,527 2,199 (2,368) Accounts payable (228) (5,799) 163 Accrued and other liabilities (2,853) 3,299 (2,604) --------- --------- -------- Net cash provided by (used in) operating activities 6,347 (7,074) (2,768) --------- --------- -------- Cash flows from investing activities: Capital expenditures for property, plant and equipment (3,780) (8,910) (8,001) Proceeds from sale of property, plant and equipment, net -- 340 -- Acquisition of assets and liabilities of businesses, net of cash acquired (1,000) (2,690) (1,628) Long term investments -- -- (250) Short term investments (850) -- -- --------- --------- -------- Net cash used in investing activities (5,630) (11,260) (9,879) --------- --------- -------- Cash flows from financing activities: Borrowings under notes payable, net of acquisitions 116,986 129,887 20,984 Borrowings under notes payable to fund acquisition of NPI 1,000 2,608 -- Proceeds from issuance of common stock and exercise of options and warrants 596 66 36,551 Repayments of notes payable (119,552) (115,807) (40,466) Repurchase of common stock -- -- (3,263) --------- --------- -------- Net cash provided by (used in) financing activities (970) 16,754 13,806 --------- --------- -------- Effect of exchange rate changes on cash (315) 73 427 --------- --------- -------- Net increase (decrease) in cash and cash equivalents (568) (1,507) 1,586 Cash and cash equivalents at beginning of year 4,055 5,562 3,976 --------- --------- -------- Cash and cash equivalents at end of year $ 3,487 $ 4,055 $ 5,562 ========= ========= ======== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 2,963 $ 2,330 $ 923 Income taxes 348 481 1,438 Supplemental schedule of noncash investing and financing activities: Conversion of debt to common stock (note 12) 10,113 -- -- Revaluation on acquired SI fixed assets -- -- 1,347 Issuance of common stock, notes, options and warrants in connection with acquisitions (note 11) -- 5,000 2,500
See accompanying notes to the consolidated financial statements. F-6 32 MTI TECHNOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The accompanying consolidated financial statements include the accounts of MTI Technology Corporation and subsidiaries (the "Company" or "MTI"). All significant intercompany accounts and transactions have been eliminated in consolidation. Fiscal Year The Company's year-end is the first Saturday following March 31. Fiscal year 1997 ended on April 5 and consisted of 52 weeks. Fiscal year 1996 ended on April 6 and consisted of 53 weeks. Fiscal year 1995 ended on April 1 and 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 5, 1997 and April 6, 1996, $266 and $1,102, 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. Short-Term Investments Short-term investments are comprised of certificates of deposit with an original maturity date longer than three months and are stated at cost, which approximates market value. 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 33 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 Prior to April 7, 1996, the Company accounted for its stock option plan in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. On April 7, 1996, the Company adopted Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("Statement 123"), which permits entities to recognize as expense over the vesting period the fair value of all stock based awards on the date of grant. Alternatively, Statement 123 also allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income and pro forma net income per share disclosures for employee stock option grants made in fiscal year 1996 and future years as if the fair-value-based method defined in Statement 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of Statement 123. Use of Estimates Management has made a number of estimates and assumptions relating to the reporting of assets and liabilities in conformity with generally accepted accounting principles. Actual results could differ from these estimates. Income Taxes 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 regularly evaluates the continuing recoverability of intangible assets and goodwill based upon the historical and projected revenue and profitability of the related acquisitions and continuing benefits of the underlying assets. Based upon these evaluations, the Company believes that the established estimated useful lives are reasonable based on the economic factors and continuing benefits applicable to the acquired businesses and/or assets. In March 1995, the Financial Accounting Standards Board ("FASB") 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 F-8 34 fourth quarter of fiscal year 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. During the fourth quarter of fiscal year 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 5, 1997. Accordingly, as of April 5, 1997, goodwill represents intellectual property rights, access to an installed customer base and research and development capacity related to Raxco and National Peripherals, Inc. (see note 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 $(499), $(262) and $593 were realized in fiscal years 1997, 1996 and 1995, 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. In February 1997, the FASB issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("Statement 128"). Statement 128 specifies new standards designed to improve the earnings per share ("EPS") information provided in financial statements by simplifying the existing computational guidelines, revising the disclosure requirements and increasing the comparability of EPS data on an international basis. Some of the changes made to simplify the EPS computations include: (a) eliminating the presentation of primary EPS and replacing it with basic EPS, with the principal difference being that common stock equivalents are not considered in computing basic EPS, (b) eliminating the modified treasury stock method and the three percent materiality provision and (c) revising the contingent share provisions and the supplemental EPS data requirements. Statement 128 also makes a number of changes to existing disclosure requirements. Statement 128 is effective for financial statements issued for periods ending after December 15, 1997, including interim periods. The Company does not believe the implementation of Statement 128 will have a material effect on net income per share. F-9 35 Fair Value of Financial Instruments In December 1991, the FASB issued Statement of Financial Accounting Standards No. 107, "Disclosure about Fair Value of Financial Instruments" ("Statement 107"). Statement 107 requires all entities to disclose the fair value of financial instruments, both assets and liabilities recognized and not recognized on the balance sheet, for which it is practicable to estimate fair value. Statement 107 defines fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties. As of April 5, 1997, the fair value of all financial instruments approximated carrying value. Fourth Quarter 1996 Adjustments During the fourth quarter of fiscal year 1996, the Company made a determination that it would not seek to continue its participation as a subcontractor relating to the U.S. Army's RCAS contract; settled its shareholder lawsuit; completed its audit by the State of California and received a determination of sales and use tax liability therefrom; and experienced a substantial increase in its mix of revenues from the Open Systems marketplace, partially offset by a corresponding decrease in revenues from the DEC market. As a consequence of these events, during the fourth quarter of fiscal year 1996, the Company reevaluated the future recoverability and economic usefulness of certain assets, the composition of its operating infrastructure, and recorded certain charges to reflect its liability related to these events. During the fourth quarter of fiscal year 1996, the Company recorded approximately $19,806 of charges related to asset write-downs and increased inventory reserves. The charges included a $14,244 charge to write-off the remaining unamortized intangible assets related to the purchase 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. During fiscal year 1997, $1,777 was paid and the remaining accrual at April 5, 1997 was zero. F-10 36 The following table summarizes the fiscal year 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 year 1996 fourth quarter adjustments $26,976 =======
Fourth Quarter 1995 Adjustments During the latter half of fiscal year 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 year 1995. During the fourth quarter of fiscal year 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 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 year 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). F-11 37 The following table summarizes the fiscal year 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 assets 714 Write-off of unamortized SF2-related goodwill 411 ------- $ 1,919 ------- Total fourth quarter adjustments due to asset write-downs and increased inventory reserves $12,425 ------- Additional returns reserves $ 2,454 Adjustments to deferred tax valuation allowance $ 3,261 ------- Total fiscal year 1995 fourth quarter adjustments $18,140 =======
Reclassifications Certain reclassifications have been made to the fiscal years 1996 and 1995 financial statements to conform to the fiscal year 1997 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. (3) INVENTORIES Inventories consist of the following:
APRIL 5, APRIL 6, 1997 1996 ---- ---- Raw materials $ 5,788 $13,090 Work-in-process 10 2,106 Finished goods 8,839 6,303 ------- ------- $14,637 $21,499 ======= =======
F-12 38 (4) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment, at cost, are summarized as follows:
APRIL 5, APRIL 6, 1997 1996 ---- ---- Plant equipment, office furniture and fixtures $12,032 $12,327 Computer equipment 13,933 13,064 Field service spares 7,966 9,294 Leasehold improvements 1,285 1,176 ------- ------- 35,216 35,861 Less accumulated depreciation and amortization 21,996 19,538 ------- ------- $13,220 $16,323 ======= =======
Property, plant and equipment include assets held under capital leases of $71 and $350 (net of accumulated depreciation of $245 and $364, respectively) at April 5, 1997 and April 6, 1996, respectively. (5) ACCRUED LIABILITIES Accrued liabilities consist of the following:
APRIL 5, APRIL 6, 1997 1996 ---- ---- Salaries, wages and commissions $ 5,077 $ 5,265 Taxes 5,878 4,970 Accrued warranty costs 912 1,142 Other 3,755 7,347 ------- ------- $15,622 $18,724 ======= =======
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%. The initial term of the agreement was for two years and automatically and continuously renews for a subsequent year, unless terminated by either party per the agreement. 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 issued warrants to purchase up to 500,000 shares of the Company's common stock at a price of $2.00 per share (see note 8). Borrowings outstanding under this line at April 5, 1997 were $22,102 which is classified as short-term borrowings. The bank line of credit agreement contains certain restrictive covenants. At April 5, 1997, the Company was in compliance with all such covenants. F-13 39 Long-term Debt A summary of long-term debt is as follows:
APRIL 5, APRIL 6, 1997 1996 ---- ---- Capital lease obligations $ 77 $ 273 Notes payable 1,780 13,990 ------- ------- $ 1,857 $14,263 Less current installments 1,851 8,297 ------- ------- $ 6 $ 5,966 ======= =======
Principal maturities of long-term debt are as follows: 1998 $1,851 1999 6 ------ $1,857 ======
The Company leases equipment under capital leases. These leases have imputed interest rates of approximately 11% 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 year 1995 upon completion of the Company's initial public offering, and the remaining unpaid balance bore 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 was 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, at April 5, 1997, $643 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 (the "Agreement") whereby it received a loan of approximately $10,000 from NFT V2, an entity affiliated with the Company's major stockholder and Chairman of the Board. Pursuant to the Agreement, the Company issued a long-term, secured subordinated note (the "Note") to NFT V2, which bore annual interest of 10.75% and was repayable in two equal installments, the first installment being due and payable in January 1997, the second in July 1997. Pursuant to the terms of the agreement, the Note was convertible at the lender's option into common stock of the Company 90 days after the date of the agreement at a price per common share equal to the then fair market value of such stock. Proceeds from the loan are being used for working capital purposes. During the second quarter of fiscal year 1996, the Company entered into an agreement with NFT V2, whereby pursuant to the terms of the agreement, the Company licensed certain software products to NFT V2 for commercial use and resale. As consideration for the licenses, the Company received $650 credit against amounts owing to NFT V2 under the Agreement and has access to certain product enhancements to be developed by NFT V2. On April 11, 1996, NFT V2 exercised its right to convert current principal and accrued interest outstanding of $10,113 into 5,992,665 common shares of the Company (see note 12). F-14 40 (7) INCOME TAXES The components of income (loss) before income taxes are as follows:
FISCAL YEARS ENDED ------------------ APRIL 5, APRIL 6, APRIL 1, 1997 1996 1995 ---- ---- ---- U.S. $ 1,010 $(44,178) $(24,125) Foreign 5,358 (4,862) 2,125 ------- -------- -------- $ 6,368 $(49,040) $(22,000) ======= ======== ========
Income tax expense (benefit) consists of the following:
CURRENT DEFERRED TOTAL ------- -------- ------ 1997: Federal $ 254 $ (176) $ 78 State 131 -- 131 Foreign 455 -- 455 ------- ------- ------ $ 840 $ (176) $ 664 ======= ======= ====== 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 ======= ======= ======
Reconciliations of the federal statutory tax rate to the effective tax rate are as follows:
FISCAL YEARS ENDED ------------------ APRIL 5, APRIL 6, APRIL 1, 1997 1996 1995 ---- ---- ---- Federal statutory rate 35.0% (35.0)% (34.0)% Effect of foreign operations (22.3) 3.1 4.6 State taxes, net of federal benefit 2.1 - - Change in valuation allowance (14.1) 33.1 44.7 Non-deductible expenses 6.7 3.2 2.2 Other 3.0 (4.0) (1.4) ----- ----- ----- 10.4% 0.4% 16.1% ===== ===== =====
F-15 41 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:
1997 1996 1995 ---- ---- ---- Deferred tax assets: Tax operating loss carryforwards $ 20,267 $ 20,158 $ 10,162 Tax basis of intangibles assets greater than book basis 5,565 5,804 -- Accrued expenses not deductible for tax purposes 3,362 3,101 3,552 Inventory reserves 1,226 1,715 3,795 Book depreciation greater than tax depreciation 1,873 1,758 -- Recognition of income reported on different methods for tax purposes than for financial reporting 80 188 186 Other (231) 140 (17) -------- -------- -------- 32,142 32,864 17,678 Less valuation allowance 31,182 32,080 15,828 -------- -------- -------- 960 784 1,850 -------- -------- -------- Deferred tax liabilities: Tax depreciation greater than book depreciation -- -- (364) Book basis of intangible assets greater than tax basis -- -- (702) Other -- -- -- -------- -------- -------- -- -- (1,066) -------- -------- -------- Net deferred tax asset $ 960 $ 784 $ 784 ======== ======== ========
