<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
\x\ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period ended October 5, 1996
OR
\ \ 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
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
--- ---
The number of shares outstanding of the issuer's common stock, $.001 par
value, as of November 11, 1996 was 25,679,164.
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MTI TECHNOLOGY CORPORATION
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at October 5,
1996 and April 6, 1996 3
Condensed Consolidated Statements of Operations for
the Three and Six Months Ended October 5, 1996 and
September 30, 1995 4
Condensed Consolidated Statements of Cash Flows for
the Six Months Ended October 5, 1996 and
September 30, 1995 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 6. Exhibits and Reports on Form 8-K 16
2
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MTI TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
OCTOBER 5, APRIL 6,
1996 1996
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,938 $ 4,055
Accounts receivable, net 23,464 21,101
Inventories 13,791 21,499
Deferred income tax benefit 784 784
Prepaid expenses and other receivables 4,664 3,750
-------- --------
Total current assets 47,641 51,189
Property, plant and equipment, net 14,670 16,323
Intangible assets and goodwill, net 14,944 15,852
Other 683 659
-------- --------
$ 77,938 $ 84,023
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Short-term borrowings $ 23,937 $ 20,613
Current maturities of long-term debt 3,341 8,297
Accounts payable 11,266 14,580
Accrued liabilities 16,025 18,724
Deferred income 9,696 14,941
-------- --------
Total current liabilities 64,265 77,155
Long-term debt, less current maturities 1,062 5,966
Deferred income 324 550
Other 4 539
-------- --------
Total liabilities 65,655 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 26,396 and 20,243 shares at
October 5 and April 6, 1996, respectively 26 20
Additional paid-in capital 88,388 77,762
Accumulated deficit (71,920) (73,645)
Less cost of treasury stock (774 and 794 shares at
October 5 and April 6, 1996, respectively) (2,863) (2,938)
Cumulative foreign currency translation
adjustments (1,348) (1,386)
-------- --------
Total stockholders' equity (deficiency) 12,283 (187)
-------- --------
$ 77,938 $ 84,023
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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MTI TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
OCTOBER 5, SEPTEMBER 30,
1996 1995
---- ----
<S> <C> <C>
Net product revenue $ 28,153 $ 25,729
Service revenue 8,358 8,617
-------- --------
Total revenue 36,511 34,346
Product cost of revenue 20,004 18,523
Service cost of revenue 4,910 5,163
-------- --------
Total cost of revenue 24,914 23,686
Gross profit 11,597 10,660
-------- --------
Operating expenses:
Selling, general and administrative 8,171 9,967
Research and development 2,376 2,969
-------- --------
Total operating expenses 10,547 12,936
Operating income (loss) 1,050 (2,276)
Other income (expense), net 331 (1,111)
-------- --------
Income (loss) before income taxes 1,381 (3,387)
Income tax expense (benefit) 150 (7)
-------- --------
Net income (loss) $ 1,231 $ (3,380)
======== ========
Income (loss) per common and common
equivalent share $ 0.05 $ (0.17)
======== ========
Weighted average common and common
equivalent shares 26,007 19,380
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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MTI TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
OCTOBER 5, SEPTEMBER 30,
1996 1995
---- ----
<S> <C> <C>
Net product revenue $ 55,757 $ 50,506
Service revenue 16,931 17,392
-------- --------
Total revenue 72,688 67,898
Product cost of revenue 40,063 36,113
Service cost of revenue 9,902 10,200
-------- --------
Total cost of revenue 49,965 46,313
Gross profit 22,723 21,585
-------- --------
Operating expenses:
Selling, general and administrative 16,749 20,935
Research and development 4,667 6,209
-------- --------
Total operating expenses 21,416 27,144
Operating income (loss) 1,307 (5,559)
Other income (expense), net 531 (1,764)
-------- --------
Income (loss) before income taxes 1,838 (7,323)
Income tax expense 150 315
-------- --------
Net income (loss) $ 1,688 $ (7,638)
======== ========
Income (loss) per common and common
equivalent share $ 0.06 $ (0.39)
======== ========
Weighted average common and common
equivalent shares 26,070 19,366
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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MTI TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
OCTOBER 5, SEPTEMBER 30,
1996 1995
---- ----
<S> <C> <C>
Net cash used in operating activities $ (254) $(11,385)
-------- --------
Cash flows from investing activities:
Capital expenditures for property, plant
and equipment, net (1,725) (4,662)
Disposal of property, plant and equipment -- 340
Acquisition of NPI assets and liabilities, net of cash
acquired -- (2,608)
Other investment -- (43)
-------- --------
Net cash used in investing activities (1,725) (6,973)
-------- --------
Cash flows from financing activities:
Borrowings under notes payable, net of acquisitions 56,194 69,965
Borrowings under notes payable to fund acquisition
of NPI -- 2,608
Proceeds from issuance of common stock and
exercise of options and warrants 267 128
Repayment of notes payable (53,380) (57,503)
-------- --------
Net cash provided by financing activities 3,081 15,198
-------- --------
Effect of exchange rate changes on cash (219) 47
-------- --------
Net increase (decrease) in cash and cash equivalents 883 (3,113)
Cash and cash equivalents at beginning of period 4,055 5,562
-------- --------
Cash and cash equivalents at end of period $ 4,938 $ 2,449
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 866 $ 2,009
Income taxes 22 235
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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MTI TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. The interim condensed consolidated financial statements included herein have
been prepared by MTI Technology Corporation (the "Company") without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission
(the "SEC"). Certain information and footnote disclosures, normally included in
the financial statements prepared in accordance with generally accepted
accounting principles, have been omitted pursuant to such SEC rules and
regulations; nevertheless, the management of the Company believes that the
disclosures herein are adequate to make the information presented not
misleading. These condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the fiscal year ended
April 6, 1996. In the opinion of management, the condensed consolidated
financial statements included herein reflect all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the condensed
consolidated financial position of the Company as of October 5, 1996, and the
condensed consolidated results of operations and cash flows for the three month
and six month periods ended October 5, 1996 and September 30, 1995. The results
of operations for the interim periods are not necessarily indicative of the
results of operations for the full year. References to amounts are in thousands,
except share and per share data, unless otherwise specified.
2. Inventories consist of the following:
<TABLE>
<CAPTION>
OCTOBER 5, APRIL 6,
1996 1996
---- ----
<S> <C> <C>
Raw Materials $ 6,207 $13,090
Work in Process 294 2,106
Finished Goods 7,290 6,303
------- -------
$13,791 $21,499
</TABLE>
3. 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.
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4. On July 19, 1995, the Company entered into an agreement (the "Agreement"),
whereby it received a loan of approximately $10,000 from NFT Ventures II, LLC
("NFT V2"), an entity affiliated with the Company's major stockholder and
Chairman of the Board. Pursuant to the loan agreement, the Company issued a
long-term, secured subordinated note ("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 were being used for working capital purposes.
During the second quarter of fiscal 1996, the Company entered into an
agreement with NFT V2, whereby, pursuant to the terms of the agreement, the
Company licensed certain software products to NFT V2 for commercial use and
resale. As consideration for the licenses, the Company received a $650 credit
against amounts owing to NFT V2 under the Agreement and has access to certain
product enhancements to be developed by NFT V2.
On April 11, 1996, NFT V2 exercised its right to convert current principal
and accrued interest outstanding of $10,113, under the Note, into 5,992,665
common shares of the Company.
