<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 2, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to ______________
Commission file number 0-23418
MTI TECHNOLOGY CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 95-3601802
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4905 East La Palma Avenue
Anaheim, California 92807
--------------------------------------------------
(Address of principal executive offices, zip code)
Registrant's telephone number, including area code: (714) 970-0300
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
The number of shares outstanding of the issuer's common stock, $.001 par
value, as of November 9, 1999 was 30,622,715.
<PAGE> 2
MTI TECHNOLOGY CORPORATION
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of October 2, 1999
and April 3, 1999 3
Condensed Consolidated Statements of Income for the Three and
Six Months Ended October 2, 1999 and October 3, 1998 4
Condensed Consolidated Statements of Cash Flows for the Six
Months Ended October 2, 1999 and October 3, 1998 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk 14
PART II. OTHER INFORMATION
Item 2. Changes in Securities - Recent Sales of Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 6. Exhibits and Reports on Form 8-K 15
</TABLE>
2
<PAGE> 3
MTI TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
OCTOBER 2, APRIL 3,
1999 1999
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,857 $ 7,213
Accounts receivable, net 62,006 53,005
Inventories 33,096 16,987
Deferred income tax benefit 3,960 3,960
Prepaid expenses and other receivables 9,004 7,312
--------- ---------
Total current assets 110,923 88,477
Property, plant and equipment, net 13,084 13,802
Goodwill, net 9,967 10,890
Investment in affiliate 5,623 --
Other 619 609
--------- ---------
$ 140,216 $ 113,778
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 4,018 $ 5,824
Note payable 3,000 --
Accounts payable 26,794 18,632
Accrued liabilities 19,684 16,043
Deferred income 14,665 17,981
--------- ---------
Total current liabilities 68,161 58,480
Other 1,562 1,157
--------- ---------
Total liabilities 69,723 59,637
Stockholders' equity:
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 31,118 and 29,212 shares at October 2,
1999 and April 3, 1999, respectively 31 29
Additional paid-in capital 105,802 98,539
Accumulated deficit (31,294) (39,929)
Less cost of treasury stock (520 and 575 shares at
October 2, 1999 and April 3, 1999, respectively) (1,899) (2,108)
Accumulated other comprehensive loss (2,147) (2,390)
--------- ---------
Total stockholders' equity 70,493 54,141
--------- ---------
$ 140,216 $ 113,778
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 4
MTI TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------- -----------------------
OCTOBER 2, OCTOBER 3, OCTOBER 2, OCTOBER 3,
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net product revenue $41,921 $37,344 $ 83,290 $76,566
Service revenue 12,404 10,630 24,275 20,824
------- ------- -------- -------
Total revenue 54,325 47,974 107,565 97,390
Product cost of revenue 24,499 26,497 51,129 51,627
Service cost of revenue 7,396 6,987 14,797 13,377
------- ------- -------- -------
Total cost of revenue 31,895 33,484 65,926 65,004
Gross profit 22,430 14,490 41,639 32,386
------- ------- -------- -------
Operating expenses:
Selling, general and administrative 13,968 11,186 26,410 21,780
Research and development 4,065 3,259 7,581 6,716
------- ------- -------- -------
Total operating expenses 18,033 14,445 33,991 28,496
------- ------- -------- -------
Operating income 4,397 45 7,648 3,890
Other income, net 1,141 946 2,177 1,905
Equity in net loss of affiliate 461 -- 461 --
------- ------- -------- -------
Income before income taxes 5,077 991 9,364 5,795
Income tax expense -- 163 729 890
------- ------- -------- -------
Net income $ 5,077 $ 828 $ 8,635 $ 4,905
======= ======= ======== =======
Net income per share:
Basic $ 0.17 $ 0.03 $ 0.29 $ 0.17
======= ======= ======== =======
Diluted $ 0.16 $ 0.03 $ 0.27 $ 0.16
======= ======= ======== =======
Weighted-average shares used in
per share computations:
Basic 30,025 28,434 29,394 28,342
======= ======= ======== =======
Diluted 32,693 29,650 31,818 29,888
======= ======= ======== =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 5
MTI TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
------------------------
OCTOBER 2, OCTOBER 3,
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 8,635 $ 4,905
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization 4,011 4,198
Provision for sales returns and losses on accounts
receivable, net 376 95
Provision for inventory obsolescence 1,713 1,349
Loss on disposal of fixed assets 228 49
Deferred income (2,912) (2,961)
Equity in net loss of affiliate 461 --
Changes in assets and liabilities:
Accounts receivable (9,266) (4,521)
Inventories (17,771) (1,805)
Prepaid expenses, other receivables and other assets (1,714) (988)
Accounts payable 8,180 4,246
Accrued and other liabilities 3,725 (332)
-------- --------
Net cash provided by (used in) operating activities (4,334) 4,235
-------- --------
Cash flows from investing activities:
Capital expenditures for property, plant
and equipment, net (2,603) (4,829)
Investment in affiliate (3,054) --
-------- --------