At April 5, 1997, 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 $17,712, 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 5, 1997, the Company had federal NOL carryforwards, exclusive of the $17,712 SF2 NOL discussed above, of $40,194. These carryforwards expire beginning in fiscal year 2008. During fiscal year 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 5, 1997. The change in the valuation allowance from fiscal year 1996 to fiscal year 1997 was $898. The Internal Revenue Service ("IRS") is conducting an examination of the Company's fiscal years 1991 through 1995 federal income tax returns. On July 29, 1996, the Company received notice from the IRS of proposed adjustments for fiscal year 1991. The Company, after consultation with tax counsel, continues to believe in the propriety of its positions as set forth in its tax returns and has filed a letter of protest with the IRS appeals office. No findings have been issued for fiscal years 1992 through 1995. The Company believes the ultimate resolution of the examinations will not result in a material impact on the Company's consolidated financial position, results of operations or liquidity. F-16 42 (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, its 1992 Stock Incentive Plan and its 1996 Stock Incentive Plan, generally at prices equal to the estimated fair market value of the Company's common stock at date of grant. In the future, the Company intends to grant options only under its 1996 Stock Incentive Plan. The 1985 Incentive Stock Option Plan and the 1987 Incentive Stock Option Plan allow a maximum of 458,000 and 2,072,000 shares to be issued in the aggregate, respectively. In addition, in connection with the acquisition of SF2 (see note 11) the Company assumed outstanding options to purchase 236,000 shares under the 1988 Stock Option Plan of SF2. The 1992 Stock Incentive Plan provides for the grant by the Company of stock options, stock bonuses/purchases and stock appreciation rights to acquire up to an aggregate of not more than the greater of 5% of the authorized shares of the Company's common stock or 15% of the total number of shares outstanding as of the Company's prior fiscal year-end, the aggregate number of options and rights outstanding not to exceed 30% of the then outstanding common stock of the Company. The maximum number of shares available in any case under the plan is 4,079,960. The 1996 Stock Incentive Plan provides for the grant by the Company of incentive stock options or non-qualified stock options. The exercise price of the non-qualified stock options may not be less than 85% of the fair market value at the date of grant. The maximum number of shares is initially 2,250,000, increased each January 1, by a number equal to three percent of the number of shares outstanding as of the immediately preceding December 31. Notwithstanding the foregoing, the maximum number of incentive stock options is 2,250,000. 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 $14, $129 and $239 for fiscal years 1997, 1996 and 1995, 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 5, 1997 and April 6, 1996, the number of options exercisable was 1,252,000 and 779,000, respectively, and the weighted-average exercise price of those options was $1.89 and $1.90, respectively. The per share weighted-average fair value of stock options granted during fiscal years 1997 and 1996 was $1.58 and $1.02, respectively, on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions: 1997 - expected dividend yield of 0%, risk-free interest rate of 6.84%, volatility of its stock over the expected life of the options of .5 and an expected life of six years; 1996 - expected dividend yield of 0%, risk-free interest rate of 6.17%, volatility of its stock over the expected life of the options of .5 and an expected life of six years. F-17 43 The Company applies APB Opinion No. 25 in accounting for its stock option plans and, accordingly, no compensation cost has been recognized for its stock options in the financial statements. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under Statement 123, the Company's net income (loss) would have been the pro forma amounts indicated below:
1997 1996 ---- ---- Net income (loss) as reported $ 5,704 $ (49,219) ========== ========== Pro forma net income (loss) $ 4,601 $ (50,266) ========== ========== Net income (loss) per share as reported $ 0.21 $ (2.54) ========== ========== Pro forma net income (loss) per share $ 0.18 $ (2.59) ========== ==========
Pro forma net income (loss) reflects only options granted in fiscal year 1997 and fiscal year 1996. Therefore, the full impact of calculating compensation cost for stock options under Statement 123 is not reflected in the pro forma net income (loss) amounts presented above because compensation cost is reflected over the options' vesting period of four years and compensation cost for options granted prior to April 2, 1995 is not considered. A summary of all stock option transactions follows (in thousands, except per share data):
WEIGHTED AVERAGE SHARES EXERCISE PRICE ------ -------------- Options outstanding at April 2, 1994 1,899 $3.12 Granted 1,011 4.00 Exercised (751) .55 Canceled (218) 4.63 ----- Options outstanding at April 1, 1995 1,941 $1.40 Granted 2,262 1.92 Exercised (29) .88 Canceled (938) 2.05 ----- Options outstanding at April 6, 1996 3,236 $1.88 Granted 1,660 2.75 Exercised (311) 1.72 Canceled (359) 2.06 ----- Options outstanding at April 5, 1997 4,226 $2.22 =====
Stock Purchase Warrants At April 5, 1997, warrants to purchase 500,000 shares of the Company's common stock at a price of $2.00 per share were outstanding. The warrants were issued in July 1996 to an entity affiliated with the Company's major stockholder and Chairman of the Board in connection with collateralizing the Company's line of credit (see note 12), and expire July 1, 2001. At April 5, 1997 all such warrants were exercisable. At April 5, 1997, warrants to purchase 508,824 shares of the Company's common stock at a price of $2.25 per share were outstanding. The warrants were issued in June 1996 to an entity affiliated with the Company's major stockholder and Chairman of the Board in connection with non-refundable research and development funding (see note 12), and expire June 27, 2001. At April 5, 1997, all such warrants were exercisable. At April 5, 1997, 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 year 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 5, 1997, all such warrants under this agreement were exercisable. F-18 44 At April 5, 1997, 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 year 1994 to a principal stockholder in connection with the unsecured loan of $2,000 from the stockholder. At April 5, 1997, all such warrants were exercisable. Employee Stock Purchase Plan On March 31, 1994, the Company adopted the 1994 Employee Stock Purchase Plan (the "Purchase Plan") allowing for an aggregate of 500,000 shares of the Company's common stock. Under the Purchase Plan, the Board may authorize participation by eligible employees, including officers, in periodic six month offerings following the commencement of the Purchase Plan. The price of the Company's common stock purchased under the Purchase Plan will be equal to 85% of the lower of the fair market value of the Company's common stock at the commencement date of each offering period or the relevant purchase date. During fiscal years 1997 and 1996, 39,529 and 35,102 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 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 5, 1997, options to purchase 42,500 shares of common stock were outstanding, of which 38,750 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. (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. Future minimum lease payments at April 5, 1997 under all noncancelable operating facility and equipment leases for subsequent fiscal years are as follows: 1998 $ 3,908 1999 2,991 2000 2,065 2001 1,767 2002 1,523 Thereafter 2,000 ------- $14,254 =======
F-19 45 Rent expense totaled $4,237, $4,373 and $3,374, for fiscal years 1997, 1996 and 1995, 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 final approval for the settlement was granted by the Court on August 5, 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 consolidated financial position, results of operations or liquidity. (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. A summary of the Company's operations by geographic area is presented below:
1997 1996 1995 ---- ---- ---- Revenue: United States $ 124,704 $ 105,153 $ 94,879 Europe 41,503 35,795 49,104 Transfers between areas (12,480) (9,034) (16,666) --------- --------- --------- Total revenue $ 153,727 $ 131,914 $ 127,317 ========= ========= ========= Operating income (loss): United States $ (188) $ (43,005) $ (26,405) Europe 5,073 (1,399) 5,413 --------- --------- --------- Total operating income (loss) $ 4,885 $ (44,404) $ (20,992) ========= ========= ========= Identifiable assets: United States $ 59,037 $ 65,513 $ 73,244 Europe 24,555 18,510 29,207 --------- --------- --------- Total assets $ 83,592 $ 84,023 $ 102,451 ========= ========= =========
No single customer accounted for more than 10% of revenue in fiscal years 1997, 1996 and 1995. F-20 46 (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. Included in other income and net product revenue for fiscal years 1997 and 1996 are $3,750 and $1,250, and $2,000 and $500, respectively, related to this agreement. Included in deferred income at April 5, 1997 and April 6, 1996, is $3,750 related to this agreement. In addition, the Company also received an irrevocable, non-cancelable, perpetual and royalty-free license to exploit, market, and sell the technology protected under the aforementioned patents. Pursuant to the terms and conditions of the agreement, this license will terminate in the event of a change in control of the Company involving certain acquirers. As part of the agreement, the Company and EMC granted to each other the license to exploit, market and sell the technology associated with each of their respective existing and future patents arising from any patent applications in existence as of the effective date of the agreement for a period of five years. National Peripherals, Inc. Effective April 2, 1995, the Company acquired all the outstanding stock of National Peripherals, Inc. ("NPI"), a privately held provider of cross-platform RAID-based storage solutions for the Open Systems computing environment. Consideration paid in the NPI acquisition included: (a) payments of $2,608 in cash to NPI and its stockholders, (b) promissory notes in the aggregate amount of $2,000 bearing 6% interest per annum and payable in two equal annual installments beginning April 1996 (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 Board of Directors approved the payment of the contingent $1,000 payment during the fourth quarter of fiscal year 1997. The accelerated timing of the payment was based on the over-achievement of the performance criteria as set forth in the amended NPI stock purchase agreement. 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 =======
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 year 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. During fiscal year 1997, the Company further increased goodwill $1,000 as a result of the contingent payment made based on certain performance criteria pursuant to the terms of the acquisition agreement. The amortization of the goodwill will result in quarterly and annual operating charges of approximately $324 and $1,296, respectively. F-21 47 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 year 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. 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 ========
F-22 48 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 year 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 year 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 year 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, 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 and acquisition costs aggregating $15,616. In the fourth quarter of fiscal year 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 Effective April 7, 1996, the Company entered into an agreement with NFT Ventures, Inc. ("NFT"), an entity affiliated with the Company's major stockholder and Chairman of the Board, whereby NFT agreed to provide the Company with up to $2,400 of non-refundable research and development funding based on actual research and development expenses incurred in connection with new and enhanced Backup-UNET software products, the RLM Software Products Group and the Open Media Products Group. The Company has received $1,628 under this agreement but does not anticipate any additional funding under this agreement. The consideration NFT received for the funding commitment included: (a) an irrevocable, worldwide, nonexclusive license to develop, market and sell certain defined new or substantially enhanced software products developed by the Company; (b) the right to royalty payments based on F-23 49 the revenue recognized by the Company from sale of the defined software products that are sold within four years of the effective date of the agreement; and (c) warrants to purchase up to 750,000 shares of the Company's common stock with an exercise price of $2.25 per share. The warrants expire on June 27, 2001. Based on the total of $1,628 of NRE funding received, warrants to purchase up to 508,824 shares of the Company's common stock have been issued. On July 19, 1995, the Company entered into an agreement (the "Agreement") whereby it received a loan of approximately $10,000 from NFT V2, an entity affiliated with the Company's major stockholder and Chairman of the Board. Pursuant to the Agreement, the Company issued a long-term, secured subordinated note (the "Note") to NFT V2, which bears annual interest of 10.75% and was repayable in two equal installments, the first installment being due and payable in January 1997, the second in July 1997. Pursuant to the terms of the agreement, the Note was convertible at the lender's option into common stock of the Company 90 days after the date of the agreement at a price per common share equal to the then fair market value of such stock. Proceeds from the loan are being used for working capital purposes. During the second quarter of fiscal year 1996, the Company entered into an agreement with NFT V2, whereby pursuant to the terms of the agreement, the Company licensed certain software products to NFT V2 for commercial use and resale. As consideration for the licenses, the Company received $650 credit against amounts owing to NFT V2 under the Agreement and has access to certain product enhancements to be developed by NFT V2. On April 11, 1996, NFT V2 exercised its right to convert current principal and accrued interest outstanding thereunder of $10,113, under the Note, into 5,992,665 shares of the Company's common stock at the current market price of $1.6875 per share on the day of conversion. After giving effect to the conversion, NFT V2 and related entities hold approximately 13,699,461 shares of the Company's common stock, or approximately 54 percent of shares outstanding at the date of conversion. The common stock provided to NFT V2 as part of the conversion was not registered under the Securities Act of 1933, and NFT V2 has indicated that it is acquiring the shares for investment purposes only. In May 1996, the Company's line of credit agreement with Greyrock Business Credit was amended to increase the line of credit to $30,000 based on additional pledged collateral by an affiliate of NFT, an entity affiliated with the Company's major stockholder and Chairman of the Board. As consideration for the guaranty, the Company issued warrants to purchase up to 500,000 shares of the Company's common stock at a price of $2.00 per share (see notes 6 and 8). (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 years 1997, 1996 and 1995, 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 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 5, 1997, the Company's total remaining obligations relating to the non-recurring charges were $1,214 and are included in accrued liabilities. F-24 50 (15) QUARTERLY FINANCIAL DATA (UNAUDITED) Selected quarterly financial data for continuing operations for fiscal years 1997 and 1996 are as follows:
Net Income (Loss) Per Common & Net Common- Total Revenues Gross Profit Income (Loss) Equivalent Share -------------- ------------ ------------- ---------------- 1997: Fourth quarter $ 42,131 $14,543 $ 2,249 $ 0.08 Third quarter 38,908 12,658 1,767 0.07 Second quarter 36,511 11,597 1,231 0.05 First quarter 36,177 11,126 457 0.02 -------- ------- -------- Total $153,727 $49,924 $ 5,704 ======== ======= ======== 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) ======== ======= ========
