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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
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(Exact name of registrant as specified in its charter)
Delaware 95-3601802
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(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
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Proxy Statement for 1997 III
Annual Meeting of Stockholders
to be held on September 25, 1997
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PART I
ITEM 1. BUSINESS:
INTRODUCTION
MTI Technology Corporation (the "Registrant") was incorporated in
California in March 1981 and reincorporated in Delaware in October 1992. Unless
the context indicates otherwise, the "Company" and "MTI" each refer to the
Registrant and its consolidated subsidiaries.
All references to years refer to the Company's fiscal years ended April
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
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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.
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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.
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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:
<TABLE>
<CAPTION>
PRIMARY
COMPUTING
PRODUCT FUNCTION PLATFORM
- ------- -------- --------
<S> <C> <C>
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
</TABLE>
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
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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
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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.
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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
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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.
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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.
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
- ---- --- -----------
<S> <C> <C>
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
</TABLE>
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.
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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.
<TABLE>
<CAPTION>
Sales Prices
------------
Fiscal Year 1996 High Low
- ---------------- ---- ---
<S> <C> <C>
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
</TABLE>
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
<PAGE> 11
ITEM 6. SELECTED FINANCIAL DATA:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------
APRIL 5, APRIL 6, APRIL 1, APRIL 2, APRIL 3,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
SELECTED STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
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
</TABLE>
<TABLE>
<CAPTION>
APRIL 5, APRIL 6, APRIL 1, APRIL 2, APRIL 3,
1997 1996 1995 1994 1993
-------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
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
</TABLE>
11
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------
APRIL 5, APRIL 6, APRIL 1,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
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)%
===== ===== =====
</TABLE>
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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 21
(3) Exhibits included herewith (numbered in accordance with
Item 601 of Regulation S-K):
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
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)
</TABLE>
21
<PAGE> 22
<TABLE>
<S> <C>
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)
</TABLE>
22
<PAGE> 23
<TABLE>
<S> <C>
*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)
</TABLE>
23
<PAGE> 24
<TABLE>
<S> <C>
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
</TABLE>
- ----------
(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
<PAGE> 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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/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)
</TABLE>
25
<PAGE> 26
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
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
</TABLE>
F-1
<PAGE> 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
<PAGE> 28
MTI TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
April 5, April 6,
1997 1996
-------- --------
<S> <C> <C>
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
======== ========
</TABLE>
See accompanying notes to the consolidated financial statements.
F-3
<PAGE> 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)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
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
========= ========= =========
</TABLE>
See accompanying notes to the consolidated financial statements.
F-4
<PAGE> 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)
<TABLE>
<CAPTION>
Cumulative Total
Foreign Stock-
Additional Retained Currency holders'
Common Stock Paid-in Earnings Translation Equity
Shares Amount Capital (Deficit) Adjustments (Deficiency)
------ ------ ------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
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
======= === ======== ======== ======= ========
</TABLE>
See accompanying notes to the consolidated financial statements.
F-5
<PAGE> 31
MTI TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED APRIL 5, 1997, APRIL 6, 1996 AND APRIL 1, 1995
(in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- --------
<S> <C> <C> <C>
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
</TABLE>
See accompanying notes to the consolidated financial statements.
F-6
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 36
The following table summarizes the fiscal year 1996 fourth quarter charges and
the impact to the Company's results of operations:
<TABLE>
<S> <C>
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
=======
</TABLE>
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
<PAGE> 37
The following table summarizes the fiscal year 1995 fourth quarter charges and
the impact to the Company's results of operations:
<TABLE>
<S> <C>
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
=======
</TABLE>
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:
<TABLE>
<CAPTION>
APRIL 5, APRIL 6,
1997 1996
---- ----
<S> <C> <C>
Raw materials $ 5,788 $13,090
Work-in-process 10 2,106
Finished goods 8,839 6,303
------- -------
$14,637 $21,499
======= =======
</TABLE>
F-12
<PAGE> 38
(4) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, at cost, are summarized as follows:
<TABLE>
<CAPTION>
APRIL 5, APRIL 6,
1997 1996
---- ----
<S> <C> <C>
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
======= =======
</TABLE>
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:
<TABLE>
<CAPTION>
APRIL 5, APRIL 6,
1997 1996
---- ----
<S> <C> <C>
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
======= =======
</TABLE>
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
<PAGE> 39
Long-term Debt
A summary of long-term debt is as follows:
<TABLE>
<CAPTION>
APRIL 5, APRIL 6,
1997 1996