Net cash used in investing activities (5,657) (4,829)
-------- --------
Cash flows from financing activities:
Borrowings under notes payable 39,990 65,140
Proceeds from issuance of common stock and
exercise of options and warrants 7,474 902
Repayment of notes payable (41,797) (67,635)
-------- --------
Net cash provided by (used in) financing activities 5,667 (1,593)
-------- --------
Effect of exchange rate changes on cash (32) (60)
-------- --------
Net decrease in cash and cash equivalents (4,356) (2,247)
Cash and cash equivalents at beginning of period 7,213 7,768
-------- --------
Cash and cash equivalents at end of period $ 2,857 $ 5,521
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 241 $ 663
Income taxes 56 66
Note issued in connection with investment
in affiliate (see note 8) 3,000 --
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE> 6
MTI TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Overview
The interim condensed consolidated financial statements included herein
have been prepared by MTI Technology Corporation (the "Company") without
audit, pursuant to the rules and regulations of the Securities and
Exchange Commission (the "SEC"). Certain information and footnote
disclosures, normally included in the financial statements prepared in
accordance with generally accepted accounting principles, have been
omitted pursuant to such SEC rules and regulations; nevertheless, the
management of the Company believes that the disclosures herein are
adequate to make the information presented not misleading. These condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the fiscal year ended April 3,
1999. In the opinion of management, the condensed consolidated financial
statements included herein reflect all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the condensed
consolidated financial position of the Company as of October 2, 1999, the
condensed consolidated results of operations for the three and six month
periods ended October 2, 1999 and October 3, 1998 and the condensed
consolidated statements of cash flows for the six month periods ended
October 2, 1999 and October 3, 1998. The results of operations for the
interim periods are not necessarily indicative of the results of
operations for the full year. References to amounts are in thousands,
except per share data, unless otherwise specified.
2. Inventory
Inventories consist of the following:
OCTOBER 2, APRIL 3,
1999 1999
---------- --------
Raw Materials $14,941 $ 8,262
Work in Process 734 367
Finished Goods 17,421 8,358
------ ------
$33,096 $16,987
======= =======
3. Line of Credit
Effective July 22, 1999, the Company renewed its agreement with Silicon
Valley Bank and General Electric Capital Corporation whereby under an
asset secured domestic line of credit, the Company may borrow up to
$30,000, limited by the value of pledged collateral. The agreement allows
the Company to borrow at a rate equal to prime rate. The term of the
agreement is for one year.
6
<PAGE> 7
4. Net Income per Share
The following table sets forth the computations of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------- ----------------------
OCTOBER 2, OCTOBER 3, OCTOBER 2, OCTOBER 3,
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Numerator:
Net income $ 5,077 $ 828 $ 8,635 $ 4,905
======= ======= ======= =======
Denominator:
Denominator for net income per share,
basic - weighted-average shares
outstanding 30,025 28,434 29,394 28,342
------- ------- ------- -------
Effect of dilutive securities:
Dilutive options outstanding 2,662 1,216 2,424 1,546
Dilutive warrants outstanding 6 -- -- --
------- ------- ------- -------
Dilutive potential common shares 2,668 1,216 2,424 1,546
------- ------- ------- -------
Denominator for net income per share,
diluted - adjusted weighted-average
shares 32,693 29,650 31,818 29,888
======= ======= ======= =======
Net income per share, basic $ 0.17 $ 0.03 $ 0.29 $ 0.17
======= ======= ======= =======
Net income per share, diluted $ 0.16 $ 0.03 $ 0.27 $ 0.16
======= ======= ======= =======
</TABLE>
Options to purchase 73 shares of common stock at prices in excess of
$20.82 per share were outstanding at October 2, 1999, but were not
included in the computation of diluted earnings per share for the three
months ended October 2, 1999, because the options' exercise price was
greater than the average market price of the common shares during the
period, and therefore, the effect would be antidilutive.
Options to purchase 3,026 shares of common stock at prices in excess of
$6.79 per share were outstanding at October 3, 1998, but were not included
in the computation of diluted earnings per share for the three months
ended October 3, 1998 because the options' exercise price was greater than
the average market price of the common shares during the period, and
therefore, the effect would be antidilutive.
Options and warrants to purchase 284 shares of common stock at prices in
excess of $14.66 per share were outstanding at October 2, 1999, but were
not included in the computation of diluted earnings per share for the six
months ended October 2, 1999, because the options' exercise price was
greater than the average market price of the common shares during the
period, and therefore, the effect would be antidilutive.