5. 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 will 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 funding payments will be received in essentially four
equal quarterly installments of approximately $600 each, of which the first two
payments have been received. The remaining installments will be paid within ten
days of submission of a statement of incurred expenses for the next two
successive quarters. 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.
6. In August 1996, the Company agreed with NFT to enter into a joint venture in
the form of a limited liability corporation (the "LLC") at some future date not
yet determined. The initial business purpose of the LLC will be the design and
development of RAID-based data storage systems that will work across multiple
operating environments.
7. Net income (loss) per common and common equivalent share was computed based
on the weighted average number of common and common equivalent shares
outstanding during the periods presented. The Company has granted certain stock
options which have been treated as common stock equivalents in computing both
primary and fully diluted income (loss) per share, except in those periods where
such inclusion would be antidilutive. The primary and fully dilutive income
(loss) per share computations are approximately the same.
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PART 1 - ITEM 2. 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 software, systems and service offerings for the Open Systems
computing environment and decrease its historic dependence on sales and service
from the Digital Equipment Corporation ("DEC") computing environment. Revenue
from product sales to the Open Systems marketplace increased from less than 10%
for fiscal 1994, to approximately 21% for fiscal 1995, to approximately 43% for
fiscal 1996, and to approximately 77% for the second quarter of fiscal 1997.
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.
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. 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.
The Raxco and NPI acquisitions are part of the Company's strategy to
expand its product lines and increase revenue from the non-DEC marketplace, and
to heighten emphasis on the Company's software product development efforts.
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) $30.0
million to be received in six equal annual installments of $5.0 million, 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 of control of the Company
involving certain identified acquirers. As part of the agreement, the Company
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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.
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 will 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 funding payments will be received in essentially
four equal quarterly installments of approximately $600 each, of which the first
two payments have been received. The remaining installments will be paid within
ten days of submission of a statement of incurred expenses for the next two
successive quarters. 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.
The Company has experienced significant quarterly fluctuations in
operating results and anticipates that these fluctuations may continue in the
future. These fluctuations have been and may continue to be caused by a number
of factors, including competitive pricing pressures, the timing of customer
orders (a large majority of which have historically been placed in the last
month of each quarter), the 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, but not limited to, the Company's ability to continue
to develop innovative products, the introduction of new products by the
Company's competitors, decreases in gross profit margin for mature products, the
ability to obtain certain key components used in the manufacture of the
Company's products, and the ability to retain and attract key personnel. There
can be no assurance that the Company will be profitable on a quarter-to-quarter
or annual basis.
The Company has operated historically without a significant backlog of
orders and, as a result, net product revenue in any quarter is dependent on
orders booked and products shipped during that quarter. A significant portion of
the Company's operating expenses are relatively fixed in nature and planned
expenditures are based primarily on sales forecasts. If revenue does not meet
the Company's expectations in any given quarter, the adverse impact on the
Company's liquidity position and net income may be magnified by the Company's
inability to reduce expenditures quickly enough to compensate for the revenue
shortfall. Further, as is common in the computer industry, the Company
historically has experienced an increase in the number of orders and shipments
in the latter part of each quarter and the Company expects this pattern to
continue in the future. The Company's failure to receive anticipated orders or
to complete shipments in the latter part of a quarter could have a material
adverse effect on the Company's results of operations for that quarter.
The non-historical information in this Form 10-Q 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 in this Form 10-Q. Additional information on
potential factors that could affect the Company's financial results are included
in the Company's Annual Report on Form 10-K for the year ended April 6, 1996.
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RESULTS OF OPERATIONS
The following table sets forth selected items from the Condensed
Consolidated Statements of Operations as a percentage of net 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 Condensed Consolidated Financial
Statements included elsewhere within:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
-------------------------- ------------------------
OCTOBER 5, SEPTEMBER 30, OCTOBER 5, SEPTEMBER 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net product revenue 77.1% 74.9% 76.7% 74.4%
Service revenue 22.9 25.1 23.3 25.6
----- ----- ----- -----
Total revenue 100.0 100.0 100.0 100.0
Product gross profit 28.9 28.0 28.1 28.5
Service gross profit 41.3 40.1 41.5 41.4
----- ----- ----- -----
Gross profit 31.8 31.0 31.3 31.8
Selling, general and
administrative expenses 22.4 29.0 23.1 30.8
Research and development 6.5 8.6 6.4 9.2
----- ----- ----- -----
Operating income (loss) 2.9 (6.6) 1.8 (8.2)
Other income (expense), net 0.9 (3.2) 0.7 (2.6)
Income tax expense 0.4 -- 0.2 0.5
----- ----- ----- -----
Net income (loss) 3.4% (9.8)% 2.3% (11.3)%
===== ===== ===== =====
</TABLE>
Net Product Revenue: Net product revenue increased $2.4 million, or 9.4% over
the same quarter of the prior year. This increase was primarily due to increased
revenue of $2.2 million from optical/tape products, primarily the mid-range 1500
series of automated DLT tape libraries. In addition, software revenue and server
revenue both increased $0.3 million over the same period of the prior year.
These increases were partially offset by decreased sales of $0.4 million to
Boeing Information Services, Inc. relating to Boeing's RCAS contract with the
federal government. The RCAS program has ended.
Net product revenue increased $5.3 million, or 10.4% for the first six months of
fiscal 1997 as compared to the same period of the prior year. This increase was
primarily due to increased revenue of $4.9 million from optical/tape products,
primarily the mid-range 1500 series of automated DLT tape libraries. In
addition, software revenue and server revenue increased $0.9 million and $0.7
million, respectively, over the same period of the prior year. These increases
were partially offset by decreased sales of $1.2 million to Boeing Information
Services, Inc. relating to Boeing's RCAS contract with the federal government.
Service Revenue: Service revenue decreased $0.3 million, or 3.0% from the same
quarter of the prior year. Service revenue decreased $0.5 million, or 2.7% for
the first six months of fiscal 1997 from the comparable period of the prior
year. These decreases are 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 year.
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Product Gross Profit: Product gross profit was $8.1 million for the second
quarter of fiscal 1997, an increase of $0.9 million, or 13.1% over the same
quarter of the preceding year, and the gross profit percentage of net product
sales was 28.9% for the second quarter of fiscal 1997 as compared to 28.0% for
the same period of the prior year. The increase in the gross profit percentage
was primarily due to the inclusion of $0.5 million of royalty revenue related to
the February 1996 sale of substantially all of the Company's existing patents,
patent applications and rights thereof to EMC Corporation ("EMC"), partially
offset by the higher mix of Open Systems product revenues, which carry a lower
margin percentage.
Product gross profit was $15.7 million for the first six months of fiscal 1997,
an increase of $1.3 million, or 9.0% over the same quarter of the preceding
year, and the gross profit percentage of net product sales was 28.1% for the
first six months of fiscal 1997 as compared to 28.5% for the same period of the
prior year. The decrease in the gross profit percentage was primarily due the
higher mix of Open Systems product revenue, which carry a lower margin
percentage, partially offset by the inclusion of $1.0 million of royalty revenue
related to the February 1996 sale of substantially all of the Company's existing
patents, patent applications and rights thereof to EMC.
Service Gross Profit: Service gross profit was $3.4 million for the second
quarter of fiscal 1997, a decrease of $0.1 million from the same period of the
previous year. The gross profit percentage of service revenue increased to 41.3%
in the first quarter of fiscal 1997 over 40.1% in the same quarter of the
preceding year. The increase in the gross profit percentage was primarily a
result of a reduction in the service cost infrastructure partially offset by a
corresponding decrease in service revenues.