---- ----
<S> <C> <C>
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
======= =======
</TABLE>
Principal maturities of long-term debt are as follows:
<TABLE>
<S> <C>
1998 $1,851
1999 6
------
$1,857
======
</TABLE>
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
<PAGE> 40
(7) INCOME TAXES
The components of income (loss) before income taxes are as follows:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
------------------
APRIL 5, APRIL 6, APRIL 1,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
U.S. $ 1,010 $(44,178) $(24,125)
Foreign 5,358 (4,862) 2,125
------- -------- --------
$ 6,368 $(49,040) $(22,000)
======= ======== ========
</TABLE>
Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------- -------- ------
<S> <C> <C> <C>
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
======= ======= ======
</TABLE>
Reconciliations of the federal statutory tax rate to the effective tax
rate are as follows:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
------------------
APRIL 5, APRIL 6, APRIL 1,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
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%
===== ===== =====
</TABLE>
F-15
<PAGE> 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:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
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
======== ======== ========
</TABLE>
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
<PAGE> 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
<PAGE> 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:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
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)
========== ==========
</TABLE>
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):
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
SHARES EXERCISE PRICE
------ --------------
<S> <C> <C>
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
=====
</TABLE>
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
<PAGE> 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:
<TABLE>
<S> <C>
1998 $ 3,908
1999 2,991
2000 2,065
2001 1,767
2002 1,523
Thereafter 2,000
-------
$14,254
=======
</TABLE>
F-19
<PAGE> 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:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
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
========= ========= =========
</TABLE>
No single customer accounted for more than 10% of revenue in fiscal
years 1997, 1996 and 1995.
F-20
<PAGE> 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:
<TABLE>
<S> <C>
Net tangible assets acquired $ 7,073
Liabilities assumed (8,715)
Goodwill 9,656
-------
Purchase price $ 8,014
=======
</TABLE>
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
<PAGE> 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:
<TABLE>
<S> <C>
Tangible assets $ 100
Purchased technology licenses 75
Goodwill 6,111
------
Purchase price $6,286
======
</TABLE>
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:
<TABLE>
<S> <C>
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
========
</TABLE>
F-22
<PAGE> 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
<PAGE> 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
<PAGE> 50
(15) QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial data for continuing operations for fiscal years
1997 and 1996 are as follows:
<TABLE>
<CAPTION>
Net
Income (Loss)
Per Common &
Net Common-
Total Revenues Gross Profit Income (Loss) Equivalent Share
-------------- ------------ ------------- ----------------
<S> <C> <C> <C> <C>
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)
======== ======= ========
</TABLE>
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
<PAGE> 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
<PAGE> 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)
<TABLE>
<CAPTION>
CHARGED TO BALANCE
BALANCE AT REVENUE, AT
BEGINNING COSTS AND END OF
DESCRIPTION OF PERIOD EXPENSES(1) DEDUCTIONS PERIOD
----------- --------- ----------- ---------- ------
<S> <C> <C> <C> <C>
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
====== ======== ======= ======
</TABLE>
(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
<PAGE> 53
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
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
</TABLE>
<PAGE> 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.
<PAGE> 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-
<PAGE> 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.
<PAGE> 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-
<PAGE> 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.
<PAGE> 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
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***, 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.
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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,
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GREYROCK BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
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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
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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
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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
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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.
<PAGE> 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.
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<PAGE> 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-
<PAGE> 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-
<PAGE> 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-
<PAGE> 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-
<PAGE> 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.
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<PAGE> 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-
<PAGE> 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-
<PAGE> 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-
<PAGE> 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
---------------------------------
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF MTI TECHNOLOGY CORPORATION
<TABLE>
<CAPTION>
JURISDICTION OF
SUBSIDIARY INCORPORATION
---------- ---------------
<S> <C>
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
</TABLE>
<PAGE> 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
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-05-1997
<PERIOD-START> APR-07-1996
<PERIOD-END> APR-05-1997
<CASH> 4,337
<SECURITIES> 0
<RECEIVABLES> 41,182
<ALLOWANCES> 9,283
<INVENTORY> 14,637
<CURRENT-ASSETS> 54,695
<PP&E> 35,216
<DEPRECIATION> 21,996
<TOTAL-ASSETS> 83,592
<CURRENT-LIABILITIES> 66,962
<BONDS> 0
0
0
<COMMON> 26
<OTHER-SE> 16,351
<TOTAL-LIABILITY-AND-EQUITY> 83,592
<SALES> 120,359
<TOTAL-REVENUES> 153,727
<CGS> 83,607
<TOTAL-COSTS> 103,803
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 319
<INTEREST-EXPENSE> 2,993
<INCOME-PRETAX> 6,368
<INCOME-TAX> 664
<INCOME-CONTINUING> 5,704
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,704
<EPS-PRIMARY> .21
<EPS-DILUTED> .21
</TABLE>