Options to purchase 1,424 shares of common stock at prices in excess of
$10.04 per share were outstanding at October 3, 1998, but were not
included in the computation of diluted earnings per share for the six
months ended October 3, 1998 because the options' exercise price was
greater than the average market price of the common shares during the
period, and therefore, the effect would be antidilutive.
7
<PAGE> 8
5. Litigation
In May 1999, the Company agreed to settle a purported stockholder
class-action lawsuit. A Stipulation of Settlement was signed providing for
a total settlement amount of $900. The Company's unreimbursed portion of
the aggregate settlement was $100. An order, preliminarily approving the
settlement was signed by the court on May 17, 1999.
6. Business Segment Information
The Company is engaged in the design, manufacture, sale and service of
high-performance storage systems, software and related products. The
Company's reportable business segments are based on geographic areas. The
Company's operations are structured to achieve consolidated objectives. As
a result, significant interdependence and overlap exists among the
Company's geographic areas. Accordingly, revenue, operating income and
identifiable assets shown for each geographic area may not be indicative
of the amount which would have been reported if the geographic areas were
independent of one another.
Revenue and transfers between geographic areas are generally priced to
recover cost plus an appropriate mark-up for profit. Operating income is
revenue less cost of revenues and direct operating expenses.
A summary of the Company's operations by geographic area is presented
below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------ ------------------------
OCTOBER 2, OCTOBER 3, OCTOBER 2, OCTOBER 3,
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue:
United States $ 43,378 $ 34,310 $ 83,652 $ 72,141
Europe 15,204 16,506 31,457 31,949
Transfers between areas (4,257) (2,842) (7,544) (6,700)
-------- -------- --------- --------
Total revenue $ 54,325 $ 47,974 $ 107,565 $ 97,390
======== ======== ========= ========
Operating income (loss):
United States $ 2,684 $ (2,024) $ 4,391 $ (900)
Europe 1,713 2,069 3,257 4,790
-------- -------- --------- --------
Total operating income $ 4,397 $ 45 $ 7,648 $ 3,890
======== ======== ========= ========
</TABLE>
<TABLE>
<CAPTION>
OCTOBER 2, APRIL 3,
1999 1999
---------- --------
<S> <C> <C>
Identifiable assets:
United States $ 99,696 $ 75,830
Europe 40,520 37,948
-------- --------
Total assets $140,216 $113,778
======== ========
</TABLE>
8
<PAGE> 9
The Company's revenues by product type are summarized below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------ -------------------------
OCTOBER 2, OCTOBER 3, OCTOBER 2, OCTOBER 3,
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Server $31,644 $ 20,790 $ 58,816 $45,797
Tape 7,263 12,479 18,482 24,082
Software 3,014 4,075 5,992 6,687
Service 12,404 10,630 24,275 20,824
------- -------- -------- -------
$54,325 $ 47,974 $107,565 $97,390
======= ======== ======== =======
</TABLE>
7. Comprehensive Income
The Company has adopted Statement of Financial Accounting Standards No.
("Statement") 130, "Reporting Comprehensive Income." Statement 130
establishes standards for reporting and displaying comprehensive income
and its components. The adoption of Statement 130 required additional
disclosure but did not have a material effect on the Company's financial
position or results of operations.
The components of comprehensive income are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------- -----------------------
OCTOBER 2, OCTOBER 3, OCTOBER 2, OCTOBER 3,
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net income $5,077 $ 828 $8,635 $4,905
Foreign currency translation adjustment 804 699 243 654
------ ------ ------ ------
Total comprehensive income $5,881 $1,527 $8,878 $5,559
====== ====== ====== ======
</TABLE>
8. Investment in Affiliate
In August 1999, the Company purchased 5,333 shares of Caldera Systems Inc.
("Caldera") for $6,000, representing approximately 25% of the outstanding
capital stock of Caldera upon completion of the purchase. Subsequent to
the Company's initial investment in Caldera, the Company's percentage
ownership was diluted to 20%. The investment is accounted for under the
equity method as the Company has significant influence, but not control,
of the operations of Caldera.
The initial investment in Caldera was $6,084 and included: (a) cash
payment of $3,000, (b) note payable of $3,000 bearing interest at the
prime rate plus one percent per annum and payable in two equal semi-annual
payments beginning February 2000 and (c) investment costs of $84. In
November 1999, the Company accelerated the first $1,500 payment on the
note payable in exchange for the cancellation of any interest charges
on the note payable. The excess of the Company's investment in Caldera
over the related underlying equity in net assets of $5,417 is being
amortized on a straight-line basis over seven years.
The Canopy Group, Inc. ("Canopy"), a major stockholder of the Company,
owned all of the issued and outstanding shares of Caldera prior to this
transaction. Raymond J. Noorda, Chairman of the Board of Directors of the
Company, is the Chairman of the Board of Directors of The Canopy Group,
Inc.