Service gross profit was $7.0 million for the first six months of fiscal 1997, a
decrease of $0.2 million, or 2.3% from the first quarter of the prior year. The
gross profit percentage of service revenue increased to 41.5% in the first six
months of fiscal 1997 over 41.4% in the comparable period of the preceding year.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses for the second quarter of fiscal 1997 decreased $1.8
million, or 18.0% from the same quarter of the preceding year. This decrease was
primarily due to reduced payroll and related expenses of approximately $1.0
million as a result of restructuring actions begun in the fourth quarter of
fiscal 1996 and completed in the first quarter of fiscal 1997, decreased
goodwill amortization of $0.5 million due to the write-off of goodwill in the
fourth quarter of fiscal 1996, and reductions in other expense categories of
$0.3 million.
For the first six months of fiscal 1997, selling, general and administrative
expenses decreased $4.2 million, or 20.0% from the comparable period of the
prior year. This decrease was primarily due to reduced payroll and related
expenses of approximately $1.8 million as a result of restructuring actions
begun in the fourth quarter of fiscal 1996 and completed in the first quarter of
fiscal 1997, decreased goodwill amortization of $1.0 million due to the
write-off of goodwill in the fourth quarter of fiscal 1996, decreased travel
expenses of $0.3 million due to restructuring actions noted above, decreased
legal expense of $0.2 million, primarily as a result of the settlement of
shareholder litigation, and reductions in other expense categories of $0.9
million.
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Research and Development Expenses: Research and development expenses for the
second quarter of fiscal 1997 decreased $0.6 million, or 20.0% from the same
quarter of the preceding year. This decrease was primarily due to non-refundable
research and development funding from NFT.
Research and development expenses for the first six months of fiscal 1997
decreased $1.5 million, or 24.8% from the comparable period of the preceding
year. This decrease was primarily due to reduced payroll and related expenses of
approximately $0.8 million as a result of restructuring actions begun in the
fourth quarter of fiscal 1996 and completed in the first quarter of fiscal 1997,
and non-refundable research and development funding from NFT of $0.9 million,
partially offset by reductions in other expense categories of $0.2 million.
Other Income (Expense), Net: Other income, net, for the second quarter of fiscal
1997 increased $1.4 million, or 129.8% over the same period of the prior year.
This increase was primarily due to $1.2 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, and decreased interest expense of $0.2
primarily due to the reduction of long-term debt.
Other income, net, for the first six months of fiscal 1997 increased $2.3
million, or 130.1% over the comparable period of the previous year. This
increase was primarily due to income recognized on the sale of substantially all
of the Company's existing patents, patent applications and rights thereof to EMC
in February 1996.
13
<PAGE> 14
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $4.9 million at October 5, 1996, an
increase of $0.9 million as compared to April 6, 1996, the prior fiscal year
end. Net operating activities used $0.3 million during the first six months of
fiscal 1997, primarily due to an increase in accounts receivable of $2.4 million
as a result of increased revenues and a decrease in accounts payable and accrued
liabilities of $6.0 million primarily due to reduced trade purchases, partially
offset by decreased inventories of $7.7 million. Cash provided by financing
activities was $3.1 million, primarily as a result of increased bank line
borrowings.
The Company's average days outstanding were 59 days at the end of the
second quarter of fiscal 1997, as compared to 75 days at the end of the same
quarter of fiscal 1996.
Stockholders' equity at the end of the second quarter of fiscal 1997 was
$12.3 million as compared to $(0.2) million at the end of fiscal 1996. The
increase was primarily due to the conversion on April 11, 1996, of $10.1 million
of outstanding debt principal and accrued interest into approximately 6.0
million shares of common stock pursuant to the terms and conditions of a loan
agreement between the Company and the lender, an entity affiliated with the
Company's major stockholder and Chairman of the Board.
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 October 5, 1996,
borrowings outstanding under this agreement were $23.9 million. At November 11,
1996, the outstanding balance under this line was approximately $24.3 million.
The bank line of credit contains certain restrictive covenants. At October 5,
1996, the Company was in compliance with all such covenants.
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.
Effective April 7, 1996, the Company entered into an agreement with NFT
whereby NFT will 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
funding payments will be received in essentially four equal quarterly
installments of approximately $0.6 million, of which the first two payments have
been received. The remaining installments will be paid within ten days of
submission of a statement of incurred expenses for the next two successive
quarters.
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.
14
<PAGE> 15
PART II - OTHER INFORMATION
ITEM 1 - 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 $5.5
million, and the Claims Receipt and Policy Release agreement became effective
March 29, 1996. The Company's unreimbursed portion of the aggregate settlement
was $1.7 million. 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.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of the stockholders of the Company was held on October
3, 1996. The following members were elected to the Company's Board of Directors
to hold office for the ensuing year:
<TABLE>
<CAPTION>
Nominee In Favor Withheld
- ------- -------- --------
<S> <C> <C>
Val Kreidel 24,068,092 26,934
Earl Pearlman 24,067,392 27,634
</TABLE>
Raymond J. Noorda, Steven J. Hamerslag and David Proctor remain members of the
Board of Directors.
The stockholders of the Company voted in favor of the ratification of selection
of KPMG Peat Marwick LLP as the Company's independent public accountants for
fiscal year 1997. The number of shares voted for ratification was 21,669,807.
The number of shares abstaining was 2,400,192. The number of shares voted
against ratification was 25,027.
The stockholders of the Company voted in favor of the issuance of warrants to
purchase 750,000 shares of the Company's common stock at an exercise price of
$2.25 per share as part of an agreement entered into with NFT Ventures. Inc. The
number of shares voted for approval of the issuance of the warrants was
18,871,170. The number of shares voted against approval of the issuance of the
warrants was 61,504. The number of shares abstaining was 53,367.
The stockholders of the Company voted in favor of the issuance of warrants to
purchase 500,000 shares of the Company's common stock as consideration for a
$10.0 million loan guaranty provided to the Company by NFT. The number of shares
voted for approval of the issuance of the warrants was 5,794,859. The number of
shares voted against approval of the issuance of the warrants was 1,856,638. The
number of shares abstaining was 51,567.
The stockholders of the Company voted in favor of the 1996 Stock Incentive Plan.
The number of shares voted for approval of the 1996 Stock Incentive Plan was
17,547,553. The number of shares voted against approval of the 1996 Stock
Incentive Plan was 1,263,717. The number of shares abstaining was 165,416.
15
<PAGE> 16
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.46 1996 Stock Incentive Plan
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.
27 Financial Data Schedule
(b) Reports on Form 8-K:
Registrant filed a report on Form 8-K dated August 30, 1996, regarding the
commencement of the trading of the Company's common stock on the Nasdaq SmallCap
Market.
16
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on the 12th day of November 1996.
MTI TECHNOLOGY CORPORATION
By: /s/ Dale R. Boyd
Dale R. Boyd
Vice President and Chief Financial
Officer
(Principal Financial and Accounting
Officer)
17
<PAGE> 18
EXHIBIT INDEX
Exhibit Number Description Page
- -------------- ----------- ----
10.46 1996 Stock Incentive Plan 19
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 the Registrant 32
27 Financial Data Schedule 36
18
<PAGE> 1
EXHIBIT 10.46
MTI TECHNOLOGY CORPORATION
1996 STOCK INCENTIVE PLAN
1. Purposes of the Plan. The purposes of this Stock Incentive Plan are
to attract and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to Employees, Directors and
Consultants of the Company and its Subsidiaries and to promote the success of
the Company's business.