During the fourth quarter of fiscal year 1996, the Company recorded approximately $19,806 of charges related to asset write-downs and increased inventory reserves. 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. 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. F-25 51 (16) SUBSEQUENT EVENT (UNAUDITED) Effective June 12, 1997, the Company entered into an agreement with Greyrock Business Credit whereby under an asset secured domestic line of credit, the Company may borrow up to $30,000, limited by the value of pledged collateral. As part of the agreement, Silicon Valley Bank has a participation interest. The agreement allows the Company to borrow at a blended rate of prime rate plus 1.67%. The initial term of the agreement is for one year and automatically and continuously renews for a subsequent year, unless terminated by either party per the agreement. F-26 52 SCHEDULE II MTI TECHNOLOGY CORPORATION VALUATION AND QUALIFYING ACCOUNTS FOR THE FISCAL YEARS ENDED APRIL 5, 1997, APRIL 6, 1996, APRIL 1, 1995 (IN THOUSANDS)
CHARGED TO BALANCE BALANCE AT REVENUE, AT BEGINNING COSTS AND END OF DESCRIPTION OF PERIOD EXPENSES(1) DEDUCTIONS PERIOD ----------- --------- ----------- ---------- ------ Year ended April 5, 1997 Allowance for doubtful accounts and sales returns $5,437 $ 4,165 $ (319) $9,283 ====== ======== ======= ====== Allowance for inventory obsolescence $3,944 $ 3,238 $(3,687) $3,495 ====== ======== ======= ====== Year ended April 6, 1996 Allowance for doubtful accounts and sales returns $9,986 $ (4,395)(2) $ (154) $5,437 ====== ======== ======= ====== Allowance for inventory obsolescence $8,613 $ 4,056 $(8,725) $3,944 ====== ======== ======= ====== 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 ====== ======== ======= ======
(1) The allowance for sales returns is recorded as a charge to revenue, the allowance for doubtful accounts is charged to selling, general and administrative expenses, and the allowance for inventory obsolescence is charged to product cost of revenue. (2) Includes amounts related to the recognition of receivables whose related revenue was not recognized until fiscal year 1996. S-1 53 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - ------ ----------- 10.48 Loan and Security Agreement between the Company and Greyrock Business Credit, dated May 23, 1997, and Schedule thereto. 21.1 Subsidiaries of the Company. 23.1 Consent of KPMG Peat Marwick LLP. 27 Financial Data Schedule
EX-10.48 2 LOAN AND SECURITY AGREEMENT MAY 23, 1997 1 EXHIBIT 10.48 - -------------------------------------------------------------------------------- Greyrock Business Credit A NationsBank Company LOAN AND SECURITY AGREEMENT BORROWER: MTI TECHNOLOGY CORPORATION ADDRESS: 4905 E. LA PALMA AVENUE ANAHEIM, CALIFORNIA 92807 Date: May 23, 1997 This Loan and Security Agreement is entered into on the above date between GREYROCK BUSINESS CREDIT, a Division of NationsCredit Commercial Corporation ("GBC"), whose address is 10880 Wilshire Boulevard, Suite 950, Los Angeles, California 90024 and the borrower named above ("Borrower"), whose chief executive office is located at the above address ("Borrower's Address"). The Schedule to this Agreement (the "Schedule") being signed concurrently is an integral part of this Agreement. (Definitions of certain terms used in this Agreement are set forth in Section 8 below.) 1. LOANS. 1.1 LOANS. GBC will make loans to Borrower (the "Loans"), (LANGUAGE INTENTIONALLY OMITTED), up to the amounts (the "Credit Limit") shown on the Schedule, provided no Default or Event of Default has occurred and is continuing. If at any time or for any reason the total of all outstanding Loans and all other Obligations exceeds the Credit Limit, Borrower shall immediately pay the amount of the excess to GBC, [ * ]*. *UPON ONE BUSINESS DAY'S NOTICE FROM GBC 1.2 INTEREST. All Loans and all other monetary Obligations shall bear interest at the rate shown on the Schedule, except where expressly set forth to the contrary in this Agreement or in another written agreement signed by GBC and Borrower. Interest shall be payable monthly, on the last day of the month. Interest may, in GBC's discretion, be charged to Borrower's loan account, and the same shall thereafter bear interest at the same rate as the other Loans. 1.3 FEES. Borrower shall pay GBC the fee(s) shown on the Schedule, which are in addition to all interest and other sums payable to GBC and are not refundable. 2. SECURITY INTEREST. 2.1 SECURITY INTEREST. To secure the payment and performance of all of the Obligations when due, Borrower hereby grants to GBC a security interest in all of Borrower's interest in the following, whether now owned or hereafter acquired, and wherever located (collectively, the "Collateral"): All Inventory, Equipment, Receivables, Investment Property and General Intangibles*, including, without limitation, all of Borrower's Deposit Accounts, all money, all collateral in which GBC is granted a security interest pursuant to any other present or future agreement, all property now or at any time in the future in GBC's possession, and all proceeds (including proceeds of any insurance policies, proceeds of letters of credit, proceeds of proceeds and claims against third parties), all products of the foregoing, and all books and records related to any of the foregoing. * GBC'S SECURITY INTEREST IN ANY PRESENT OR FUTURE TECHNOLOGY (INCLUDING PATENTS, TRADE SECRETS, AND OTHER TECHNOLOGY) SHALL BE SUBJECT TO ANY LICENSES OR RIGHTS NOW OR IN THE FUTURE GRANTED BY THE BORROWER TO ANY THIRD PARTIES IN THE ORDINARY COURSE OF BORROWER'S BUSINESS; PROVIDED THAT IF THE BORROWER PROPOSES TO SELL, LICENSE OR GRANT ANY OTHER RIGHTS WITH RESPECT TO ANY MATERIAL TECHNOLOGY OF BORROWER IN A TRANSACTION THAT, IN SUBSTANCE, CONVEYS A MAJOR PART OF THE ECONOMIC VALUE OF THAT TECHNOLOGY, GBC SHALL FIRST BE REQUESTED TO RELEASE ITS SECURITY INTEREST IN THE SAME, AND GBC MAY WITHHOLD SUCH RELEASE IN ITS REASONABLE DISCRETION. TRANSFERS OF TECHNOLOGY PURSUANT TO THE -1- Language indicated as being shown by strike out in the typeset document is enclosed in brackets [ * ] in the electronic format. 2 GREYROCK BUSINESS CREDIT LOAN AND SECURITY AGREEMENT - -------------------------------------------------------------------------------- SETTLEMENT AGREEMENT BETWEEN BORROWER AND DIGITAL EQUIPMENT CORPORATION DATED DECEMBER 4, 1992 SHALL NOT REQUIRE THE CONSENT OF GBC. 3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE BORROWER. In order to induce GBC to enter into this Agreement and to make Loans, Borrower represents and warrants to GBC as follows, and Borrower covenants that the following representations will continue to be true, and that Borrower will at all times comply with all of the following covenants: 3.1 CORPORATE EXISTENCE AND AUTHORITY. Borrower, if a corporation, is and will continue to be, duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation. Borrower is and will continue to be qualified and licensed to do business in all jurisdictions in which any failure to do so would have a material adverse effect on Borrower. The execution, delivery and performance by Borrower of this Agreement, and all other documents contemplated hereby (i) have been duly and validly authorized, (ii) are enforceable against Borrower in accordance with their terms (except as enforcement may be limited by equitable principles and by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to creditors' rights generally), (iii) do not violate Borrower's articles or certificate of incorporation, or Borrower's by-laws, or any law or any material agreement or instrument which is binding upon Borrower or its property, and (iv) do not constitute grounds for acceleration of any material indebtedness or obligation under any material agreement or instrument which is binding upon Borrower or its property. 3.2 NAME; TRADE NAMES AND STYLES. The name of Borrower set forth in the heading to this Agreement is its correct name. Listed on the Schedule are all prior names of Borrower and all of Borrower's present and prior trade names. Borrower shall give GBC 30* days prior written notice before changing its name or doing business under any other name. Borrower has complied, and will in the future comply, with all laws relating to the conduct of business under a fictitious business name. *10 3.3 PLACE OF BUSINESS; LOCATION OF COLLATERAL. The address set forth in the heading to this Agreement is Borrower's chief executive office. In addition, Borrower has places of business and Collateral is located only at the locations set forth on the Schedule. Borrower will give GBC at least 30* days' prior written notice before opening any additional place of business, changing its chief executive office, or moving any of the Collateral to a location other than Borrower's Address or one of the locations set forth on the Schedule. *10 3.4 TITLE TO COLLATERAL; PERMITTED LIENS. Borrower is now, and will at all times in the future be, the sole owner of all the Collateral, except for items of Equipment which are leased by Borrower*. The Collateral now is and will remain free and clear of any and all liens, charges, security interests, encumbrances and adverse claims, except for Permitted Liens. GBC now has, and will continue to have, a first-priority perfected and enforceable security interest in all of the Collateral**, subject only to the Permitted Liens, and Borrower will at all times defend GBC and the Collateral against all claims of others. So long as any Loan is outstanding which is a term loan, none of the Collateral now is or will be affixed to any real property in such a manner, or with such intent, as to become a fixture. Borrower is not and will not become a lessee under any real property lease pursuant to which the lessor may obtain any rights in any of the Collateral and no such lease now prohibits, restrains, impairs or will prohibit, restrain or impair Borrower's right to remove any Collateral from the leased premises. Whenever any Collateral is located upon premises in which any third party has an interest (whether as owner, mortgagee, beneficiary under a deed of trust, lien or otherwise), Borrower shall, whenever requested by GBC, use its best efforts to cause such third party to execute and deliver to GBC, in form acceptable to GBC, such waivers and subordinations as GBC shall specify, so as to ensure that GBC's rights in the Collateral are, and will continue to be, superior to the rights of any such third party. Borrower will keep in full force and effect, and will comply*** with all the terms of, any lease of real property where any of the Collateral now or in the future may be located. *, EXCEPT FOR THE DEC 4000AXP COMPUTER WHICH IS ON LOAN TO BORROWER PURSUANT TO THE SETTLEMENT AGREEMENT BETWEEN BORROWER AND DIGITAL EQUIPMENT CORPORATION DATED DECEMBER 4, 1992 ** (IN WHICH A SECURITY INTEREST CAN BE PERFECTED BY THE FILING OF A FINANCING STATEMENT OR, IN THE CASE OF ANY DEPOSIT ACCOUNT, BY NOTICE) *** IN ALL MATERIAL RESPECTS -2- 3 GREYROCK BUSINESS CREDIT LOAN AND SECURITY AGREEMENT - -------------------------------------------------------------------------------- 3.5 MAINTENANCE OF COLLATERAL. Borrower will maintain the *Collateral in good working condition, ordinary wear and tear excepted, and Borrower will not use the Collateral for any unlawful purpose. Borrower will immediately advise GBC in writing of any material loss or damage to the Collateral. Borrower will maintain the validity of, and otherwise maintain, preserve and protect, its patents, trademarks, copyrights and other intellectual property in accordance with prudent business practices. * EQUIPMENT 3.6 BOOKS AND RECORDS. Borrower has maintained and will maintain at Borrower's Address complete and accurate books and records, comprising an accounting system in accordance with generally accepted accounting principles. 3.7 FINANCIAL CONDITION, STATEMENTS AND REPORTS. All financial statements now or in the future delivered to GBC have been, and will be, prepared in conformity with generally accepted accounting principles and now and in the future will [ * ]* the financial condition of Borrower, at the times and for the periods therein stated. Between the last date covered by any such statement provided to GBC and the date hereof, there has been no material adverse change in the financial condition or business of Borrower. Borrower is now and will continue to be solvent. *PRESENT FAIRLY, SUBJECT TO YEAR-END AUDIT ADJUSTMENTS, 3.8 TAX RETURNS AND PAYMENTS; PENSION CONTRIBUTIONS. Borrower has timely filed, and will timely file*, all tax returns and** reports required by applicable law, and Borrower has timely paid, and will [ * ] pay***, all applicable taxes, assessments, deposits and contributions now or in the future owed by Borrower. Borrower may, however, defer payment of any contested taxes, provided that Borrower (i) in good faith contests Borrower's obligation to pay the taxes by appropriate proceedings promptly and diligently instituted and conducted, (ii) notifies GBC in writing of the commencement of, and any material development in, the proceedings, and (iii) posts bonds or takes any other steps required to keep the contested taxes from becoming a lien upon any of the Collateral. **** Borrower is unaware of any claims or adjustments proposed for any of Borrower's prior tax years which could result in additional taxes becoming due and payable by Borrower. Borrower has paid, and shall continue to pay all amounts necessary to fund all present and future pension, profit sharing and deferred compensation plans in accordance with their terms, and Borrower has not and will not withdraw from participation in, permit partial or complete termination of, or permit the occurrence of any other event with respect to, any such plan which could result in any***** liability of Borrower, including any liability to the Pension Benefit Guaranty Corporation or any other governmental agency. Borrower shall, at all times, utilize the services of an outside payroll service providing for the automatic deposit of all payroll taxes payable by Borrower. *, INCLUDING ANY APPLICABLE EXTENSIONS ** MATERIAL *** PRIOR TO DELINQUENCY **** EXCEPT AS OTHERWISE DISCLOSED TO GBC IN WRITING, ***** MATERIAL 3.9 COMPLIANCE WITH LAW. Borrower has complied, and will comply, in all material respects, with all provisions of all applicable laws and regulations, including, but not limited to, those relating to Borrower's ownership of real or personal property, the conduct and licensing of Borrower's business, and all environmental matters. 3.10 LITIGATION. Except as disclosed in the Schedule, there is no claim, suit, litigation, proceeding or investigation pending or (to best of Borrower's knowledge) threatened by or against or affecting Borrower in any court or before any governmental agency (or any basis therefor known to Borrower) which may result, either separately or in the aggregate, in any material adverse change in the financial condition or business of Borrower, or in any material impairment in the ability of Borrower to carry on its business in substantially the same manner as it is now being conducted. Borrower will promptly inform GBC in writing of any claim, proceeding, litigation or investigation in the future threatened or instituted by or against Borrower involving any single claim of $50,000* or more, or involving $100,000** or more in the aggregate. * $100,000 ** $200,000 -3- Language indicated as being shown by strike out in the typeset document is enclosed in brackets [ * ] in the electronic format. 4 GREYROCK BUSINESS CREDIT LOAN AND SECURITY AGREEMENT - -------------------------------------------------------------------------------- 3.11 USE OF PROCEEDS. All proceeds of all Loans shall be used solely for lawful business purposes. 4. RECEIVABLES AND INVESTMENT PROPERTY. 4.1 REPRESENTATIONS RELATING TO RECEIVABLES. Borrower represents and warrants to GBC that each Receivable with respect to which Loans are requested by Borrower shall, on the date each Loan is requested and made, represent an undisputed, bona fide, existing, unconditional obligation of the Account Debtor created by the sale, delivery, and acceptance of goods or the rendition of services, in the ordinary course of Borrower's business. 