The Company has also entered into a distribution and license agreement
with Caldera that allows the Company to market and distribute the full
range of Caldera's products and services.
9. Related Party Transactions
In the normal course of business, the Company sold goods and services to
a subsidiary of Canopy. Goods and services sold to Canopy in the second
quarter of fiscal 2000 amounted to $2,953. The Company made no sales to
Canopy prior to these transactions. In addition, at October 2, 1999,
there were no amounts due from Canopy.
In August 1999, the Company issued a warrant to purchase 150,000 shares of
the Company's common stock at a price of $18.75 per share. The warrant was
issued to an individual affiliated with Canopy in connection with
consulting services to the provided Company and expire in August 2009. At
October 2, 1999 the warrant was not exercisable.
9
<PAGE> 10
PART 1 - ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain statements set forth below are not historical or based on historical
facts and constitute "forward-looking statements" involving known and unknown
risks, uncertainties and other factors that may cause the actual results,
performance or achievements of the Company, or industry results, to be
materially different from any future results, performance or achievements,
expressed or implied, by such forward-looking statements, including statements
about the Company's increases in sales personnel and selling, general and
administrative costs, dependence on new products, management of growth,
competition, international sales, dependence on suppliers, year 2000 compliance
and quarterly fluctuations. Given these uncertainties, investors in the
Company's common stock are cautioned not to place undue reliance on such
forward-looking statements. Additional information on potential factors that
could affect the Company's financial results are included in the Company's
Annual Report on Form 10-K for the year ended April 3, 1999.
Overview
MTI Technology Corporation is an international provider of high-performance data
storage solutions for the Open Systems market. MTI designs, manufactures, sells
and services a fully integrated hierarchy of data storage solutions including
fault tolerant RAID disk arrays, solid state disk systems, tape libraries and
storage management software. In addition, the Company provides a full line of
customer services and support offerings. The Company's integrated solutions are
compatible with most Open System computing platforms, including those of Sun
Microsystems, Hewlett Packard ("HP"), Silicon Graphics, IBM and Digital
Equipment ("DEC"), and Linux-based computing systems. 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.
10
<PAGE> 11
Results of Operations
The following table sets forth selected items from the Condensed Consolidated
Statements of Income as a percentage of net revenues for the periods indicated,
except for product gross profit and service gross profit, which are expressed as
a percentage of the related revenue. This information should be read in
conjunction with the Condensed Consolidated Financial Statements included
elsewhere herein:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
-------------------------- ---------------------------
OCTOBER 2, OCTOBER 3, OCTOBER 2, OCTOBER 3,
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net product revenue 77.2% 77.8% 77.4% 78.6%
Service revenue 22.8 22.2 22.6 21.4
----- ------ ------ -----
Total revenue 100.0 100.0 100.0 100.0
Product gross profit 41.6 29.0 38.6 32.6
Service gross profit 40.4 34.3 39.0 35.8
------ ----- ----- -----
Gross profit 41.3 30.2 38.7 33.3
Selling, general and administrative 25.7 23.3 24.6 22.5
Research and development 7.5 6.8 7.0 6.9
------- ------- ---- ----
Operating income 8.1 0.1 7.1 3.9
Other income, net 2.1 2.0 2.0 2.0
Equity in net loss of affiliate 0.9 - 0.4 -
Income tax expense - 0.4 0.7 0.9
------ ------- ------ ----
Net income 9.3% 1.7% 8.0% 5.0%
======= ======= ==== ====
</TABLE>
Net Product Revenue: Net product revenue for the second quarter of fiscal 2000
increased $4.6 million, or 12.3% from the same quarter of the prior year. Net
product revenue for the first six months of fiscal 2000 increased $6.7 million,
or 8.8% from the same period of the prior year. These increases were primarily
due to increased revenue from server products resulting from an increase in
fiber channel product revenue offset by a reduction in SCSI product revenue.
Additionally, these increases were primarily related to domestic operations.
Service Revenue: Service revenue for the second quarter of fiscal 2000 increased
$1.8 million, or 16.7% over the same quarter of the prior year. Service revenue
for the first six months of fiscal 2000 increased $3.5 million, or 16.6% over
the same period of the prior year. These increases were primarily due to
increased revenue from maintenance contracts.
Product Gross Profit: Product gross profit was $17.4 million for the second
quarter of fiscal 2000, an increase of $6.6 million, or 60.6% over the same
quarter of the preceding year, and the gross profit percentage of net product
sales was 41.6% for the second quarter of fiscal 2000 as compared to 29.0% for
the same period of the prior year. This increase is primarily due to increased
revenue on server products which historically carry a higher margin.