2. Definitions. As used herein, the following definitions shall apply:
(a) "Administrator" means the Board or any of the Committees
appointed to administer the Plan.
(b) "Affiliate" and "Associate" shall have the respective
meanings ascribed to such terms in Rule 12b-2 promulgated under the Exchange
Act.
(c) "Applicable Laws" means the legal requirements relating to
the administration of stock incentive plans, if any, under applicable provisions
of federal securities laws, state corporate and securities laws, the Code, and
the rules of any applicable stock exchange or national market system.
(d) "Award" means the grant of an Option, SAR, Dividend
Equivalent Right, Restricted Stock, Performance Unit, Performance Share, or
other right or benefit under the Plan.
(e) "Award Agreement" means the written agreement evidencing
the grant of an Award executed by the Company and the Grantee, including any
amendments thereto.
(f) "Board" means the Board of Directors of the Company.
(g) "Change in Control" means a change in ownership or control
of the Company effected through either of the following transactions:
(i) the direct or indirect acquisition by any person
or related group of persons (other than an acquisition from or by (A) the
Company or by a Company-sponsored employee benefit plan or by a person that
directly or indirectly controls, is controlled by, or is under common control
with, the Company or (B) any current beneficial stockholder or group, as defined
by Rule 13d-5 of the Securities Exchange Act of 1934, holding in excess of 50%
of the combined voting power of the Company's outstanding securities, including
the heirs, assigns and successors thereof) of beneficial ownership (within the
meaning of Rule 13d-3 of the Exchange Act) of securities possessing more than
fifty percent (50%) of the total combined voting power of the Company's
outstanding securities pursuant to a tender or exchange offer made directly to
the Company's stockholders which a majority of the Continuing Directors who are
not Affiliates or Associates of the offeror do not recommend such stockholders
to accept, or
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<PAGE> 2
(ii) a change in the composition of the Board over a
period of thirty-six (36) months or less such that a majority of the Board
members (rounded up to the next whole number) ceases, by reason of one or more
contested elections for Board membership, to be comprised of individuals who are
Continuing Directors.
(h) "Code" means the Internal Revenue Code of 1986, as
amended.
(i) "Committee" means any committee appointed by the Board to
administer the Plan.
(j) "Common Stock" means the common stock of the Company, as
adjusted in accordance with the provisions of Section 10, below.
(k) "Company" means MTI Technology Corporation, a Delaware
corporation.
(l) "Consultant" means any person who is engaged by the
Company or any Parent or Subsidiary to render consulting or advisory services
and is compensated for such services.
(m) "Continuing Directors" means members of the Board who
either (i) have been Board members continuously for a period of at least
thirty-six (36) months or (ii) have been Board members for less than thirty-six
(36) months and were elected or nominated for election as Board members by at
least a majority of the Board members described in clause (i) who were still in
office at the time such election or nomination was approved by the Board.
(n) "Continuous Status as an Employee, Director or Consultant"
means that the employment, director or consulting relationship with the Company,
any Parent, or Subsidiary, is not interrupted or terminated. Continuous Status
as an Employee, Director or Consultant shall not be considered interrupted in
the case of (i) any leave of absence approved by the Company or (ii) transfers
between locations of the Company or between the Company, its Parent, any
Subsidiary, or any successor. A leave of absence approved by the Company shall
include sick leave, military leave, or any other personal leave approved by an
authorized representative of the Company. For purposes of Incentive Stock
Options, no such leave may exceed ninety (90) days, unless reemployment upon
expiration of such leave is guaranteed by statute or contract.
(o) "Corporate Transaction" means any of the following
stockholder-approved transactions to which the Company is a party:
(i) a merger or consolidation in which the Company is
not the surviving entity, except for a transaction the principal purpose of
which is to change the state in which the Company is incorporated,
(ii) the sale, transfer or other disposition of all
or substantially all of the assets of the Company (including the capital stock
of the Company's subsidiary corporations) in connection with complete
liquidation or dissolution of the Company, or
2
<PAGE> 3
(iii) any reverse merger in which the Company is the
surviving entity but in which securities possessing more than fifty percent
(50%) of the total combined voting power of the Company's outstanding securities
are transferred to a person or persons different from those who held such
securities immediately prior to such merger.
(p) "Covered Employee" means an Employee who is a "covered
employee" under Section 162(m)(3) of the Code.
(q) "Director" means a member of the Board.
(r) "Dividend Equivalent Right" means a right entitling the
Grantee to compensation measured by dividends paid with respect to Common Stock.
(s) "Employee" means any person, including Officers and
Directors, employed by the Company or any Parent or Subsidiary of the Company.
The payment of a director's fee by the Company shall not be sufficient to
constitute "employment" by the Company.
(t) "Exchange Act" means the Securities Exchange Act of 1934,
as amended.
(u) "Fair Market Value" means, as of any date, the value of
Common Stock determined as follows:
(i) Where there exists a public market for the Common
Stock, the Fair Market Value shall be (A) the closing sales price for a Share
for the last market trading day prior to the time of the determination (or, if
no sales were reported on that date, on the last trading date on which sales
were reported) on the New York Stock Exchange, the NASDAQ National Market or the
principal securities exchange on which the Common Stock is listed for trading,
whichever is applicable or (B) if the Common Stock is not traded on any such
exchange or national market system, the average of the closing bid and asked
prices of a Share on the NASDAQ Small Cap Market, in each case, as reported in
The Wall Street Journal or such other source as the Administrator deems
reliable; or
(ii) In the absence of an established market of the
type described in (i), above, for the Common Stock, the Fair Market Value
thereof shall be determined by the Administrator in good faith, and such
determination shall be conclusive and binding on all persons.
(v) "Grantee" means an Employee, Director or Consultant who
receives an Award under the Plan.
(w) "Incentive Stock Option" means an Option intended to
qualify as an incentive stock option within the meaning of Section 422 of the
Code.
(x) "Non-Qualified Stock Option" means an Option not intended
to qualify as an Incentive Stock Option.
3
<PAGE> 4
(y) "Officer" means a person who is an officer of the Company
within the meaning of Section 16 of the Exchange Act and the rules and
regulations promulgated thereunder.
(z) "Option" means a stock option granted pursuant to
the Plan.
(aa) "Parent" means a "parent corporation," whether now or
hereafter existing, as defined in Section 424(e) of the Code.
(bb) "Performance - Based Compensation" means compensation
qualifying as "performance-based compensation" under Section 162(m) of the Code.
(cc) "Performance Shares" means Shares or an award denominated
in Shares which may be earned in whole or in part upon attainment of performance
criteria established by the Administrator.
(dd) "Performance Units" means an award which may be earned in
whole or in part upon attainment of performance criteria established by the
Administrator and which may be settled for cash, securities or a combination or
cash or securities as determined by the Administrator.
(ee) "Plan" means this 1996 Stock Incentive Plan.
(ff) "Restricted Stock" means Shares issued under the Plan to
the Grantee for such consideration, if any, and subject to such restrictions on
transfer, rights of first refusal, repurchase provisions, forfeiture provisions,
and other terms and conditions as established by the Administrator.
(gg) "Rule 16b-3" means Rule 16b-3 promulgated under the
Exchange Act or any successor thereto.
(hh) "SAR" means a stock appreciation right entitling the
Grantee to Shares or cash compensation measured by appreciation in the value of
Common Stock.
(ii) "Share" means a share of the Common Stock.