4.2 REPRESENTATIONS RELATING TO DOCUMENTS AND LEGAL COMPLIANCE. Borrower represents and warrants to GBC as follows: All statements made and all unpaid balances appearing in all invoices, instruments and other documents evidencing the Receivables are and shall be true and correct and all such invoices, instruments and other documents and all of Borrower's books and records are and shall be genuine and in all respects what they purport to be, and all signatories and endorsers have the capacity to contract. All sales and other transactions underlying or giving rise to each Receivable shall comply with all applicable laws and governmental rules and regulations. All* signatures and indorsements on all documents, instruments, and agreements relating to all Receivables are and shall be genuine, and all such documents, instruments and agreements are and shall be legally enforceable in accordance with their terms**. *TO THE BEST OF BORROWER'S KNOWLEDGE, ALL **, EXCEPT AS ENFORCEMENT MAY BE LIMITED BY BANKRUPTCY, INSOLVENCY, REORGANIZATION, MORATORIUM, AND OTHER SIMILAR LAWS RELATING TO OR AFFECTING CREDITORS' RIGHTS GENERALLY AND BY GENERAL EQUITY PRINCIPLES 4.3 SCHEDULES AND DOCUMENTS RELATING TO RECEIVABLES AND INVESTMENT PROPERTY. Borrower shall deliver to GBC transaction reports and loan requests, schedules and assignments of all Receivables, and schedules of collections, all on GBC's standard forms; provided, however, that Borrower's failure to execute and deliver the same shall not affect or limit GBC's security interest and other rights in all of Borrower's Receivables, nor shall GBC's failure to advance or lend against a specific Receivable affect or limit GBC's security interest and other rights therein. Together with each such schedule and assignment, or later if requested by GBC, Borrower shall furnish GBC with copies (or, at GBC's request, originals) of all contracts, orders, invoices, and other similar documents, and all original shipping instructions, delivery receipts, bills of lading, and other evidence of delivery, for any goods the sale or disposition of which gave rise to such Receivables, and Borrower warrants the genuineness of all of the foregoing. Borrower shall also furnish to GBC an aged accounts receivable trial balance in such form and at such intervals as GBC shall* request. In addition, Borrower shall deliver to GBC the originals of all instruments, chattel paper, security agreements, guarantees and other documents and property evidencing or securing any Receivables, immediately upon receipt thereof and in the same form as received, with all necessary indorsements, and, upon the request of GBC, Borrower shall deliver to GBC all letters of credit and also all certificated securities with respect to any Investment Property, with all necessary indorsements, and obtain such account control agreements with securities intermediaries and take such other action with respect to any Investment Property, as GBC shall request, in form and substance satisfactory to GBC. Upon request of GBC Borrower additionally shall** obtain consents from any letter of credit issuers with respect to the assignment to GBC of any letter of credit proceeds. * REASONABLY ** USE ITS BEST EFFORTS TO 4.4 COLLECTION OF RECEIVABLES AND INVESTMENT PROPERTY INCOME. Borrower shall have the right to collect all Receivables and retain all Investment Property payments and distributions, unless and until a Default or an Event of Default has occurred. Borrower shall hold all payments on, and proceeds of, and distributions with respect to, Receivables and Investment Property in trust for GBC, and Borrower shall deliver all such payments, proceeds and distributions to GBC, within one business day after receipt of the same, in their original form, duly endorsed, to be applied to the Obligations in such order as GBC shall determine. Upon the request of GBC, any such distributions and payments with respect to any Investment Property held in any securities account shall be held and retained in such securities account as part of the Collateral. 4.5 DISPUTES. Borrower shall notify GBC promptly of all disputes* or claims relating to Receivables** on the regular reports to GBC. Borrower shall not forgive, or settle any Receivable for less than payment in full, or agree to do any of the foregoing, except that Borrower may do so, provided that: (i) Borrower does so in good faith, in a commercially reasonable manner, in the -4- 5 GREYROCK BUSINESS CREDIT LOAN AND SECURITY AGREEMENT - -------------------------------------------------------------------------------- ordinary course of business, and in arm's length transactions, which are reported to GBC on the regular reports provided to GBC; (ii) no Default or Event of Default has occurred and is continuing; and (iii) taking into account all such settlements and forgiveness, the total outstanding Loans and other Obligations will not exceed the Credit Limit. * IN EXCESS OF $50,000 ** (INCLUDING ALL DISPUTES OR CLAIMS REGARDING RECEIVABLES WITH RESPECT TO WHICH ANY LOAN WAS MADE) 4.6 RETURNS. Provided no Event of Default has occurred and is continuing, if any Account Debtor returns any Inventory to Borrower in the ordinary course of its business, Borrower shall promptly determine the reason for such return and promptly issue a credit memorandum to the Account Debtor in the appropriate amount (*sending a copy to GBC). In the event any attempted return occurs after the occurrence of any Event of Default, Borrower shall (i) not accept any return** without GBC's prior written consent, (ii) hold the returned Inventory in trust for GBC, (iii) segregate all returned Inventory from all of Borrower's other property, (iv) conspicuously label the returned Inventory as GBC's property, and (v) immediately notify GBC of the return of any*** Inventory, specifying the reason for such return, the location and condition of the returned Inventory, and on GBC's request deliver such returned Inventory to GBC.**** * AND, UPON REQUEST OF GBC, ** OF MATERIAL INVENTORY *** MATERIAL **** MATERIAL INVENTORY MEANS INVENTORY WITH A VALUE IN EXCESS OF $50,000. 4.7 VERIFICATION. GBC may, from time to time, verify directly with the respective Account Debtors the validity, amount and other matters relating to the Receivables, by means of mail, telephone or otherwise, either in the name of Borrower or GBC or such other name as GBC may choose, and GBC or its designee may, at any time*, notify Account Debtors that it has a security interest in the Receivables. * AFTER THE OCCURRENCE OF AN EVENT OF DEFAULT WHICH IS CONTINUING 4.8 NO LIABILITY. GBC shall not under any circumstances be responsible or liable for any shortage or discrepancy in, damage to, or loss or destruction of, any goods, the sale or other disposition of which gives rise to a Receivable, or for any error, act, omission, or delay of any kind occurring in the settlement, failure to settle, collection or failure to collect any Receivable, or for settling any Receivable in good faith for less than the full amount thereof, nor shall GBC be deemed to be responsible for any of Borrower's obligations under any contract or agreement giving rise to a Receivable. Nothing herein shall, however, relieve GBC from liability for its own gross negligence or willful misconduct. 5. ADDITIONAL DUTIES OF THE BORROWER. 5.1 INSURANCE. Borrower shall, at all times, insure all of the tangible personal property Collateral and carry such other business insurance, with insurers reasonably acceptable to GBC, in such form and amounts as GBC may reasonably require, and Borrower shall provide evidence of such insurance to GBC, so that GBC is satisfied that such insurance is, at all times, in full force and effect. All such insurance policies shall name GBC as an additional loss payee, and shall contain a lenders loss payee endorsement in form reasonably acceptable to GBC. Upon receipt of the proceeds of any such insurance, GBC shall apply such proceeds in reduction of the Obligations as GBC shall determine in its sole discretion, except that, provided no Default or Event of Default has occurred and is continuing, GBC shall release to Borrower insurance proceeds with respect to Equipment totaling less than $[ * ]*, which shall be utilized by Borrower for the replacement of the Equipment with respect to which the insurance proceeds were paid. GBC may require reasonable assurance that the insurance proceeds so released will be so used. If Borrower fails to provide or pay for any insurance, GBC may, but is not obligated to, obtain the same at Borrower's expense. Borrower shall promptly deliver to GBC copies of all reports made to insurance companies. *$750,000 5.2 REPORTS. Borrower, at its expense, shall provide GBC with the written reports set forth in the Schedule, and such other written reports with respect to Borrower (including budgets, sales projections, operating plans and other financial documentation), as GBC shall from time to time reasonably specify. 5.3 ACCESS TO COLLATERAL, BOOKS AND RECORDS. At reasonable times, and on one business day's notice, -5- Language indicated as being shown by strike out in the typeset document is enclosed in brackets [ * ] in the electronic format. 6 GREYROCK BUSINESS CREDIT LOAN AND SECURITY AGREEMENT - -------------------------------------------------------------------------------- GBC, or its agents, shall have the right to inspect the Collateral, and the right to audit and copy Borrower's books and records. GBC shall take reasonable steps to keep confidential all information obtained in any such inspection or audit, but GBC shall have the right to disclose any such information to its auditors, regulatory agencies, and attorneys, and pursuant to any subpoena or other legal process. [ * ]* Borrower will not enter into any agreement with any accounting firm, service bureau or third party to store Borrower's books or records at any location other than Borrower's Address, without first obtaining GBC's written consent, which may be conditioned upon such accounting firm, service bureau or other third party agreeing to give GBC the same rights with respect to access to books and records and related rights as GBC has under this Agreement. *THE FOREGOING AUDITS AND INSPECTIONS SHALL BE AT GBC'S EXPENSE EXCEPT THAT, AFTER THE OCCURRENCE AND DURING THE CONTINUANCE OF ANY DEFAULT OR EVENT OF DEFAULT, SUCH AUDITS AND INSPECTIONS SHALL BE AT BORROWER'S EXPENSE. 5.4 REMITTANCE OF PROCEEDS. All proceeds arising from the sale or other disposition of any Collateral shall be delivered, in kind, by Borrower to GBC in the original form in which received by Borrower not later than the following business day after receipt by Borrower, to be applied to the Obligations in such order as GBC shall determine; provided that, if no Default or Event of Default has occurred and is continuing, and if no term loan is outstanding hereunder, then Borrower shall not be obligated to remit to GBC the proceeds of the sale of Equipment which is sold in the ordinary course of business, in a good-faith arm's length transaction. Except for the proceeds of the sale of Equipment as set forth above, Borrower shall not commingle proceeds of Collateral with any of Borrower's other funds or property, and shall hold such proceeds separate and apart from such other funds and property and in an express trust for GBC. Nothing in this Section limits the restrictions on disposition of Collateral set forth elsewhere in this Agreement. 5.5 NEGATIVE COVENANTS. Except as may be permitted in the Schedule, Borrower shall not, without GBC's prior written consent, do any of the following: (i) merge or consolidate with another corporation or entity*; (ii) acquire any assets, except in the ordinary course of business**; (iii) enter into any other transaction outside the ordinary course of business; (iv) sell or transfer any Collateral, except that, provided no Default or Event of Default has occurred and is continuing, Borrower may (a) sell finished Inventory in the ordinary course of Borrower's business, and (b) if no term loan is outstanding hereunder, sell Equipment in the ordinary course of business, in good-faith arm's length transactions; (v) store any Inventory or other Collateral with any warehouseman or other third party; (vi) sell any Inventory on a sale-or-return, guaranteed sale, consignment, or other contingent basis; (vii) make any loans of any money or other assets***; (viii) incur any debts, outside the ordinary course of business, which would have a material, adverse effect on Borrower or on the prospect of repayment of the Obligations; (ix) guarantee or otherwise become liable with respect to the obligations of another party or entity****; (x) pay or declare any dividends on Borrower's stock (except for dividends payable solely in stock of Borrower); (xi) redeem, retire, purchase or otherwise acquire, directly or indirectly, any of Borrower's stock*****; (xii) make any change in Borrower's capital structure which would have a material adverse effect on Borrower or on the prospect of repayment of the Obligations; or (xiii) dissolve or elect to dissolve; or (xiv) agree to do any of the foregoing.O *, EXCEPT THAT BORROWER MAY MERGE OR CONSOLIDATE WITH ANOTHER CORPORATION IF BORROWER IS THE SURVIVING CORPORATION IN THE MERGER, AND THE AGGREGATE VALUE OF THE ASSETS ACQUIRED IN THE MERGER DOES NOT EXCEED 25% OF BORROWER'S TANGIBLE NET WORTH AS OF THE END OF THE MONTH PRIOR TO THE EFFECTIVE DATE OF THE MERGER, AND THE ASSETS OF THE CORPORATION ACQUIRED IN THE MERGER ARE NOT SUBJECT TO ANY LIENS OR ENCUMBRANCES, EXCEPT LIENS THAT WOULD CONSTITUTE PERMITTED LIENS AFTER GIVING EFFECT TO SUCH MERGER **, EXCEPT THAT BORROWER MAY ACQUIRE ASSETS OUTSIDE THE ORDINARY COURSE OF BUSINESS IF THE AGGREGATE PURCHASE PRICE OF SUCH ASSETS DOES NOT EXCEED 25% OF BORROWER'S TANGIBLE NET WORTH AS OF THE END OF THE MONTH PRIOR TO THE EFFECTIVE DATE OF THE ACQUISITION -6- Language indicated as being shown by strike out in the typeset document is enclosed in brackets [ * ] in the electronic format. 7 GREYROCK BUSINESS CREDIT LOAN AND SECURITY AGREEMENT - -------------------------------------------------------------------------------- ***, EXCEPT FOR (A) LOANS TO EMPLOYEES IN AN AGGREGATE AMOUNT AT ANY ONE TIME OUTSTANDING NOT TO EXCEED $250,000, (B) MISCELLANEOUS AMOUNTS IN AN AGGREGATE AMOUNT AT ANY ONE TIME OUTSTANDING NOT TO EXCEED $500,000, (C) CREDIT SALES TO ACCOUNT DEBTORS IN THE ORDINARY COURSE OF BUSINESS, AND (D) LOANS OF DEMONSTRATION EQUIPMENT IN THE ORDINARY COURSE OF BUSINESS ****, AND EXCEPT FOR GUARANTEES OF LOANS TO EMPLOYEES IN AN AGGREGATE AMOUNT AT ANY ONE TIME OUTSTANDING NOT TO EXCEED $250,000, AND EXCEPT FOR GUARANTEES OF MISCELLANEOUS AMOUNTS IN AN AGGREGATE AMOUNT AT ANY ONE TIME OUTSTANDING NOT TO EXCEED $500,000, AND EXCEPT FOR GUARANTEES OF OBLIGATIONS OF BORROWER'S WHOLLY OWNED SUBSIDIARIES IN THE ORDINARY COURSE OF BUSINESS ***** (EXCEPT THAT BORROWER MAY REPURCHASE OR REDEEM SHARES OF ITS CAPITAL STOCK PURSUANT TO EMPLOYEE STOCK OPTION PLANS FOR AN AGGREGATE PRUCHASE PRICE NOT TO EXCEED $50,000 PER FISCAL YEAR) + TRANSACTIONS EXCEPTED FROM THE FOREGOING NEGATIVE COVENANTS ARE ONLY PERMITTED IF NO EVENT OF DEFAULT HAS OCCURRED AND IS CONTINUING AND IF NO DEFAULT OR EVENT OF DEFAULT WOULD OCCUR AS A RESULT OF SUCH TRANSACTION. FOR PURPOSES OF THE FOREGOING, "TANGIBLE NET WORTHO MEANS THE EXCESS OF TOTAL ASSETS OVER TOTAL LIABILITIES, DETERMINED IN ACCORDANCE WITH GAAP, EXCLUDING HOWEVER ALL ASSETS WHICH WOULD BE CLASSIFIED AS INTANGIBLE ASSETS UNDER GAAP, INCLUDING, WITHOUT LIMITATION GOODWILL, LICENSES, PATENTS, TRADEMARKS, TRADE NAMES, COPYRIGHTS, AND FRANCHISES. "LIABILITIESO FOR PURPOSES OF THE FOREGOING DO NOT INCLUDE INDEBTEDNESS WHICH IS SUBORDINATED TO THE INDEBTEDNESS TO GBC UNDER A SUBORDINATION AGREEMENT IN FORM SPECIFIED BY GBC OR BY LANGUAGE IN THE INSTRUMENT EVIDENCING THE INDEBTEDNESS WHICH IS ACCEPTABLE TO GBC. 5.6 LITIGATION COOPERATION. Should any third-party suit or proceeding be instituted by or against GBC with respect to any Collateral or in any manner relating to Borrower, Borrower shall, without expense to GBC, make available Borrower and its officers, employees and agents, and Borrower's books and records, without charge, to the extent that GBC may deem them reasonably necessary in order to prosecute or defend any such suit or proceeding. 5.7 NOTIFICATION OF CHANGES. Borrower will promptly notify GBC in writing of any change in its officers or directors, the opening of any new bank account or other deposit account, the opening of any new securities account, and any material adverse change in the business or financial affairs of Borrower. 