Product gross profit was $32.4 million for the first six months of fiscal 2000,
an increase of $7.2 million, or 29.0% over the same period of the preceding
year, and the gross profit percentage of net product sales was 38.6% for the
first six months of fiscal 2000 as compared to 32.6% for the same period of the
prior year. This increase is primarily due to increased revenue on server
products which historically carry a higher margin.
Service Gross Profit: Service gross profit was $5.0 million for the second
quarter of fiscal 2000, an increase of $1.4 million, or 37.5% over the same
period of the previous year. The gross profit percentage of service revenue
increased to 40.4% in the second quarter of fiscal 2000 as compared to 34.3% in
the
11
<PAGE> 12
same quarter of the preceding year. This increase is primarily due to increased
revenue from maintenance contracts without corresponding increases in support
costs.
Service gross profit was $9.5 million for the first six months of fiscal 2000,
an increase of $2.0 million, or 27.3% over the same period of the previous year.
The gross profit percentage of service revenue increased to 39.0% for the first
six months of fiscal 2000 as compared to 35.8% in the same period of the
preceding year. This increase is primarily due to increased revenue from
maintenance contracts without corresponding increases in support costs.
Selling, General and Administrative: Selling, general and administrative
expenses for the second quarter of fiscal 2000 increased $2.8 million, or 24.9%
from the same quarter of the preceding year. This increase was primarily due to
increased compensation-related sales costs resulting from increased staff of
$1.8 million, increased marketing efforts of $0.8 million and increases in other
expenses of $0.2 million. The Company expects to continue increasing its direct
sales force and anticipates that selling, general and administrative costs will
increase in absolute dollars and as a percentage of total revenue until the
additional sales staff are at full productivity levels.
Selling, general and administrative expenses for the first six months of fiscal
2000 increased $4.6 million, or 21.3% from the same period of the preceding
year. This increase was primarily due to increased compensation-related sales
costs resulting from increased staff of $2.3 million, increased marketing
efforts of $1.2 million and increases in other expenses of $1.1 million.
Research and Development: Research and development expenses for the second
quarter of fiscal 2000 increased $0.8 million, or 24.7% from the same quarter of
the prior year. Research and development expenses for the first six months of
fiscal 2000 increased $0.9 million, or 12.9% from the same period of the prior
year. These increases are attributable to increased project costs of $0.5
million and $0.4 million for the second quarter of fiscal 2000 and the first six
months of fiscal 2000, respectively and increased salary and related costs of
$0.3 million and $0.5 million for the second quarter of fiscal 2000 and the
first six months of fiscal 2000, respectively due to increased headcount.
Other Income, Net: Other income, net, for the second quarter of fiscal 2000
increased $0.2 million, or 20.6% from the same period of the prior year. Other
income, net was 2.1% of total revenue for the second quarter of fiscal 2000 and
2.0% of total revenue for the same quarter of fiscal 1999.
Other income, net, for the first six months of fiscal 2000 increased $0.3
million, or 14.3% over the same period of the prior year. Other income, net was
2.0% of total revenue for the first six months of both fiscal 2000 and fiscal
1999.
Income Tax Expense: There was no income tax expense for the second quarter of
fiscal 2000. Income tax expense for the second quarter of fiscal 1999 was 16.4%
of income before income taxes. Income tax expense for the first six months of
fiscal 2000 was 7.8% of income before income tax, as compared to 15.4% for the
same period of the prior year. The effective tax rate is less than statutory
rates primarily due to the percentage of pre-tax profit from foreign
subsidiaries and the utilization of net operating losses.
Liquidity and Capital Resources
Cash and cash equivalents were $2.9 million at October 2, 1999, a decrease of
$4.4 million as compared to April 3, 1999, the prior fiscal year end. Net
operating activities used cash of $4.3 million for the first six months of
fiscal 2000, primarily due to increased accounts receivable of $9.3 million as a
result of increased days sales outstanding and to increases in gross inventories
of $17.8 million. The inventory increase resulted primarily from increased trade
inventories caused by a shift in the mix of products sold as compared to the mix
of inventory purchased and higher anticipated shipments. These uses of cash were
partially offset by net income adjusted for non-cash items of $12.5 million and
a combined increase in accounts payable and accrued and other liabilities of
$11.9 million.
12
<PAGE> 13
At October 2, 1999, the Company's days sales outstanding were 104 days, as
compared to 96 days at April 3, 1999. The Company's average days sales
outstanding is impacted by the high percentage of sales occurring within the
last month of each quarter and the large percentage of international sales,
which historically have slower payment patterns. The increase is primarily due
to a higher percentage of sales occurring within the last month of the second
quarter of fiscal year 2000 than the percentage of sales occurring within the
last month of the fourth quarter of fiscal year 1999.