(jj) "Subsidiary" means a "subsidiary corporation," whether
now or hereafter existing, as defined in Section 424(f) of the Code.
(kk) "Subsidiary Disposition" means the disposition by the
Company of its equity holdings in any subsidiary corporation effected by a
merger or consolidation involving that subsidiary corporation, the sale of all
or substantially all of the assets of that subsidiary corporation or the
Company's sale or distribution of substantially all of the outstanding capital
stock of such subsidiary corporation.
4
<PAGE> 5
3. Stock Subject to the Plan.
(a) Subject to the provisions of Section 10, below, the
maximum aggregate number of Shares which may be issued pursuant to Awards
initially shall be 2,250,000 Shares, and commencing with the first business day
of each calendar year thereafter beginning with 1997, such maximum aggregate
number of Shares shall be increased by a number equal to three percent (3%) of
the number of Shares outstanding as of December 31st of the immediately
preceding calendar year. Notwithstanding the foregoing, the maximum aggregate
number of Shares available for grant of Incentive Stock Options shall be
2,250,000 Shares, and such number shall not be subject to annual adjustment as
described above. The Shares to be issued pursuant to Awards may be authorized,
but unissued, or reacquired Common Stock.
(b) If an Award expires or becomes unexercisable without
having been exercised in full, or is surrendered pursuant to an Award exchange
program, or if any unissued Shares are retained by the Company upon exercise of
an Award in order to satisfy the exercise price for such Award or any
withholding taxes due with respect to such Award, such unissued or retained
Shares shall become available for future grant or sale under the Plan (unless
the Plan has terminated). Shares that actually have been issued under the Plan
pursuant to an Award shall not be returned to the Plan and shall not become
available for future distribution under the Plan, except that if unvested Shares
are forfeited, or repurchased by the Company at their original purchase price,
such Shares shall become available for future grant under the Plan.
4. Administration of the Plan.
(a) Plan Administrator.
(i) Administration with Respect to Directors and
Officers. With respect to grants of Awards to Directors or Employees who are
also Officers or Directors of the Company, the Plan shall be administered by (A)
the Board or (B) a Committee designated by the Board, which Committee shall be
constituted in such a manner as to satisfy the Applicable Laws and to permit
such grants and related transactions under the Plan to be exempt from Section
16(b) of the Exchange Act in accordance with Rule 16b-3. Once appointed, such
Committee shall continue to serve in its designated capacity until otherwise
directed by the Board.
(ii) Administration With Respect to Consultants and
Other Employees. With respect to grants of Awards to Employees or Consultants
who are neither Directors nor Officers of the Company, the Plan shall be
administered by (A) the Board or (B) a Committee designated by the Board, which
Committee shall be constituted in such a manner as to satisfy the Applicable
Laws. Once appointed, such Committee shall continue to serve in its designated
capacity until otherwise directed by the Board. The Board may authorize one or
more Officers to grant such Awards and may limit such authority by requiring
that such Awards must be reported to and ratified by the Board or a Committee
within six (6) months of the grant date, and if so ratified, shall be effective
as of the grant date.
(iii) Administration With Respect to Covered
Employees. Notwithstanding the foregoing, grants of Awards to any Covered
Employee intended to qualify
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<PAGE> 6
as Performance-Based Compensation shall be made only by a Committee (or
subcommittee of a Committee) which is composed solely of two or more Directors
eligible to serve on a committee making Awards qualifying as Performance-Based
Compensation. In the case of such Awards granted to Covered Employees,
references to the "Administrator" or to a "Committee" shall be deemed to be
references to such Committee or subcommittee.
(b) Powers of the Administrator. Subject to Applicable Laws, the
provisions of the Plan (including any other powers given to the Administrator
hereunder) and except as otherwise provided by the Board, the Administrator
shall have the authority, in its discretion:
(i) to select the Employees, Directors and
Consultants to whom Awards may from time to time be granted hereunder;
(ii) to determine whether and to what extent Awards
are granted hereunder;
(iii) to determine the number of Shares to be covered
by each Award granted hereunder;
(iv) to approve forms of Award Agreement for use
under the Plan;
(v) to determine the terms and conditions of any
Award granted hereunder;
(vi) to amend the terms of any outstanding Award
granted under the Plan including a reduction in the exercise price (or base
amount on which appreciation is measured) of any Award to reflect a reduction in
the Fair Market Value of the Common Stock since the grant date of the Award,
provided that any amendment that would adversely affect the Grantee's rights
under an outstanding Award shall not be made without the Grantee's written
consent;
(vii) to construe and interpret the terms of the Plan
and Awards granted pursuant to the Plan; and
(viii) to take such other action, not inconsistent
with the terms of the Plan, as the Administrator deems appropriate.
(c) Effect of Administrator's Decision. All decisions,
determinations and interpretations of the Administrator shall be final and
binding on the Grantees and any other holders of Awards intended by the
Administrator to be affected thereby.
5. Eligibility. Awards other than Incentive Stock Options may be
granted to Employees, Directors and Consultants. Incentive Stock Options may be
granted only to Employees. An Employee, Director or Consultant who has been
granted an Award may, if otherwise eligible, be granted additional Awards.
Awards may be granted to such Employees of the Company and its subsidiaries who
are residing in foreign jurisdictions as the Administrator in
6
<PAGE> 7
its sole discretion may determine from time to time. The Administrator may
establish additional terms, conditions, rules or procedures to accommodate the
rules or laws of applicable foreign jurisdictions and to afford Grantees
favorable treatment under such laws; provided, however, that no Award shall be
granted under any such additional terms, conditions, rules or procedures with
terms or conditions which are inconsistent with the provisions of the Plan.
6. Terms and Conditions of Awards.
(a) Type of Awards. The Administrator is authorized under the
Plan to award any type of arrangement to an Employee, Director or Consultant
that is not inconsistent with the provisions of the Plan and that by its terms
involves or might involve the issuance of (i) Shares, (ii) an Option, a SAR or
similar right with an exercise or conversion privilege at a fixed or variable
price related to the Common Stock and/or the passage of time, the occurrence of
one or more events, or the satisfaction of performance criteria or other
conditions, or (iii) any other security with the value derived from the value of
the Common Stock. Such awards include, without limitation, Options, SARs, sales
or bonuses of Restricted Stock, Dividend Equivalent Rights, Performance Units or
Performance Shares, and an Award may consist of one such security or benefit, or
two or more of them in any combination or alternative.
(b) Designation of Award. Each Award shall be designated in
the Award Agreement. In the case of an Option, the Option shall be designated as
either an Incentive Stock Option or a Non-Qualified Stock Option. However,
notwithstanding such designation, to the extent that the aggregate Fair Market
Value of Shares subject to Options designated as Incentive Stock Options which
become exercisable for the first time by a Grantee during any calendar year
(under all plans of the Company or any Parent or Subsidiary) exceeds $100,000,
such excess Options, to the extent of the Shares covered thereby in excess of
the foregoing limitation, shall be treated as Non-Qualified Stock Options. For
this purpose, Incentive Stock Options shall be taken into account in the order
in which they were granted, and the Fair Market Value of the Shares shall be
determined as of the date the Option with respect to such Shares is granted.
(c) Conditions of Award. Subject to the terms of the Plan, the
Administrator shall determine the provisions, terms, and conditions of each
Award including, but not limited to, the Award vesting schedule, repurchase
provisions, rights of first refusal, forfeiture provisions, form of payment
(cash, Shares, or other consideration) upon settlement of the Award, payment
contingencies, and satisfaction of any performance criteria. The performance
criteria established by the Administrator may be based on any one of, or
combination of, increase in share price, earnings per share, total stockholder
return, return on equity, return on assets, return on investment, net operating
income, cash flow, revenue, economic value added, personal management
objectives, or other measure of performance selected by the Administrator.