5.8 FURTHER ASSURANCES. Borrower agrees, at its expense, on request by GBC, to execute all documents and take all actions, as GBC may deem reasonably necessary or useful in order to perfect and maintain GBC's perfected security interest in the Collateral*, and in order to fully consummate the transactions contemplated by this Agreement. *WHICH IS OF A TYPE WITH RESPECT TO WHICH A SECURITY INTEREST MAY BE PERFECTED BY THE FILING OF A FINANCING STATEMENT 5.9 INDEMNITY. Borrower hereby agrees to indemnify GBC and hold GBC harmless from and against any and all claims, debts, liabilities, demands, obligations, actions, causes of action, penalties, costs and expenses (including attorneys' fees), of every nature, character and description, which GBC may sustain or incur based upon or arising out of any of the Obligations, any actual or alleged failure to collect and pay over any withholding or other tax relating to Borrower or its employees, any relationship or agreement between GBC and Borrower, any actual or alleged failure of GBC to comply with any writ of attachment or other legal process relating to Borrower or any of its property, or any other matter, cause or thing whatsoever occurred, done, omitted or suffered to be done by GBC relating to Borrower or the Obligations (except any such amounts sustained or incurred as the result of the gross negligence or willful misconduct of GBC or any of its directors, officers, employees, agents, attorneys, or any other person affiliated with or representing GBC). Notwithstanding any provision in this Agreement to the contrary, the indemnity agreement set forth in this Section shall survive any termination of this Agreement and shall for all purposes continue in full force and effect. 6. TERM. 6.1 MATURITY DATE. This Agreement shall continue in effect until the maturity date set forth on the Schedule (the "Maturity Date"); provided that the Maturity Date shall automatically be extended, and this Agreement shall automatically and continuously renew, for successive additional terms of one year each, unless one party gives written notice to the other, not less than sixty days prior to the next Maturity Date, that such party elects to terminate this Agreement effective on the next Maturity Date. -7- Language indicated as being shown by strike out in the typeset document is enclosed in brackets [ * ] in the electronic format. 8 GREYROCK BUSINESS CREDIT LOAN AND SECURITY AGREEMENT - -------------------------------------------------------------------------------- 6.2 EARLY TERMINATION. This Agreement may be terminated prior to the Maturity Date as follows: (i) by Borrower, effective three business days after written notice of termination is given to GBC; or (ii) by GBC at any time after the occurrence* of an Event of Default, without notice, effective immediately. [ * ] * AND DURING THE CONTINUANCE 6.3 PAYMENT OF OBLIGATIONS. On the Maturity Date or on any earlier effective date of termination, Borrower shall pay and perform in full all Obligations, whether evidenced by installment notes or otherwise, and whether or not all or any part of such Obligations are otherwise then due and payable. Without limiting the generality of the foregoing, if on the Maturity Date, or on any earlier effective date of termination, there are any outstanding letters of credit issued based upon an application, guarantee, indemnity or similar agreement on the part of GBC, then on such date Borrower shall provide to GBC cash collateral in an amount equal to 110% of the face amount of all such letters of credit plus all interest, fees and costs due or (in GBC's estimation) likely to become due in connection therewith, to secure all of the Obligations relating to said letters of credit, pursuant to GBC's then standard form cash pledge agreement. Notwithstanding any termination of this Agreement, all of GBC's security interests in all of the Collateral and all of the terms and provisions of this Agreement shall continue in full force and effect until all Obligations have been paid and performed in full; provided that (LANGUAGE INTENTIONALLY OMITTED) GBC may, in its sole discretion, refuse to make any further Loans after termination. No termination shall in any way affect or impair any right or remedy of GBC, nor shall any such termination relieve Borrower of any Obligation to GBC, until all of the Obligations have been paid and performed in full. Upon payment and performance in full of all the Obligations and termination of this Agreement, GBC shall promptly deliver to Borrower termination statements, requests for reconveyances and such other documents as may be reasonably required to terminate GBC's security interests. 7. EVENTS OF DEFAULT AND REMEDIES. 7.1 EVENTS OF DEFAULT. The occurrence of any of the following events shall constitute an "Event of Defaulto under this Agreement, and Borrower shall give GBC immediate written notice thereof: (a) Any warranty, representation, statement, report or certificate* made or delivered to GBC by Borrower or any of Borrower's officers, employees or agents, now or in the future, shall be untrue or misleading in a material respect; or (b) Borrower shall fail to pay when due any Loan or any interest thereon or any other monetary Obligation; or (c) the total Loans and other Obligations outstanding at any time shall exceed the Credit Limit; or (d) Borrower shall fail to perform any non-monetary Obligation which by its nature cannot be cured; or (e) Borrower shall fail to perform any other non-monetary Obligation, which failure is not cured within** [ * ]; or (f) Any levy, assessment, attachment, seizure, lien or encumbrance (other than a Permitted Lien) is made on all or any*** part of the Collateral which is not cured within ****10 days after the occurrence of the same; or (g) any default or event of default occurs under any obligation secured by a Permitted Lien, which is not cured within any applicable cure period or waived in writing by the holder of the Permitted Lien; or (h) Borrower or any Guarantor breaches any material contract or obligation, which has or may reasonably be expected to have a material adverse effect on Borrower's or such Guarantor's business or financial condition; or (i) dissolution, termination of existence, insolvency or business failure of Borrower or any Guarantor; or appointment of a receiver, trustee or custodian, for all or any part of the property of, assignment for the benefit of creditors by, or the commencement of any proceeding by Borrower or any Guarantor under any reorganization, bankruptcy, insolvency, arrangement, -8- Language indicated as being shown by strike out in the typeset document is enclosed in brackets [ * ] in the electronic format. 9 GREYROCK BUSINESS CREDIT LOAN AND SECURITY AGREEMENT - -------------------------------------------------------------------------------- readjustment of debt, dissolution or liquidation law or statute of any jurisdiction, now or in the future in effect; or (j) the commencement of any proceeding against Borrower or any Guarantor under any reorganization, bankruptcy, insolvency, arrangement, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction, now or in the future in effect, which is not cured by the dismissal thereof within 45 days after the date commenced; or (k) revocation or termination of, or limitation or denial of liability upon, any guaranty of the Obligations or any attempt to do any of the foregoing; or (l) revocation or termination of, or limitation or denial of liability upon, any pledge of any certificate of deposit, securities or other property or asset pledged by any other Person to secure any or all of the Obligations, or any attempt to do any of the foregoing, or commencement of proceedings by or against any such Person under any reorganization, bankruptcy, insolvency, arrangement, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction, now or in the future in effect; or (m) Borrower or any Guarantor makes any payment on account of any indebtedness or obligation which has been subordinated to the Obligations other than as permitted in the applicable subordination agreement, or if any Person who has subordinated such indebtedness or obligations terminates or in any way limits or terminates its subordination agreement; or (n) [ * ] *****without the prior written consent of GBC; or (") Borrower or any Guarantor shall generally not pay its debts as they become due, or Borrower or any Guarantor shall conceal, remove or transfer any part of its property, with intent to hinder, delay or defraud its creditors, or make or suffer any transfer of any of its property which may be fraudulent under any bankruptcy, fraudulent conveyance or similar law; or (p) there shall be a material adverse change in Borrower's or any Guarantor's business or financial condition. GBC may cease making any Loans hereunder during any of the above cure periods, and thereafter if an Event of Default has occurred. * IN WRITING (OTHER THAN PROJECTIONS) ** THIRTY (30) DAYS AFTER NOTICE FROM GBC, PROVIDED THAT IF SUCH FAILURE MATERIALLY ADVERSELY AFFECTS THE COLLATERAL OR GBC'S SECURITY INTERESTS THEREIN, THEN AN EVENT OF DEFAULT SHALL BE DEEMED TO OCCUR IMMEDIATELY UPON NOTICE FROM GBC *** MATERIAL **** 30 ***** ANY PERSON, OR TWO OR MORE PERSONS ACTING IN CONCERT, SHALL ACQUIRE BENEFICIAL OWNERSHIP, DIRECTLY OR INDIRECTLY, OR SHALL ENTER INTO A CONTRACT OR ARRANGEMENT (1) FOR THE ACQUISITION OF THE SECURITIES OF THE BORROWER (OR OTHER SECURITIES CONVERTIBLE INTO SUCH SECURITIES) REPRESENTING 20% OR MORE OF THE COMBINED VOTING POWER OF ALL SECURITIES OF THE BORROWER ENTITLED TO VOTE IN THE ELECTION OF DIRECTORS, OR (2) WHICH UPON CONSUMMATION WILL RESULT IN ITS OR THEIR ACQUISITION OF, OR CONTROL OVER, SECURITIES OF THE BORROWER (OR OTHER SECURITIES CONVERTIBLE INTO SUCH SECURITIES) REPRESENTING 20% OR MORE OF THE COMBINED VOTING POWER OF ALL SECURITIES OF THE BORROWER ENTITLED TO VOTE IN THE ELECTION OF DIRECTORS, 7.2 REMEDIES. Upon the occurrence and during the continuance of any Event of Default, GBC, at its option, and without notice or demand of any kind (all of which are hereby expressly waived by Borrower), may do any one or more of the following: (a) Cease making Loans or otherwise extending credit to Borrower under this Agreement or any other document or agreement; (b) Accelerate and declare all or any part of the Obligations to be immediately due, payable, and performable, notwithstanding any deferred or installment payments allowed by any instrument evidencing or relating to any Obligation; (c) Take possession of any or all of the Collateral wherever it may be found, and for that purpose Borrower hereby authorizes GBC without judicial process to enter onto any of Borrower's premises without interference to search for, take possession of, keep, store, or remove any of the Collateral, and remain on the premises or cause a custodian to remain on the premises in exclusive control thereof, without charge for so long as GBC deems it reasonably necessary in order to complete the enforcement of its rights under this Agreement or any other agreement; provided, however, that should GBC seek to take possession of any of the Collateral by Court process, Borrower hereby irrevocably waives: (i) any bond and any surety or security relating thereto required by any statute, court rule or otherwise as an incident to such possession; (ii) any demand for possession prior to the commencement of any suit or action to recover possession thereof; and (iii) any requirement that GBC retain possession of, and not dispose of, any such Collateral until after trial or final judgment; (d) Require Borrower to assemble any or all of the Collateral and make it available to GBC at places designated by GBC which are reasonably convenient to GBC and Borrower, and to remove the Collateral to such locations as GBC may deem advisable; (e) Complete the processing, manufacturing or repair of any Collateral prior to a disposition thereof and, for such purpose and for the purpose of removal, GBC shall have the right to use* Borrower's premises, vehicles, hoists, lifts, cranes, equipment and all other property without charge; (f) Sell, lease or otherwise dispose of any of the Collateral, in its condition at the time GBC obtains possession of it or after further manufacturing, processing or repair, at one or more public and/or private sales, in lots or in bulk, for cash, exchange or other property, or on credit, and to adjourn any such sale from time to time without notice other than oral announcement at the time scheduled for sale. GBC shall have the right to conduct such disposition on Borrower's premises without charge, for such time or times as GBC deems reasonable, or on GBC's premises, or elsewhere and the Collateral need not be located at the place of disposition. GBC may -9- Language indicated as being shown by strike out in the typeset document is enclosed in brackets [ * ] in the electronic format. 10 GREYROCK BUSINESS CREDIT LOAN AND SECURITY AGREEMENT - -------------------------------------------------------------------------------- directly or through any affiliated company purchase or lease any Collateral at any such public disposition, and if permissible under applicable law, at any private disposition. Any sale or other disposition of Collateral shall not relieve Borrower of any liability Borrower may have if any Collateral is defective as to title or physical condition or otherwise at the time of sale; (g) Demand payment of, and collect any Receivables and General Intangibles comprising Collateral and, in connection therewith, Borrower irrevocably authorizes GBC to endorse or sign Borrower's name on all collections, receipts, instruments and other documents, to take possession of and open mail addressed to Borrower and remove therefrom payments made with respect to any item of the Collateral or proceeds thereof, and, in GBC's [ * ]** discretion, to grant extensions of time to pay, compromise claims and settle Receivables, General Intangibles and the like for less than face value; (h) Collect, receive, dispose of and realize upon any Investment Property, including withdrawal of any and all funds from any securities accounts; and (i) Demand and receive possession of any of Borrower's federal and state income tax returns and the books and records utilized in the preparation thereof or referring thereto. All reasonable attorneys' fees, expenses, costs, liabilities and obligations incurred by GBC with respect to the foregoing shall be added to and become part of the Obligations, shall be due on demand, and shall bear interest at a rate equal to the highest interest rate applicable to any of the Obligations. * (TO THE EXTENT THAT BORROWER HAS THE RIGHT TO ALLOW SUCH USE) ** REASONABLE 7.3 STANDARDS FOR DETERMINING COMMERCIAL REASONABLENESS. Borrower and GBC agree that a sale or other disposition (collectively, "sale") of any Collateral which complies with the following standards will conclusively be deemed to be commercially reasonable: (i) Notice of the sale is given to Borrower at least seven days prior to the sale, and, in the case of a public sale, notice of the sale is published at least seven days before the sale in a newspaper of general circulation in the county where the sale is to be conducted; (ii) Notice of the sale describes the collateral in general, non-specific terms; (iii) The sale is conducted at a place designated by GBC, with or without the Collateral being present; (iv) The sale commences at any time between 8:00 a.m. and 6:00 p.m; (v) Payment of the purchase price in cash or by cashier's check or wire transfer is required; (vi) With respect to any sale of any of the Collateral, GBC may (but is not obligated t") direct any prospective purchaser to ascertain directly from Borrower any and all information concerning the same. GBC shall be free to employ other methods of noticing and selling the Collateral, in its discretion, if they are commercially reasonable. Without limiting the generality of the foregoing, Borrower recognizes that GBC may be unable to make a public sale of any or all of the Investment Property, by reason of prohibitions contained in applicable securities laws or otherwise, and expressly agrees that a private sale to a restricted group of purchasers for investment and not with a view to any distribution thereof shall be considered a commercially reasonable sale. 7.4 POWER OF ATTORNEY. Upon the occurrence and during the continuance of any Event of Default, without limiting GBC's other rights and remedies, Borrower grants to GBC an irrevocable power of attorney coupled with an interest, authorizing and permitting GBC (acting through any of its employees, attorneys or agents) at any time, at its option, but without obligation, with or without notice to Borrower, and at Borrower's expense, to do any or all of the following, in Borrower's name or otherwise, but GBC agrees to exercise the following powers in a commercially reasonable manner: (a) Execute on behalf of Borrower any documents that GBC may, in its sole discretion, deem advisable in order to perfect and maintain GBC's security interest in the Collateral, or in order to exercise a right of Borrower or GBC, or in order to fully consummate all the transactions contemplated under this Agreement, and all other present and future agreements*; (b) Execute on behalf of Borrower any document exercising, transferring or assigning any option to purchase, sell or otherwise dispose of or to lease (as lessor or lessee) any real or personal property which is part of GBC's Collateral or in which GBC has an interest; (c) Execute on behalf of Borrower, any invoices relating to any Receivable, any draft against any Account Debtor and any notice to any Account Debtor, any proof of claim in bankruptcy, any Notice of Lien, claim of mechanic's, materialman's or other lien, or assignment or satisfaction of mechanic's, materialman's or other lien; (d) Take control in any manner of any cash or non-cash items of payment or proceeds of Collateral; endorse the name of Borrower upon any instruments, or documents, evidence of payment or Collateral that may come into GBC's possession; (e) Endorse all checks and other forms of remittances received by GBC; (f) Pay, contest or settle any lien, charge, encumbrance, security interest and adverse claim in or to any of the Collateral, or any judgment based thereon, or otherwise take any action to terminate or discharge the same; (g) Grant extensions of time to pay, compromise claims and settle Receivables -10- Language indicated as being shown by strike out in the typeset document is enclosed in brackets [ * ] in the electronic format. 