Effective July 22, 1999, the Company renewed its agreement with Silicon Valley
Bank and General Electric Capital Corporation. The Company may borrow up to
$30.0 million under an asset secured domestic line of credit, limited by the
value of pledged collateral. The agreement allows the Company to borrow at a
rate equal to prime rate. Borrowings under the line of credit are subject to
certain financial and operating covenants, including various financial covenants
requiring the Company to maintain a minimum current ratio, debt-net worth ratio,
tangible net worth and level of profitability. The agreement restricts the
Company from paying any dividends. The term of the agreement is for one year.
Borrowings outstanding under this agreement at November 9, 1999 were $11.9
million, an increase of $6.1 million from April 3, 1999, primarily due to the
timing of payments for inventory purchases in the second quarter of fiscal 2000.
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 includes $30.0 million to be received in six equal
annual installments of $5.0 million each, the first four of which were received
in February 1996, January 1997, January 1998 and January 1999. The remaining
payments are to be received in each of the subsequent two years beginning
January 2000. The Company will also receive royalty payments in the aggregate of
up to a maximum of $30.0 million over the term of the agreement. As part of the
maximum $30.0 million of royalties, minimum royalties of $10.0 million will be
received in five annual installments, beginning within thirty days of the first
anniversary of the effective date of the agreement, and within thirty days of
each subsequent anniversary thereof. The first three annual installments were
received in March 1997, March 1998 and March 1999. Also, as part of the maximum
$30.0 million of royalties, $10.0 million of royalties will be received in five
equal annual installments beginning March 2000 as a result of the announced
computer and technology agreement between EMC and IBM in March 1999.
Management believes that the Company's working capital, bank lines of credit and
future cash flow from operating activities will be sufficient to meet the
Company's operating and capital expenditure requirements for at least 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, such financing will be on terms favorable to
the Company.
New Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement 133,
"Accounting for Derivative Instruments and Hedging Activities." The new
statement is effective for both interim and annual periods beginning after June
15, 2000. The Company does not expect the adoption of Statement 133 to have a
material impact on the Company's consolidated financial statements.
Year 2000 Issue
In the past, many computer software programs were written using two digits
rather than four digits to define the applicable year. As a result,
date-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This situation is generally referred to as the "Year 2000
Issue." If such a situation occurs, the potential exists for system failures or
miscalculations, which could disrupt operations.
The Company has completed a comprehensive remediation plan for the Year 2000
Issue that includes the assessment, rectification, testing and reporting of
product compliance, the receipt and review of third party representations of
year 2000 compliance and assessment, and rectification and testing of all
internal IT and non-IT systems. As a part of the remediation plan, the Company
will complete a contingency plan for its critical systems in December 1999.
The Company has received representations on year 2000 compliance from the
majority of suppliers and is continuing to evaluate the adequacy of the
responses. The Company has identified certain suppliers that are critical to the
business and has performed site visits to better understand the suppliers'
status regarding year 2000 compliance. Evaluation of suppliers is an ongoing
process and this phase will continue through
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<PAGE> 14
the end of calendar 1999 as the Company will continue to update and reevaluate
the status of critical suppliers.
The Company has tested all of its current product offerings and the majority of
its discontinued products for year 2000 compliance. The results of these tests
are published on the Company's website at "www.mti.com/y2k." Testing on the
remaining products is expected to continue through the end of calendar 1999. The
Company has initiated a plan notifying customers of the information available on
the website and to encourage them to assess their own systems based on their
operating environments and the information provided by the Company.
The Company has completed the assessment of its critical internal IT and non-IT
systems and believes all critical systems are year 2000 compliant. The Company
has replaced systems within its existing computer infrastructure with an
enterprise-wide business system which it believes is year 2000 compliant based
on representations of the manufacturers. Additionally, the Company will complete
a "Year 2000 Simulation" designed to test these systems by the end of November
1999.
Management believes that the most reasonably likely worst case scenario related
to the Year 2000 Issue that the Company may experience, would be the delay or
inability to procure inventory components from suppliers or delays in receiving
orders or payments from customers due to year 2000 issues experienced by third
parties. Additionally, the effect of customers' spending patterns before and
after January 1, 2000, is uncertain at this time. There can be no assurance that
these potentially altered spending patterns will not have a material impact on
the Company's results of operation. Such factors could materially adversely
affect the Company's business, results of operations and financial condition.
The Company does not consider the cost of upgrading its existing computer
infrastructure and replacing all of its manufacturing, accounting, customer
service and other management information software with an enterprise-wide
business system to be a cost relating to year 2000 compliance, because the
project was initiated independent of the Year 2000 Issue and the project
completion date has not been accelerated in order to achieve compliance. As of
November 9, 1999 the Company has incurred year 2000 costs consisting primarily
of internal labor costs which is considered immaterial. The Company anticipates
that costs to complete year 2000 compliance will continue to consist primarily
of internal labor costs and be immaterial, but there can be no assurance that
unanticipated costs will not be incurred.