Partial achievement of the specified criteria may result in a payment or vesting
corresponding to the degree of achievement as specified in the Award Agreement.
(d) Deferral of Award Payment. The Administrator may establish
one or more programs under the Plan to permit selected Grantees the opportunity
to elect to defer receipt of consideration upon exercise of an Award,
satisfaction of performance criteria, or other
7
<PAGE> 8
event that absent the election would entitle the Grantee to payment or receipt
of Shares or other consideration under an Award. The Administrator may establish
the election procedures, the timing of such elections, the mechanisms for
payments of, and accrual of interest or other earnings, if any, on amounts or
Shares so deferred, and such other terms, conditions, rules and procedures that
the Administrator deems advisable for the administration of any such deferral
program.
(e) Term of Award. The term of each Award shall be the term
stated in the Award Agreement, provided, however, that the term of an Incentive
Stock Option shall be no more than ten (10) years from the date of grant
thereof. However, in the case of an Incentive Stock Option granted to a Grantee
who, at the time the Option is granted, owns stock representing more than ten
percent (10%) of the voting power of all classes of stock of the Company or any
Parent or Subsidiary, the term of the Incentive Stock Option shall be five (5)
years from the date of grant thereof or such shorter term as may be provided in
the Award Agreement.
(f) Transferability of Awards. Incentive Stock Options may not
be sold, pledged, assigned, hypothecated, transferred, or disposed of in any
manner other than by will or by the laws of descent or distribution and may be
exercised, during the lifetime of the Grantee, only by the Grantee. Other Awards
shall be transferable to the extent provided in the Award Agreement.
(g) Time of Granting Awards. The date of grant of an Award
shall for all purposes be the date on which the Administrator makes the
determination to grant such Award, or such other date as is determined by the
Administrator. Notice of the grant determination shall be given to each
Employee, Director or Consultant to whom an Award is so granted within a
reasonable time after the date of such grant.
7. Award Exercise or Purchase Price, Consideration, Taxes and
Reload Options.
(a) Exercise or Purchase Price. The exercise or purchase
price, if any, for an Award shall be as follows:
(i) In the case of an Incentive Stock Option:
(A) granted to an Employee who, at the time
of the grant of such Incentive Stock Option owns stock representing more than
ten percent (10%) of the voting power of all classes of stock of the Company or
any Parent or Subsidiary, the per Share exercise price shall be not less than
one hundred ten percent (110%) of the Fair Market Value per Share on the date of
grant.
(B) granted to any Employee other than an
Employee described in the preceding paragraph, the per Share exercise price
shall be not less than one hundred percent (100%) of the Fair Market Value per
Share on the date of grant.
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<PAGE> 9
(ii) In the case of a Non-Qualified Stock Option, the
per Share exercise price shall be not less than eighty-five percent (85%) of the
Fair Market Value per Share on the date of grant unless otherwise determined by
the Administrator.
(iii) In the case of other Awards, such price as is
determined by the Administrator.
(b) Consideration. Subject to Applicable Laws, the
consideration to be paid for the Shares to be issued upon exercise or purchase
of an Award including the method of payment, shall be determined by the
Administrator (and, in the case of an Incentive Stock Option, shall be
determined at the time of grant). In addition to any other types of
consideration the Administrator may determine, the Administrator is authorized
to accept as consideration for Shares under the Plan the following:
(i) cash;
(ii) check;
(iii) surrender of Shares (including withholding of
Shares otherwise deliverable upon exercise of the Award) which have a Fair
Market Value on the date of surrender equal to the aggregate exercise price of
the Shares as to which said Award shall be exercised (but only to the extent
that such exercise of the Award would not result in an accounting compensation
charge with respect to the Shares used to pay the exercise price unless
otherwise determined by the Administrator);
(iv) delivery of a properly executed exercise notice
together with such other documentation as the Administrator and the broker, if
applicable, shall require to effect an exercise of the Award and delivery to the
Company of the sale or loan proceeds required to pay the exercise price; or
(v) any combination of the foregoing methods of
payment.
(c) Taxes. No Shares shall be delivered under the Plan to any
Grantee or other person until such Grantee or other person has made arrangements
acceptable to the Administrator for the satisfaction of federal, state, and
local income and employment tax withholding obligations, including, without
limitation, obligations incident to the receipt of Shares or the disqualifying
disposition of Shares received on exercise of an Incentive Stock Option. Upon
exercise of an Award, the Company shall withhold from Grantee an amount
sufficient to satisfy such tax obligations.
(d) Reload Options. In the event the exercise price or tax
withholding of an Option is satisfied by the Company or the Grantee's employer
withholding Shares otherwise deliverable to the Grantee, the Administrator may
issue the Grantee an additional Option, with terms identical to the Award
Agreement under which the Option was exercised, but at an exercise price as
determined by the Administrator in accordance with the Plan.
9
<PAGE> 10
8. Exercise of Award.
(a) Procedure for Exercise; Rights as a Stockholder.
(i) Any Award granted hereunder shall be exercisable
at such times and under such conditions as determined by the Administrator under
the terms of the Plan and specified in the Award Agreement.
(ii) An Award shall be deemed to be exercised when
written notice of such exercise has been given to the Company in accordance with
the terms of the Award by the person entitled to exercise the Award and full
payment for the Shares with respect to which the Award is exercised has been
received by the Company. Until the issuance (as evidenced by the appropriate
entry on the books of the Company or of a duly authorized transfer agent of the
Company) of the stock certificate evidencing such Shares, no right to vote or
receive dividends or any other rights as a stockholder shall exist with respect
to Shares subject to an Award, notwithstanding the exercise of an Option or
other Award. The Company shall issue (or cause to be issued) such stock
certificate promptly upon exercise of the Award. No adjustment will be made for
a dividend or other right for which the record date is prior to the date the
stock certificate is issued, except as provided in the Award Agreement or
Section 10, below.
(b) Exercise of Award Following Termination of Employment,
Director or Consulting Relationship.
(i) An Award may not be exercised after the
termination date of such Award set forth in the Award Agreement and may be
exercised following the termination of a Grantee's Continuous Status as an
Employee, Director or Consultant only to the extent provided in the Award
Agreement.
(ii) Where the Award Agreement permits a Grantee to
exercise an Award following the termination of the Grantee's Continuous Status
as an Employee, Director or Consultant for a specified period, the Award shall
terminate to the extent not exercised on the last day of the specified period or
the last day of the original term of the Award, whichever occurs first.
(iii) Any Award designated as an Incentive Stock
Option to the extent not exercised within the time permitted by law for the
exercise of Incentive Stock Options following the termination of a Grantee's
Continuous Status as an Employee, Director or Consultant shall convert
automatically to a Non-Qualified Stock Option and thereafter shall be
exercisable as such to the extent exercisable by its terms for the period
specified in the Award Agreement.
(c) Buyout Provisions. The Administrator may at any time offer
to buy out for a payment in cash or Shares, an Award previously granted, based
on such terms and conditions as the Administrator shall establish and
communicate to the Grantee at the time that such offer is made.
10
<PAGE> 11
9. Conditions Upon Issuance of Shares.
(a) Shares shall not be issued pursuant to the exercise of an Award
unless the exercise of such Award and the issuance and delivery of such Shares
pursuant thereto shall comply with all Applicable Laws, and shall be further
subject to the approval of counsel for the Company with respect to such
compliance.