11 GREYROCK BUSINESS CREDIT LOAN AND SECURITY AGREEMENT - -------------------------------------------------------------------------------- and General Intangibles for less than face value and execute all releases and other documents in connection therewith; (h) Pay any sums required on account of Borrower's taxes or to secure the release of any liens therefor, or both; (i) Settle and adjust, and give releases of, any insurance claim that relates to any of the Collateral and obtain payment therefor; (j) Instruct any third party having custody or control of any books or records belonging to, or relating to, Borrower to give GBC the same rights of access and other rights with respect thereto as GBC has under this Agreement; (k) Execute and deliver to any securities intermediary or other Person any entitlement order, account control agreement or other notice, document or instrument with respect to any Investment Property; and (l) Take any action or pay any sum required of Borrower pursuant to this Agreement and any other present or future agreements**. Any and all reasonable sums paid and any and all reasonable costs, expenses, liabilities, obligations and reasonable attorneys' fees incurred by GBC with respect to the foregoing shall be added to and become part of the Obligations, shall be payable on demand, and shall bear interest at a rate equal to the highest interest rate applicable to any of the Obligations. In no event shall GBC's rights under the foregoing power of attorney or any of GBC's other rights under this Agreement be deemed to indicate that GBC is in control of the business, management or properties of Borrower. * BETWEEN GBC AND BORROWER ** BETWEEN GBC AND BORROWER 7.5 APPLICATION OF PROCEEDS. All proceeds realized as the result of any sale or other disposition of the Collateral shall be applied by GBC first to the reasonable costs, expenses, liabilities, obligations and attorneys' fees incurred by GBC in the exercise of its rights under this Agreement, second to the interest due upon any of the Obligations, and third to the principal of the Obligations, in such order as GBC shall determine in its sole discretion. Any surplus shall be paid to Borrower or other persons legally entitled thereto; Borrower shall remain liable to GBC for any deficiency. If, GBC, in its sole discretion, directly or indirectly enters into a deferred payment or other credit transaction with any purchaser at any sale of Collateral, GBC shall have the option, exercisable at any time, in its sole discretion, of either reducing the Obligations by the principal amount of the purchase price or deferring the reduction of the Obligations until the actual receipt by GBC of the cash therefor. 7.6 REMEDIES CUMULATIVE. In addition to the rights and remedies set forth in this Agreement, GBC shall have all the other rights and remedies accorded a secured party under the California Uniform Commercial Code and under all other applicable laws, and under any other instrument or agreement now or in the future entered into between GBC and Borrower, and all of such rights and remedies are cumulative and none is exclusive. Exercise or partial exercise by GBC of one or more of its rights or remedies shall not be deemed an election, nor bar GBC from subsequent exercise or partial exercise of any other rights or remedies. The failure or delay of GBC to exercise any rights or remedies shall not operate as a waiver thereof, but all rights and remedies shall continue in full force and effect until all of the Obligations have been fully paid and performed. 8. DEFINITIONS. As used in this Agreement, the following terms have the following meanings: "Account Debtor" means the obligor on a Receivable. "Affiliate" means, with respect to any Person, a relative, partner, shareholder, director, officer, or employee of such Person, or any parent or subsidiary of such Person, or any Person controlling, controlled by or under common control with such Person. "Agreement" and "this Agreemento means this Loan and Security Agreement and all modifications and amendments thereto, extensions thereof, and replacements therefor. "Business Day" means a day on which GBC is open for business. "Code" means the Uniform Commercial Code as adopted and in effect in the State of California from time to time. "Collateral" has the meaning set forth in Section 2.1 above. "Default" means any event which with notice or passage of time or both, would constitute an Event of Default. "Deposit Account" has the meaning set forth in Section 9105 of the Code. "Eligible Inventory" means Inventory which GBC, in its sole judgment, deems eligible for borrowing, based on such considerations as GBC may from time to time -11- 12 GREYROCK BUSINESS CREDIT LOAN AND SECURITY AGREEMENT - -------------------------------------------------------------------------------- deem appropriate. Without limiting the fact that the determination of which Inventory is eligible for borrowing is a matter of GBC's discretion, Inventory which does not meet the following requirements will not be deemed to be Eligible Inventory: Inventory which (i) [ * ],* not obsolete or unmerchantable, and is not comprised of raw materials, work in process, packaging materials or supplies; (iii) meets all applicable governmental standards; (iv) has been manufactured in compliance with the Fair Labor Standards Act; (v) conforms in all respects to the warranties and representations set forth in this Agreement; (vi) is at all times subject to GBC's duly perfected, first priority security interest; and (vii) is situated at a one of the locations set forth on the Schedule. * IS "Eligible Receivables" means Receivables arising in the ordinary course of Borrower's business from the sale of goods or rendition of services, which GBC, in its sole judgment, shall deem eligible for borrowing, based on the following considerations (the "Eligibility Requirements"): (i) the Receivable must not be outstanding for more than 120 days from its invoice date, (ii) the Receivable must not represent progress billings, or be due under a fulfillment or requirements contract with the Account Debtor, (iii) the Receivable must not be subject to any contingencies (including Receivables arising from sales on consignment, guaranteed sale or other terms pursuant to which payment by the Account Debtor may be conditional), (iv) the Receivable must not be owing from an Account Debtor with whom the Borrower has any dispute (whether or not relating to the particular Receivable), (v) the Receivable must not be owing from an Affiliate of Borrower, (vi) the Receivable must not be owing from an Account Debtor which is subject to any insolvency or bankruptcy proceeding, or whose financial condition is not acceptable to GBC, or which, fails or goes out of a material portion of its business, (vii) the Receivable must not be owing from the United States or any department, agency or instrumentality thereof (unless there has been compliance, to GBC's satisfaction, with the United States Assignment of Claims Act), (viii) the Receivable must not be owing from an Account Debtor located outside the United States or Canada (unless pre-approved by GBC in its discretion in writing, or backed by a letter of credit satisfactory to GBC, or FCIA insured satisfactory to GBC), (ix) the Receivable must not be owing from an Account Debtor to whom Borrower is or may be liable for goods purchased from such Account Debtor or otherwise, (x) the Receivable must not violate any representation or warranty set forth in this Agreement, (xi) the Receivable, when aggregated with all other Receivables owing from the Account Debtor, must not exceed 40% of the total Eligible Receivables outstanding, (xii) the Receivable must not be one in which GBC does not have a first-priority, valid, perfected security interest, (xiii) the Receivable must not arise from a maintenance contract or from billings made on a percentage completion basis, and (xiv) the Receivable must not be one which GBC, in its sole judgment exercised in good faith discretion, believes the collection of which is insecure or may not be paid by reason of the Account Debtor's financial inability to pay, or deems ineligible on such other credit and/or collateral considerations as GBC in its good faith discretion deems appropriate. If more than 50% of the Receivables owing from an Account Debtor are outstanding more than 120 days from their invoice date (without regard to unapplied credits) or are otherwise not Eligible Receivables, then all Receivables owing from that Account Debtor will be deemed ineligible for borrowing. "Equipment" means all of Borrower's present and hereafter acquired machinery, molds, machine tools, motors, furniture, equipment, furnishings, fixtures, trade fixtures, motor vehicles, tools, parts, dyes, jigs, goods and other tangible personal property (other than Inventory) of every kind and description used in Borrower's operations or owned by Borrower and any interest in any of the foregoing, and all attachments, accessories, accessions, replacements, substitutions, additions or improvements to any of the foregoing, wherever located. "Event of Default" means any of the events set forth in Section 7.1 of this Agreement. "General Intangibles" means all general intangibles of Borrower, whether now owned or hereafter created or acquired by Borrower, including, without limitation, all choses in action, causes of action, corporate or other business records, Deposit Accounts, inventions, designs, drawings, blueprints, patents, patent applications, trademarks and the goodwill of the business symbolized thereby, names, trade names, trade secrets, goodwill, copyrights, registrations, licenses, franchises, customer lists, security and other deposits, rights in all litigation presently or hereafter pending for any cause or claim (whether in contract, tort or otherwise), and all judgments now or hereafter arising therefrom, all claims of Borrower against GBC, rights to purchase or sell real or personal property, rights as a licensor or licensee of any kind, royalties, telephone numbers, proprietary -12- Language indicated as being shown by strike out in the typeset document is enclosed in brackets [ * ] in the electronic format. 13 GREYROCK BUSINESS CREDIT LOAN AND SECURITY AGREEMENT - -------------------------------------------------------------------------------- information, purchase orders, and all insurance policies and claims (including life insurance, key man insurance, credit insurance, liability insurance, property insurance and other insurance), tax refunds and claims, computer programs, discs, tapes and tape files, claims under guaranties, security interests or other security held by or granted to Borrower, all rights to indemnification and all other intangible property of every kind and nature (other than Receivables). "Guarantor" means any Person who has guaranteed any of the Obligations. "Inventory" means all of Borrower's now owned and hereafter acquired goods, merchandise or other personal property, wherever located, to be furnished under any contract of service or held for sale or lease (including all raw materials, work in process, finished goods and goods in transit), and all materials and supplies of every kind, nature and description which are or might be used or consumed in Borrower's business or used in connection with the manufacture, packing, shipping, advertising, selling or finishing of such goods, merchandise or other personal property, and all warehouse receipts, documents of title and other documents representing any of the foregoing. "Investment Property" means any and all investment property of Borrower, including all securities, whether certificated or uncertificated, security entitlements, securities accounts, commodity contracts and commodity accounts, and all financial assets held in any securities account or otherwise, wherever located, and whether now existing or hereafter acquired or arising. "Obligations" means all present and future Loans, advances, debts, liabilities, obligations, guaranties, covenants, duties and indebtedness at any time owing by Borrower to GBC, whether evidenced by this Agreement or any note or other instrument or document, whether arising from an extension of credit, opening of a letter of credit, banker's acceptance, loan, guaranty, indemnification or otherwise, whether direct or indirect (including, without limitation, those acquired by assignment and any participation by GBC in Borrower's debts owing to others), absolute or contingent, due or to become due, including, without limitation, all interest, charges, expenses, fees, attorney's fees, expert witness fees, audit fees, letter of credit fees, loan fees, termination fees, minimum interest charges and any other sums chargeable to Borrower under this Agreement or under any other present or future instrument or agreement between Borrower and GBC. "Permitted Liens" means the following: (i) purchase money security interests in specific items of Equipment; (ii) leases of specific items of Equipment; (iii) liens for taxes not yet payable*; (iv) additional security interests and liens which are subordinate to the security interest in favor of GBC and are consented to in writing by GBC (which consent shall not be unreasonably withheld); (v) security interests being terminated substantially concurrently with this Agreement; (vi) liens of materialmen, mechanics, warehousemen, carriers, or other similar liens arising in the ordinary course of business and securing obligations which are not delinquent; (vii) liens incurred in connection with the extension, renewal or refinancing of the indebtedness secured by liens of the type described above in clauses (i) or (ii) above, provided that any extension, renewal or replacement lien is limited to the property encumbered by the existing lien and the principal amount of the indebtedness being extended, renewed or refinanced does not increase; and (viii) Liens in favor of customs and revenue