The Company expects year 2000 compliance during calendar year 1999. However,
there can be no assurances that the Company or third parties will not experience
delays or obstacles in becoming year 2000 compliant and any delay or failure by
the Company or critical third parties in achieving year 2000 compliance could
materially adversely affect the Company's business, results of operations and
financial condition.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's European operations transact in foreign currencies, primarily
European, and may be exposed to financial market risk resulting from
fluctuations in foreign currency exchange rates, particularly the British Pound
sterling and the Euro. The Company has and may continue to utilize hedging
programs, currency forward contracts, currency options and/or other derivative
financial instruments commonly used to reduce financial market risks. There can
be no assurance that such actions will successfully reduce the Company's
exposure to financial market risks.
The Company maintains a $30 million credit line. The interest rate applied to
any debt outstanding under this credit line is equal to the prime rate and is,
therefore subject to a certain amount of risk arising from fluctuations in these
rates. However, a 10% increase in interest rates would not have a material
impact on the Company's results of operations.
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PART II - OTHER INFORMATION
ITEM 2 (c) - CHANGES IN SECURITIES - RECENT SALES OF SECURITIES
In August 1999, in a private placement transaction pursuant to Section 4 (2),
the Company issued a warrant to purchase 150,000 shares of common stock of the
Company at a per share exercise price of $18.95 to an accredited investor.
In September 1999, in a private placement transaction pursuant to Section 4 (2),
the Company issued 526 shares of common stock to Pacific Harbor Capital, Inc.
for $18.95 per share pursuant to a warrant agreement with Pacific Harbor
Capital, Inc. dated March 1990.
The transactions summarized above were made directly by the Company without use
of an underwriter or placement agent and without payment of commissions or other
remuneration. In each case the aggregate sales proceeds, after payment of
offering expenses in immaterial amounts, were applied to the working capital of
the Company and other general corporate purposes.
With respect to the exemption from registration claimed under Section 4 (2) of
the Securities Act of 1933, neither the Company nor any person acting on its
behalf offered or sold the securities by means of any form of general
solicitation or advertising. Prior to making any offer or sale, the Company had
reasonable grounds to believe and believed that each prospective investor was
capable of the merits and risks or the investment and was able to bear the
economic risk of the investment. Each purchaser represented that such purchaser
was an accredited investor and that the securities were being acquired for
investment for purchaser's own account, and agreed that the securities would not
be sold without registration under the Securities Act or exemption therefrom.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of the stockholders of the Company was held on
September 23, 1999. Val Kreidel was elected to the Company's Board of Directors
to hold office for the ensuing three years. The number of shares voted in favor
of her appointment was 27,444,191. The number of shares voted against was
89,153. Earl Pearlman was elected to the Company's Board of Directors to hold
office for the ensuing three years. The number of shares voted in favor of his
appointment was 27,444,751. The number of shares voted against was 88,593.
Raymond Noorda, John Repp and Al Melrose remain members of the Board of
Directors.
The stockholders of the Company voted in favor of the ratification of
selection of KPMG LLP as the Company's independent public accountants for fiscal
year 2000. The number of shares voted for ratification was 27,515,684. The
number of shares voted against ratification was 12,924. The number of shares
abstaining was 4,736.
The stockholders of the Company approved an amendment to the 1996 Stock
Incentive Plan. The number of shares voting in favor was 17,493,664. The number
of shares voting against was 3,360,747. The number of shares abstaining was
36,371. The number of shares not voting was 6,642,562.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.29 Amendment to the 1996 Stock Incentive Plan
27 Financial Data Schedule
(b) Reports on Form 8-K:
Form 8-K, dated August 19,1999, regarding the purchase of approximately
25% of the issued and outstanding stock of Caldera Systems, Inc.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on the 11th day of November, 1999.
MTI TECHNOLOGY CORPORATION
By: /s/ Dale R. Boyd
----------------------------------------
Dale R. Boyd
Senior Vice President, Finance and
Administration and Chief Financial
Officer (Principal Financial Officer)
By: /s/ Stephanie M. Braun
----------------------------------------
Stephanie M. Braun
Vice President, Corporate Controller and
Chief Accounting Officer (Principal
Accounting Officer)
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EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<C> <S>
10.29 Amendment to the 1996 Stock Incentive Plan
27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10.29
MTI TECHNOLOGY CORPORATION
1996 STOCK INCENTIVE PLAN
(AMENDED AND RESTATED AS OF JULY 10, 1997, AMENDED AUGUST 1999)
1. Purposes of the Plan. The purposes of this Stock Incentive Plan are
to attract and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to Employees, Directors and
Consultants of the Company and its Subsidiaries and to promote the success of
the Company's business.