(b) As a condition to the exercise of an Award, the Company may require
the person exercising such Award to represent and warrant at the time of any
such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares if, in the
opinion of counsel for the Company, such a representation is required by any
Applicable Laws.
10. Adjustments Upon Changes in Capitalization. Subject to any required
action by the stockholders of the Company, the number of Shares covered by each
outstanding Award, and the number of Shares which have been authorized for
issuance under the Plan but as to which no Awards have yet been granted or which
have been returned to the Plan, as well as the price per share of Common Stock
covered by each such outstanding Award, shall be proportionately adjusted for
any increase or decrease in the number of issued shares of Common Stock
resulting from a stock split, reverse stock split, stock dividend, combination
or reclassification of the Common Stock, or any other similar event resulting in
an increase or decrease in the number of issued shares of Common Stock. Such
adjustment shall be made by the Administrator, and its determination in that
respect shall be final, binding and conclusive. Except as expressly provided
herein, no issuance by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall affect, and no
adjustment by reason hereof shall be made with respect to, the number or price
of Shares subject to an Award.
11. Corporate Transactions/Changes in Control/Subsidiary Dispositions.
(a) The Administrator shall have the authority exercisable
either in advance of any actual or anticipated Corporate Transaction or at the
time of an actual Corporate Transaction and either at the time of the grant of
any Award or at any time while an Award remains outstanding to provide for the
automatic full vesting and exercisability of one or more outstanding unvested
Awards under the Plan and the termination of restrictions on transfer and
repurchase or forfeiture rights on such Awards, in connection with a Corporate
Transaction. The Administrator also shall have the authority to condition any
such Award vesting and exercisability or release from such limitations upon the
subsequent termination of the Continuous Status of an Employee or Consultant of
the Grantee within a specified period following the effective date of the
Corporate Transaction. The Administrator may provide that any Awards so vested
or released from such limitations in connection with a Corporate Transaction,
shall remain fully exercisable until the expiration or sooner termination of the
Award.
(b) Effective upon the consummation of the Corporate
Transaction, all outstanding Awards under the Plan shall terminate and cease to
remain outstanding, except to the extent assumed by the successor company or its
Parent.
11
<PAGE> 12
(c) The Administrator shall have the authority, exercisable
either in advance of any actual or anticipated Change in Control (other than a
Change in Control which is also a Corporate Transaction) or at the time of an
actual Change in Control and either at the time of the grant of an Award or at
any time while an Award remains outstanding, to provide for the automatic full
vesting and exercisability of one or more outstanding unvested Awards under the
Plan and the termination of restrictions on transfer and repurchase or
forfeiture rights on such Awards, in connection with a Change in Control. The
Administrator also shall have the authority to condition any such Award vesting
and exercisability or release from such limitations upon the subsequent
termination of the Continuous Status as an Employee or Consultant of the Grantee
within a specified period following the effective date of the Change in Control.
The Administrator may provide that any Awards so vested or released from such
limitations in connection with a Change in Control, shall remain fully
exercisable until the expiration or sooner termination of the Award.
(d) The Administrator shall have the authority, exercisable
either in advance of any actual or anticipated Subsidiary Disposition or at the
time of an actual Subsidiary Disposition and either at the time of the grant of
an Award or at any time while an Award remains outstanding, to provide for the
automatic full vesting and exercisability of one or more outstanding unvested
Awards under the Plan and the termination of restrictions on transfer and
repurchase or forfeiture rights on such Awards, in connection with a Subsidiary
Disposition, but only with respect to those Grantees who are at the time engaged
primarily in Continuous Service as an Employee or Consultant with the subsidiary
corporation involved in such Subsidiary Disposition. The Administrator also
shall have the authority to condition any such Award vesting and exercisability
or release from such limitations upon the subsequent termination of the affected
Grantee's Continuous Service as an Employee or Consultant with that subsidiary
corporation within a specified period following the effective date of the
Subsidiary Disposition. The Administrator may provide that any Awards so vested
or released from such limitations in connection with a Subsidiary Disposition,
shall remain fully exercisable until the expiration or sooner termination of the
Award.
(e) The portion of any Incentive Stock Option accelerated
under this Section 11 in connection with a Corporate Transaction, Change in
Control or Subsidiary Disposition shall remain exercisable as an Incentive Stock
Option under the Code only to the extent the $100,000 dollar limitation of
Section 422(d) of the Code is not exceeded. To the extent such dollar limitation
is exceeded, the accelerated excess portion of such Option shall be exercisable
as a Non-Qualified Stock Option.
12. Term of Plan. The Plan shall become effective upon the earlier to
occur of its adoption by the Board or its approval by the stockholders of the
Company. It shall continue in effect for a term of ten (10) years unless sooner
terminated.
13. Amendment, Suspension or Termination of the Plan.
(a) The Board may at any time amend, suspend or terminate the
Plan. To the extent necessary and desirable to comply with Applicable Laws, the
Company shall obtain stockholder approval of any Plan amendment in such a manner
and to such a degree as required.
12
<PAGE> 13
(b) No Award may be granted during any suspension or after
termination of the Plan.
(c) Any amendment, suspension or termination of the Plan shall
not affect Awards already granted, and such Awards shall remain in full force
and effect as if the Plan had not been amended, suspended or terminated, unless
mutually agreed otherwise between the Grantee and the Administrator, which
agreement must be in writing and signed by the Grantee and the Company.
14. Reservation of Shares.
(a) The Company, during the term of the Plan, will at all
times reserve and keep available such number of Shares as shall be sufficient to
satisfy the requirements of the Plan.
(b) The inability of the Company to obtain authority from any
regulatory body having jurisdiction, which authority is deemed by the Company's
counsel to be necessary to the lawful issuance and sale of any Shares hereunder,
shall relieve the Company of any liability in respect of the failure to issue or
sell such Shares as to which such requisite authority shall not have been
obtained.
15. No Effect on Terms of Employment. The Plan shall not confer upon
any Grantee any right with respect to continuation of employment or consulting
relationship with the Company, nor shall it interfere in any way with his or her
right or the Company's right to terminate his or her employment or consulting
relationship at any time, with or without cause.
16. Stockholder Approval. Continuance of the Plan with respect to the
grant of Incentive Stock Options and the grant of Options and SARs to Covered
Employees shall be subject to approval by the stockholders of the Company within
twelve (12) months before or after the date the Plan is adopted. Such
stockholder approval shall be obtained in the degree and manner required under
Applicable Laws.
<PAGE> 1
EXHIBIT 10.47
AMENDMENT NO. 2
TO
STOCK PURCHASE AGREEMENT
AND
SENIOR PROMISSORY NOTES
THIS AMENDMENT NO. 2 TO STOCK PURCHASE AGREEMENT AND SENIOR PROMISSORY
NOTES (the "Amendment") is dated as of October 3, 1996, between Earl M. Pearlman
("Pearlman"), William E. Decker ("Decker") and the William E. Decker Trust (the
"Trust," and collectively with Pearlman and Decker, "Sellers") and MTI
Technology Corporation, a Delaware corporation (the "Purchaser").