authorities which secure payment of customs duties in connection with the importation of goods. GBC will have the right to require, as a condition to its consent under subparagraph (iv) above, that the holder of the additional security interest or lien sign an intercreditor agreement on GBC's then standard form, acknowledge that the security interest is subordinate to the security interest in favor of GBC, and agree not to take any action to enforce its subordinate security interest so long as any Obligations remain outstanding, and that Borrower agree that any uncured default in any obligation secured by the subordinate security interest shall also constitute an Event of Default under this Agreement. * DELINQUENT "Person" means any individual, sole proprietorship, partnership, joint venture, trust, unincorporated organization, association, corporation, government, or any agency or political division thereof, or any other entity. "Prime Rate" means the actual "Reference Rateo or the substitute therefor of Bank of America NT & SA ("B of A") whether or not that rate is the lowest interest rate charged by B of A. If the Prime Rate, as so defined, is unavailable on any date of determination, "Prime Rateo shall mean the highest of the prime rates published in the Wall Street Journal, on such date of determination, as the base rate on corporate loans at large United States money center commercial banks, as determined in good faith by GBC, which determination shall be conclusive absent manifest error. -13- 14 GREYROCK BUSINESS CREDIT LOAN AND SECURITY AGREEMENT - -------------------------------------------------------------------------------- "Receivables" means all of Borrower's now owned and hereafter acquired accounts (whether or not earned by performance), letters of credit, contract rights, chattel paper, instruments, documents and all other forms of obligations at any time owing to Borrower, all guaranties and other security therefor, all merchandise returned to or repossessed by Borrower, and all rights of stoppage in transit and all other rights or remedies of an unpaid vendor, lienor or secured party. Other Terms. All accounting terms used in this Agreement, unless otherwise indicated, shall have the meanings given to such terms in accordance with generally accepted accounting principles, consistently applied. All other terms contained in this Agreement, unless otherwise indicated, shall have the meanings provided by the Code, to the extent such terms are defined therein. 9. GENERAL PROVISIONS. 9.1 INTEREST COMPUTATION. In computing interest on the Obligations, all checks, wire transfers and other items of payment received by GBC (including proceeds of Receivables and payment of the Obligations in full) shall be deemed applied by GBC on account of the Obligations THREE Business Days after receipt by GBC of immediately available funds. GBC shall not, however, be required to credit Borrower's account for the amount of any item of payment which is unsatisfactory to GBC in its discretion, and GBC may charge Borrower's Loan account for the amount of any item of payment which is returned to GBC unpaid. 9.2 APPLICATION OF PAYMENTS. All payments with respect to the Obligations may be applied, and in GBC's sole discretion reversed and reapplied, to the Obligations, in such order and manner as GBC shall determine in its sole discretion. 9.3 CHARGES TO ACCOUNT. GBC may, in its discretion, require that Borrower pay monetary Obligations in cash to GBC, or charge them to Borrower's Loan account, in which event they will bear interest at the same rate applicable to the Loans. 9.4 MONTHLY ACCOUNTINGS. GBC shall provide Borrower monthly with an account of advances, charges, expenses and payments made pursuant to this Agreement. Such account shall be deemed correct, accurate and binding on Borrower and an account stated (except for reverses and reapplications of payments made and corrections of errors discovered by GBC), unless Borrower notifies GBC in writing to the contrary within sixty days after each account is rendered, describing the nature of any alleged errors or admissions. 9.5 NOTICES. All notices to be given under this Agreement shall be in writing and shall be given either personally or by reputable private delivery service, or by facsimile, or by regular first-class mail, or certified mail return receipt requested, addressed to GBC or Borrower at the addresses shown in the heading to this Agreement, or at any other address designated in writing by one party to the other party. All notices shall be deemed to have been given upon delivery in the case of notices personally delivered, or at the expiration of one business day following delivery to the private delivery service, or one day after the date sent by facsimile, or two business days following the deposit thereof in the United States mail, with postage prepaid. 9.6 SEVERABILITY. Should any provision of this Agreement be held by any court of competent jurisdiction to be void or unenforceable, such defect shall not affect the remainder of this Agreement, which shall continue in full force and effect. 9.7 INTEGRATION. This Agreement and such other written agreements, documents and instruments as may be executed in connection herewith are the final, entire and complete agreement between Borrower and GBC and supersede all prior and contemporaneous negotiations and oral representations and agreements, all of which are merged and integrated in this Agreement. There are no oral understandings, representations or agreements between the parties which are not set forth in this Agreement or in other written agreements signed by the parties in connection herewith. 9.8 WAIVERS. The failure of GBC at any time or times to require Borrower to strictly comply with any of the provisions of this Agreement or any other present or future agreement between Borrower and GBC shall not waive or diminish any right of GBC later to demand and receive strict compliance therewith. Any waiver of any default shall not waive or affect any other default, whether prior or subsequent, and whether or not similar. None of the provisions of this Agreement or any other agreement now or in the future executed by Borrower and delivered to GBC shall be deemed to have been waived by any act or knowledge of GBC or its agents or employees, but only by a specific written waiver signed by an authorized officer of GBC and delivered to Borrower. Borrower waives demand, protest, notice of protest and notice of default or dishonor, notice of payment and nonpayment, release, compromise, settlement, extension or renewal of any commercial -14- 15 GREYROCK BUSINESS CREDIT LOAN AND SECURITY AGREEMENT - -------------------------------------------------------------------------------- paper, instrument, account, General Intangible, document or guaranty at any time held by GBC on which Borrower is or may in any way be liable, and notice of any action taken by GBC, unless expressly required by this Agreement. 9.9 AMENDMENT. The terms and provisions of this Agreement may not be waived or amended, except in a writing executed by Borrower and a duly authorized officer of GBC. 9.10 TIME OF ESSENCE. Time is of the essence in the performance by Borrower of each and every obligation under this Agreement. 9.11 ATTORNEYS' FEES AND COSTS. Borrower shall reimburse GBC for all reasonable attorneys' fees and all filing, recording, search, title insurance, appraisal, audit, and other reasonable costs incurred by GBC, pursuant to, or in connection with, or relating to this Agreement (whether or not a lawsuit is filed), including, but not limited to, any reasonable attorneys' fees and costs GBC incurs in order to do the following: prepare and negotiate this Agreement and the documents relating to this Agreement; obtain legal advice in connection with this Agreement or Borrower; enforce, or seek to enforce, any of its rights; prosecute actions against, or defend actions by, Account Debtors; commence, intervene in, or defend any action or proceeding; initiate any complaint to be relieved of the automatic stay in bankruptcy; file or prosecute any probate claim, bankruptcy claim, third-party claim, or other claim; examine, audit, copy, and inspect any of the Collateral or any of Borrower's books and records; protect, obtain possession of, lease, dispose of, or otherwise enforce GBC's security interest in, the Collateral; and otherwise represent GBC in any litigation relating to Borrower. If either GBC or Borrower files any lawsuit against the other predicated on a breach of this Agreement, the prevailing party in such action shall be entitled to recover its reasonable costs and attorneys' fees, including (but not limited t") reasonable attorneys' fees and costs incurred in the enforcement of, execution upon or defense of any order, decree, award or judgment. All attorneys' fees and costs to which GBC may be entitled pursuant to this Paragraph shall immediately become part of Borrower's Obligations, shall be* due on demand, and shall bear interest at a rate equal to the highest interest rate applicable to any of the Obligations. * ADDED TO BORROWER'S RECEIVABLES LOAN ACCOUNT 9.12 BENEFIT OF AGREEMENT. The provisions of this Agreement shall be binding upon and inure to the benefit of the respective successors, assigns, heirs, beneficiaries and representatives of Borrower and GBC and, as to Section 9.19 below, any participant of GBC; provided, however, that Borrower may not assign or transfer any of its rights under this Agreement without the prior written consent of GBC, and any prohibited assignment shall be void. No consent by GBC to any assignment shall release Borrower from its liability for the Obligations. 9.13 JOINT AND SEVERAL LIABILITY. If Borrower consists of more than one Person, their liability shall be joint and several, and the compromise of any claim with, or the release of, any Borrower shall not constitute a compromise with, or a release of, any other Borrower. 9.14 LIMITATION OF ACTIONS. Any claim or cause of action by Borrower against GBC, its directors, officers, employees, agents, accountants or attorneys, based upon, arising from, or relating to this Agreement, or any other present or future document or agreement, or any other transaction contemplated hereby or thereby or relating hereto or thereto, or any other matter, cause or thing whatsoever, occurred, done, omitted or suffered to be done by GBC, its directors, officers, employees, agents, accountants or attorneys, shall be barred unless asserted by Borrower by the commencement of an action or proceeding in a court of competent jurisdiction by the filing of a complaint within one year after* the first act, occurrence or omission upon which such claim or cause of action, or any part thereof, is based, and the service of a summons and complaint on an officer of GBC, or on any other person authorized to accept service on behalf of GBC, within thirty (30) days thereafter. Borrower agrees that such one-year period is a reasonable and sufficient time for Borrower to investigate and act upon any such claim or cause of action. The one-year period provided herein shall not be waived, tolled, or extended except by the written consent of GBC in its sole discretion. This provision shall survive any termination of this Agreement or any other present or future agreement. * BORROWER LEARNS OF, OR IN THE EXERCISE OF REASONABLE DILIGENCE SHOULD HAVE LEARNED OF 9.15 PARAGRAPH HEADINGS; CONSTRUCTION. Paragraph headings are only used in this Agreement for convenience. Borrower and GBC acknowledge that the headings may not describe completely the subject matter of the applicable paragraph, and the headings shall not be used in any manner to construe, limit, define or interpret any term or provision of this Agreement. The term "including,o whenever used in this Agreement, shall -15- 16 GREYROCK BUSINESS CREDIT LOAN AND SECURITY AGREEMENT - -------------------------------------------------------------------------------- mean "including (but not limited to)." This Agreement has been fully reviewed and negotiated between the parties and no uncertainty or ambiguity in any term or provision of this Agreement shall be construed strictly against GBC or Borrower under any rule of construction or otherwise. 9.16 GOVERNING LAW; JURISDICTION; VENUE. This Agreement and all acts and transactions hereunder and all rights and obligations of GBC and Borrower shall be governed by the laws of the State of California. As a material part of the consideration to GBC to enter into this Agreement, Borrower (i) agrees that all actions and proceedings relating directly or indirectly to this Agreement shall, at GBC's option, be litigated in courts located within California, and that the exclusive venue therefor shall be Los Angeles County; (ii) consents to the jurisdiction and venue of any such court and consents to service of process in any such action or proceeding by personal delivery or any other method permitted by law; and (iii) waives any and all rights Borrower may have to object to the jurisdiction of any such court, or to transfer or change the venue of any such action or proceeding. 9.17 MUTUAL WAIVER OF JURY TRIAL. BORROWER AND GBC EACH HEREBY WAIVE THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT OF, OR IN ANY WAY RELATING TO, THIS AGREEMENT OR ANY OTHER PRESENT OR FUTURE INSTRUMENT OR AGREEMENT BETWEEN GBC AND BORROWER, OR ANY CONDUCT, ACTS OR OMISSIONS OF GBC OR BORROWER OR ANY OF THEIR DIRECTORS, OFFICERS, EMPLOYEES, AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH GBC OR BORROWER, IN ALL OF THE FOREGOING CASES, WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE. 9.18 CONFIDENTIALITY; SECURITIES LAWS. In handling any information designated by Borrower as confidential, GBC shall exercise reasonable efforts to keep such information confidential, provided that GBC may disclose such information (a) to its auditors and attorneys, (b) to affiliates of GBC in connection with their present or prospective business relations with Borrower, (c) to prospective transferees or purchasers of an interest in the Obligations, provided that they have entered into a comparable confidentiality agreement in favor of Borrower and have delivered a copy to Borrower, (d) as required by law, regulation (including, without limitation, as may be issued by any regulatory authority), rule or order, subpoena, judicial order or similar order, (e) as may be required in connection with any examination, audit or similar investigation of GBC, (f) in connection with the enforcement of GBC's rights, (g) to Silicon Valley Bank, and (h) where reasonably necessary in order to protect GBC's interest. GBC acknowledges that it is aware that the United States securities laws prohibit any persons who has material non-public information about a company which has been obtained from such company from purchasing or selling securities of such company. 