A. Sellers and Purchaser entered into that certain Stock Purchase Agreement
(as amended by Amendment No. 1 thereto, the "Agreement") dated as of April 2,
1995 relating to the sale of the capital stock of National Peripherals, Inc.;
that certain Senior Promissory Note by Purchaser in favor of Trust in the amount
of $715,000 dated as of April 2, 1995 (the "Decker Note"); and that certain
Senior Promissory Note by Purchaser in favor of Pearlman in the amount of
$1,285,000, dated as of April 2, 1995 (the "Pearlman Note").
B. Subsequent to the entering into of the Agreement, Pearlman and Decker
have agreed to accept broader management responsibilities for the Purchaser
beyond the original intended scope of Pearlman's and Decker's duties.
C. Sellers and Purchaser desire to amend the Agreement, the Decker Note and
the Pearlman Note as set forth herein. Capitalized terms not otherwise defined
herein shall have the meaning ascribed to them in the Agreement.
NOW, THEREFORE, in consideration of the mutual covenants hereinafter
set forth, the parties to this Amendment hereby agree as follows:
1. Contingent Payments. Section 1.4 of the Agreement is amended in its
entirety as follows:
1.4 Contingent Payments.
(a) As part of the Purchase Price, Purchaser
shall make three (3) guaranteed annual payments to Sellers in the
manner and at the times provided in Section 1.4(b) and Section 1.5.
Each such annual payment shall be in the amount (the "Annual Payment
Amount") of One Million Dollars ($1,000,000) in the aggregate. Payment
of the three Annual Payments is unconditional and is not subject to the
attainment of any profit, revenue or other goal or condition. Only the
Final Payment described in subsection (d) below, shall be determined by
reference to a formula.
<PAGE> 2
(b) Except as provided in subparagraphs (e)
- (i) below or in the event of any dispute as to the calculation
thereof under Section 1.5 (in which event payment shall be made within
fifteen (15) days of the calculation of the Annual Payment Amount
becoming final), each payment of the Annual Payment Amount shall be
made by Purchaser to Sellers within sixty (60) days after the end of
each fiscal year following the Closing Date, beginning in April 1996,
net of any offset pursuant to Article X, below; provided that the first
period of calculation shall commence on the Effective Date hereof. Each
Seller shall be entitled to the percentage of the Annual Payment Amount
shown in Exhibit "A" hereto.
(c) Subject to any offset pursuant to
Article X, below, which for the purpose of this subparagraph (c) shall
be treated as if received by Sellers, to the extent that the aggregate
Annual Payment Amounts made pursuant to this Section 1.4 prior to or
concurrent with the Final Payment (as defined below), if any, are less
than Two Million Dollars ($2,000,000), the Final Payment shall be
increased in an amount equal to such shortfall (the "Shortfall").
(d) As part of the Purchase Price, Purchaser
shall make a final payment (the "Final Payment") in the manner provided
in Section 1.5, within sixty (60) days after the end of the fiscal year
ended April 1998, except as provided in subparagraphs (e) - (i), below,
or in the event of any bona fide dispute as to the calculation thereof
under Section 1.5 (in which event payment shall be made within fifteen
(15) days of the calculation of the Final Payment becoming final). The
Final Payment shall equal One Million Dollars ($1,000,000)in the event
that the total aggregate Open Systems Revenue (as defined below) for
the three fiscal years commencing fiscal 1996 shall meet or exceed
Eighty Four Million Dollars ($84,000,000), less any reduction required
by Section 1.3(g) above or offset pursuant to Article X, below. "Open
Systems Revenue" shall mean all revenue of Purchaser related to sales
of products that will perform in an open systems environment.
(e) Notwithstanding anything to the contrary
herein, Purchaser's obligations to make any Contingent Payments (as
defined below) to a Seller in the event that any Seller's employment
with Purchaser terminates shall be as set forth in this subsection (e):
(i) In the event any Seller's
employment is terminated by Purchaser for Cause (as defined in
such Seller's Employment agreement), Seller shall be entitled
to no Contingent Payments earned on or after his termination,
except for his portion of the Shortfall, if any.
(ii) In the event any Seller's
employment is terminated by reason of death or disability (as
defined in such Seller's Employment agreement), Seller or his
estate shall be entitled to all remaining Contingent Payments
earned, if any.
2
<PAGE> 3
(iii) In the event any Seller's
employment is terminated by such Seller voluntarily, Seller
shall be entitled to no Contingent Payments earned on or after
his termination.
(iv) In the event any Seller's
employment is terminated by Purchaser without Cause, Seller
shall be entitled to all remaining Contingent Payments earned,
if any.
For purposes of this Section 1.4, Contingent Payments shall be earned as of
the last day of the fiscal year on which the payment of such amount is based.
(f) The Annual Payments and the Final Payment as
determined under this Section 1.4 are hereafter referred to as the "Contingent
Payments."
(g) If an Event of Default (as defined in the Note)
occurs under any Note, such Seller shall be entitled to receive an amount equal
to his percentage (as shown in Exhibit "A" hereto) of the Shortfall less the
amount of aggregate Contingent Payments made to all Sellers as of the date of
such default, which amount will be paid to such Seller within fifteen (15)
business days.
(h) If Purchaser discontinues its non-DEC storage
business, Sellers shall be entitled to receive all Contingent Payments that
would otherwise have been paid after such discontinuation as if the percentage
in (d) above had been one hundred percent (100%), which amount will be paid
Sellers within fifteen (15) business days.
(i) If Purchaser sells its non-DEC storage business
to an unaffiliated third party and such third party shall fail to expressly
assume in writing Purchaser's obligations to make Contingent Payments hereunder,
Sellers shall be entitled to receive all Contingent Payments that would
otherwise have been paid after such discontinuation as if the percentage in (d)
above had been one hundred percent (100%), which amount will be paid Sellers
within fifteen (15) business days.
2. Senior Promissory Notes. Section 7.1(d) of each of the Decker Note
and the Pearlman Note is amended in its entirety as follows:
(d) Maker discontinues its non-DEC storage business or
sells substantially all the assets thereof to an unaffiliated
third party; and
3. Miscellaneous.
3.1 Except as specifically provided in Sections 1 and 2, the
Agreement, the Decker Note and the Pearlman Note have not been amended or
modified and are hereby confirmed.
3
<PAGE> 4
3.2 This Amendment may be executed in counterparts, each of
which shall constitute one and the same instrument.
3.3 The parties intend that this Amendment (and the Agreement,
Amendment No. 1 to the Agreement, the Decker Note and the Pearlman Note) shall
be the final expression of their agreement with respect to the subject matter
hereof and may not be contradicted by evidence of any prior or contemporaneous
agreement. The parties further intend that this Agreement (and the Agreement,
Amendment No. 1 to the Agreement, the Decker Note and the Pearlman Note)
constitute the complete and exclusive statement of the parties of their
agreement and that no extrinsic evidence whatsoever may be introduced in any
judicial, administrative, or other legal proceeding involving this Amendment.
The parties have caused this Amendment to be duly executed as of the date
first written above.
PURCHASER:
MTI Technology Corporation,
a Delaware corporation
By: /s/ Dale R. Boyd
---------------------------------------------------
Title: Vice President & Chief Financial Officer
----------------------------------------
SELLERS:
/s/ Earl M. Pearlman
-------------------------------------------------------
Earl M. Pearlman
/s/ William E. Decker
-------------------------------------------------------
William E. Decker
William E. Decker Trust
By: /s/ William E. Decker
----------------------------------------------------
William E. Decker,
Sole Trustee and Settlor
4
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<FISCAL-YEAR-END> APR-05-1997
<PERIOD-START> JUL-07-1996
<PERIOD-END> OCT-05-1996
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0
0
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