9.19 ATTORNEYS' FEES AND COSTS OF PARTICIPANT. Without limitation upon the generality of Borrower's obligations pursuant to paragraph 9.11 of this Agreement, Borrower agrees, upon demand, to pay any participant of GBC in the Loans, the amount of all reasonable attorneys' fees and [ * ] costs incurred by such participant* in connection with its participation in the Loans. If GBC shall advance or reimburse such participant for any such fees or costs, then the amounts advanced or reimbursed shall become part of Borrower's Obligations under this Agreement and shall bear interest at the same rate as Borrower's Loans. * PURSUING PAYMENT DEFAULT OR BANKRUPTCY RELIEF BORROWER: MTI TECHNOLOGY CORPORATION BY [SIG] ------------------------------------- PRESIDENT OR VICE PRESIDENT GBC: GREYROCK BUSINESS CREDIT, A DIVISION OF NATIONSCREDIT COMMERCIAL CORPORATION BY [SIG] -------------------------------------- TITLE ----------------------------------- PRESIDENT -16- 17 - -------------------------------------------------------------------------------- Greyrock Business Credit A NationsBank Company SCHEDULE TO LOAN AND SECURITY AGREEMENT BORROWER: MTI TECHNOLOGY CORPORATION ADDRESS: 4905 E. LA PALMA AVENUE ANAHEIM, CALIFORNIA 92807 DATE: MAY 23, 1997 This Schedule is an integral part of the Loan and Security Agreement between GREYROCK BUSINESS CREDIT, A DIVISION OF NATIONSCREDIT COMMERCIAL CORPORATION ("GBC") and the borrower named above ("Borrower") of even date. - -------------------------------------------------------------------------------- 1. CREDIT LIMIT (Section 1.1): (a) An amount not to exceed the lesser of (1) or (2) below: (1) $30,000,000 at any one time outstanding; or (2) an amount equal to (i) either 80% of the amount of Borroweros Eligible Receivables (as defined in Section 8 above) if the "Non-Streamlined Facilityo (as defined below) is in effect, or 50% of the amount of Borrower's Eligible Receivables if the "Streamlined Facilityo (as defined below) is in effect, as applicable, plus (ii) either the amount described in (a) below or the amount described in (b) below, as applicable (the "Inventory Loan"): (A) the lesser of 20% of the value of Borrower's Eligible Inventory (as defined in Section 8 above) or $3,500,000, to be available during the period beginning on the first day and ending on the 15th day of the first calendar month of any calendar quarter (the "Initial Quarterly Periods"); or (B) the lesser of 40% of the value of Borrower's Eligible Inventory or $7,500,000, to be available other than during Initial Quarterly Periods. (For purposes of the foregoing, the "value of Borrower's Eligible Inventoryo shall mean the lesser of cost or wholesale market value as determined in GBC's discretion.) -1- 18 GREYROCK BUSINESS CREDIT SCHEDULE TO LOAN AND SECURITY AGREEMENT - -------------------------------------------------------------------------------- For example, if on December 31 of any calendar quarter the value of Borrower's Eligible Inventory were $18,000,000, then the maximum Inventory Loan (without regard to the limit contained in (1) above) which Borrower may have outstanding on that date would be $7,200,000, and if on January 1 of any calendar quarter the value of Borrower's Eligible Inventory were $18,000,000, then the maximum Inventory Loan (without regard to the limit contained in (1) above) which Borrower may have outstanding on that date would be $3,500,000. Without limitation upon the requirement of timeliness with respect to any other Obligations under the Loan and Security Agreement, there shall be no cure period from the end of one quarter to the beginning of the next Initial Quarterly Period for purposes of bringing the balance of the Inventory Loan into formula, and, without limitation upon any of GBC's rights and remedies, if the Inventory Loan shall at any time ever exceed the limits set forth herein, then GBC may, in its sole discretion, reduce the amount of Inventory Loans which it shall make available. (b) GBC agrees to approve as Eligible Receivables certain amounts not exceeding $10,000,000 in the aggregate owing to Borrower from EMC Corporation ("EMC") under that certain Asset Purchase Agreement dated as of February 9, 1996 (as amended from time to time, the "EMC Agreement"), between the Borrower and EMC, provided that (i) GBC does not believe the collection thereof is insecure or may not be paid by reason of EMC's financial inability to pay, (ii) GBC has a first priority, valid, perfected security interest therein, and (iii) such amounts are not otherwise deemed ineligible on such credit and/or collateral considerations as GBC in its good faith discretion deems appropriate. Borrower hereby covenants and agrees that it shall not agree to any amendment or modification to the EMC Agreement without GBC's prior written consent, which consent GBC shall not unreasonably withhold. - -------------------------------------------------------------------------------- 2. INTEREST INTEREST RATE (Section 1.2): The interest rate in effect throughout each calendar month during the term of this Agreement shall be the highest "Prime Rateo in effect during such month, plus 1.67% per annum, provided that the interest rate in effect in each month shall not be less than 9% per annum, and provided further that the interest charged for each month shall be a minimum of $10,000 regardless of the amount of the Obligations outstanding. Interest shall be calculated on the basis of a 360-day year for the actual number of days elapsed. "Prime Rateo has the meaning set forth in Section 8 above. - -------------------------------------------------------------------------------- 3. FEES (Section 1.3/Section 6.2): LOAN FEE: $50,000, payable on or before the Effective Date (as defined below). NSF CHECK CHARGE: $15.00 per item. -2- 19 GREYROCK BUSINESS CREDIT SCHEDULE TO LOAN AND SECURITY AGREEMENT - -------------------------------------------------------------------------------- WIRE TRANSFERS: $15.00 per transfer. 4. MATURITY DATE May 31, 1998, subject to automatic renewal as provided in Section 6.1 above, (Section 6.1): and early termination as provided in Section 6.2 above. - -------------------------------------------------------------------------------- 5. REPORTING Borrower shall provide GBC with the following: (Section 5.2): 1. Annual financial statements, certified by independent certified public accountants acceptable to GBC, within 5 days after the earlier of the date the Form 10-K is filed or is required to be filed with the Securities and Exchange Commission (the "SEC"), but, in any event, no later than 90 days after the end of Borrower's fiscal year. 2. Quarterly unaudited financial statements as soon as available, and, in any event, no later than the earlier of (i) 5 days after the earlier of the date the Forms 10-Q and 10-K are filed or are required to be filed with the SEC, or (ii) 30 days after the end of each fiscal quarter of Borrower. 3. Copies of the regular, periodical or special reports (including Forms 10K, 10Q and 8K) that the Borrower or any subsidiary may make to, or file with, the SEC, within 5 days after the earlier the date they are filed or required to be filed with the Securities Exchange Commission. 4. Monthly Receivable agings, aged by invoice date, within 15 days after the end of each month. 5. Monthly accounts payable agings, aged by invoice date, and outstanding or held check registers within 15 days after the end of each month. 6. Monthly perpetual inventory reports for the Inventory valued on a first-in, first-out basis at the lower of cost or market (in accordance with generally accepted accounting principles) or such other inventory reports as are reasonably requested by GBC, all within 15 days after the end of each month. - -------------------------------------------------------------------------------- 6. BORROWER INFORMATION: PRIOR NAMES OF BORROWER (Section 3.2): None ------------------------------- PRIOR TRADE NAMES OF BORROWER (Section 3.2): Micro Technology, Inc. ------------------------------- -3- 20 GREYROCK BUSINESS CREDIT SCHEDULE TO LOAN AND SECURITY AGREEMENT - -------------------------------------------------------------------------------- EXISTING TRADE NAMES OF BORROWER (Section 3.2): None ------------------------------- OTHER LOCATIONS AND ADDRESSES (Section 3.3): See Exhibit A ------------------------------- MATERIAL ADVERSE LITIGATION (Section 3.10): None ------------------------------ - -------------------------------------------------------------------------------- 7. STREAMLINED AND NON-STREAMLINED FACILITIES (Section 4): 7.1 SELECTING A FACILITY. Throughout each calendar quarter, either the "Streamlined Facilityo or the "Non-Streamlined Facilityo shall be in effect, and Borrower shall give GBC written notice, at least three business days before the beginning of each calendar quarter as to which Facility shall be in effect during such calendar quarter. If Borrower fails to give written notice to GBC at least three business days before the beginning of a calendar quarter, as to which Facility shall be in effect, then the Facility in effect during the prior calendar quarter shall continue in effect during the next calendar quarter. The Facility in effect as of the Effective Date shall be the Non-Streamlined Facility. If Borrower desires to change from a Streamlined Facility to a Non-Streamlined Facility, then along with the written notice of such change, Borrower shall provide GBC with any schedules, reports, assignments, agings and the like which would be required under the new Facility but were not required under the old Facility, current as of the date of the change, and shall allow GBC access to its books and records for purposes of GBC conducting its standard pre-funding audit. 7.2 STREAMLINED FACILITY PROVISIONS. At all times while the Streamlined Facility is in effect, the following provisions shall apply: (A) Daily reporting of transactions and daily schedules and assignments of Receivables and schedules of collections, called for by Section 4.3 of the Loan Agreement, will not be required. Instead, Borrower will provide GBC with a weekly monthly Borrowing Base Certificate, in such form as GBC shall from time to time specify, within 3 days after the end of each week. In the event, as of the end of any week, the total of all Loans and all other Obligations exceeds the Credit Limit, Borrower shall immediately pay the amount of the excess to GBC. (B) Delivery of the proceeds of Receivables and other Collateral within one business day after receipt, as called for by Sections 4.4 and 5.4 of the Loan Agreement, will not be required. 7.3 TERMINATION OF STREAMLINED FACILITY Borrower shall have the right to terminate the Streamlined Facility, as provided above. In addition, the Streamlined Facility shall immediately terminate if any Default or Event -4- 21 GREYROCK BUSINESS CREDIT SCHEDULE TO LOAN AND SECURITY AGREEMENT - -------------------------------------------------------------------------------- of Default occurs and is continuing. Upon any termination of the Streamlined Facility, Borrower shall, then and thereafter, provide GBC with the daily reporting of transactions and daily schedules and assignments of Receivables and schedules of collections, as called for by Section 4.3 of the Loan Agreement, and Borrower shall deliver all proceeds of Receivables and other Collateral to GBC, within one business day after receipt, as called for by Sections 4.4 and 5.4 of the Loan Agreement. - -------------------------------------------------------------------------------- 8. AMENDMENT AND RESTATEMENT The Loan and Security Agreement dated March 31, 1995, together with the Schedule thereto, each as amended, between GBC and Borrower (as so amended, the "Prior Loan Agreement") shall be amended and restated in its entirety by the Loan and Security Agreement, and this Schedule thereto, subject to the conditions precedent that no Default or Event of Default has occurred or is continuing under the Prior Loan Agreement, and GBC shall have received each of the following, in form and substance satisfactory to GBC and its counsel: (i) a certificate of the Secretary of Borrower certifying (A) the resolutions and other actions taken or adopted by Borrower authorizing the execution, delivery and performance of the Loan and Security Agreement, this Schedule and any other documents and instruments in connection therewith (the "Amendment Documents"), and (B) the incumbency, authority and signatures of each officer of Borrower authorized to execute and deliver the Amendment Documents and act with respect thereto; (ii) a favorable legal opinion of legal counsel to the Borrower as to such matters as GBC may reasonably request; (iii) a Participation Agreement between GBC and Silicon Valley Bank ("SVB"), in form and substance satisfactory to GBC, pursuant to which SVB will acquire a $10,000,000 participation interest in the Loans; and (iv) evidence that all searches have been received and all filings, registrations and recordings have been made in the appropriate governmental offices, and all other action has been taken, which shall be necessary to confirm and continue GBC's first-priority perfected and enforceable security interest in all of the Collateral (other than the Collateral to be released as provided below), subject only to the Permitted Liens. GBC shall notify Borrower and SVB of the date of satisfaction of the foregoing conditions to effectiveness (the "Effective Date"). Until the occurrence of the Effective Date, the Prior Loan Agreement shall remain in full force and effect and shall be unaffected hereby. On the Effective Date GBC shall release the Pledged Securities, and the Pledge Agreement, the Guaranty and the Subordination Agreement shall terminate (except for any obligations which by their terms survive such termination, such as indemnification obligations). In connection therewith GBC will return all -5- 22 GREYROCK BUSINESS CREDIT SCHEDULE TO LOAN AND SECURITY AGREEMENT - -------------------------------------------------------------------------------- original Pledged Securities and stock powers to Guarantor and sign such other documents and take such other actions as are reasonably necessary to accomplish the foregoing termination, including termination of any UCC Financing Statements in GBC's favor. (The foregoing capitalized terms shall have the meanings set forth in the Amendment to Loan Documents dated May 3, 1996, between Borrower and GBC.) Other than the foregoing release of the Pledged Securities GBC's security interests in the Collateral created pursuant to the Prior Loan Agreement shall be preserved and continue in full force and effect notwithstanding the amendment and restatement of the Prior Loan Agreement and the occurrence of the Effective Date. GBC's execution and delivery of, or acceptance of, the Amendment Documents shall not be deemed to create a course of dealing or otherwise create any express or implied duty by it to provide any other or further amendments, consents or waivers in the future. The Amendment Documents set forth in full all of the representations and agreements of the parties with respect to the subject matter thereof and supersede all prior discussions, representations, agreements and understandings between the parties with respect to the subject thereof. All documents, instruments and agreements between GBC and Borrower other than the Prior Loan Agreement shall continue in full force and effect and the same are hereby ratified and confirmed. - -------------------------------------------------------------------------------- BORROWER: GBC: MTI TECHNOLOGY CORPORATION GREYROCK BUSINESS CREDIT, A DIVISION OF NATIONSCREDIT COMMERCIAL CORPORATION BY [SIG] BY [SIG] ------------------------------ ------------------------------------ PRESIDENT OR VICE PRESIDENT TITLE PRESIDENT --------------------------------- EX-21.1 3 SUBSIDIARIES OF MTI TECHNOLOGY CORPORATION 1 EXHIBIT 21.1 SUBSIDIARIES OF MTI TECHNOLOGY CORPORATION
JURISDICTION OF SUBSIDIARY INCORPORATION ---------- --------------- MTI Technology GmbH Germany MTI Technology Limited Scotland MTI France SA France Microtechnology Scandinavia, AB Sweden MTI Technology Ireland Ltd. Ireland MTI Technology BV Holland MTI Technology SA Switzerland MTI Technology Europe Ireland National Peripherals, Inc. Illinois, USA International Micro Technology, Inc. U.S. Virgin Islands SI Computer Systems, Ltd. UK System Industries (Deutschland) GmbH Germany SI Network Storage Canada, Ltd. Canada System Industries Ireland, Ltd. Ireland System Industries Network Storage B.V. Holland System Industries (Switzerland), S.A. Switzerland
EX-23.1 4 INDEPENDENT AUDITORS' CONSENT 1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT The Board of Directors MTI Technology Corporation: We consent to incorporation by reference in the registration statements (Nos. 333-18501 and 33-80438) on Form S-8 of MTI Technology Corporation of our report dated May 20, 1997, relating to the consolidated balance sheets of MTI Technology Corporation and subsidiaries as of April 5, 1997 and April 6, 1996 and the related consolidated statements of operations, stockholders' equity (deficiency) and cash flows for the fiscal years ended April 5, 1997, April 6, 1996 and April 1, 1995, and related schedule, which report appears in the April 5, 1997 annual report on Form 10-K of MTI Technology Corporation. KPMG Peat Marwick LLP Orange County, California July 2, 1997 EX-27 5 FINANCIAL DATA SCHEDULE
5 1,000 YEAR APR-05-1997 APR-07-1996 APR-05-1997 4,337 0 41,182 9,283 14,637 54,695 35,216 21,996 83,592 66,962 0 0 0 26 16,351 83,592 120,359 153,727 83,607 103,803 0 319 2,993 6,368 664 5,704 0 0 0 5,704 .21 .21
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