2. Definitions. As used herein, the following definitions shall apply:
(a) "Administrator" means the Board or any of the Committees
appointed to administer the Plan.
(b) "Affiliate" and "Associate" shall have the respective
meanings ascribed to such terms in Rule 12b-2 promulgated under the Exchange
Act.
(c) "Applicable Laws" means the legal requirements relating to
the administration of stock incentive plans, if any, under applicable provisions
of federal securities laws, state corporate and securities laws, the Code, and
the rules of any applicable stock exchange or national market system.
(d) "Award" means the grant of an Option, SAR, Dividend
Equivalent Right, Restricted Stock, Performance Unit, Performance Share, or
other right or benefit under the Plan.
(e) "Award Agreement" means the written agreement evidencing the
grant of an Award executed by the Company and the Grantee, including any
amendments thereto.
(f) "Board" means the Board of Directors of the Company.
(g) "Change in Control" means a change in ownership or control of
the Company effected through either of the following transactions:
(i) the direct or indirect acquisition by any person or
related group of persons (other than an acquisition from or by (A) the Company
or by a Company-sponsored employee benefit plan or by a person that directly or
indirectly controls, is controlled by, or is under common control with, the
Company or (B) any current beneficial stockholder or group, as defined by Rule
13d-5 of the Securities Exchange Act of 1934, holding in excess of 50% of the
combined voting power of the Company's outstanding securities, including the
heirs, assigns and successors thereof) of beneficial ownership (within the
meaning of Rule 13d-3 of the Exchange Act) of securities possessing more than
fifty percent (50%) of the total combined voting power of the Company's
outstanding securities pursuant to a tender or exchange offer made directly to
the Company's stockholders which a majority of the Continuing Directors who are
not Affiliates or Associates of the offeror do not recommend such stockholders
to accept, or
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(ii) a change in the composition of the Board over a period
of thirty-six (36) months or less such that a majority of the Board members
(rounded up to the next whole number) ceases, by reason of one or more contested
elections for Board membership, to be comprised of individuals who are
Continuing Directors.
(h) "Code" means the Internal Revenue Code of 1986, as amended.
(i) "Committee" means any committee appointed by the Board to
administer the Plan.
(j) "Common Stock" means the common stock of the Company, as
adjusted in accordance with the provisions of Section 10, below.
(k) "Company" means MTI Technology Corporation, a Delaware
corporation.
(l) "Consultant" means any person who is engaged by the Company
or any Parent or Subsidiary to render consulting or advisory services and is
compensated for such services.
(m) "Continuing Directors" means members of the Board who either
(i) have been Board members continuously for a period of at least thirty-six
(36) months or (ii) have been Board members for less than thirty-six (36) months
and were elected or nominated for election as Board members by at least a
majority of the Board members described in clause (i) who were still in office
at the time such election or nomination was approved by the Board.
(n) "Continuous Status as an Employee, Director or Consultant"
means that the employment, director or consulting relationship with the Company,
any Parent, or Subsidiary, is not interrupted or terminated. Continuous Status
as an Employee, Director or Consultant shall not be considered interrupted in
the case of (i) any leave of absence approved by the Company or (ii) transfers
between locations of the Company or between the Company, its Parent, any
Subsidiary, or any successor. A leave of absence approved by the Company shall
include sick leave, military leave, or any other personal leave approved by an
authorized representative of the Company. For purposes of Incentive Stock
Options, no such leave may exceed ninety (90) days, unless reemployment upon
expiration of such leave is guaranteed by statute or contract.
(o) "Corporate Transaction" means any of the following
stockholder-approved transactions to which the Company is a party:
(i) a merger or consolidation in which the Company is not the
surviving entity, except for a transaction the principal purpose of which is to
change the state in which the Company is incorporated,
(ii) the sale, transfer or other disposition of all or
substantially all of the assets of the Company (including the capital stock of
the Company's subsidiary corporations) in connection with complete liquidation
or dissolution of the Company, or
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<PAGE> 3
(iii) any reverse merger in which the Company is the
surviving entity but in which securities possessing more than fifty percent
(50%) of the total combined voting power of the Company's outstanding securities
are transferred to a person or persons different from those who held such
securities immediately prior to such merger.
(p) "Covered Employee" means an Employee who is a "covered
employee" under Section 162(m)(3) of the Code.
(q) "Director" means a member of the Board.
(r) "Dividend Equivalent Right" means a right entitling the
Grantee to compensation measured by dividends paid with respect to Common Stock.
(s) "Employee" means any person, including Officers and
Directors, employed by the Company or any Parent or Subsidiary of the Company.
The payment of a director's fee by the Company shall not be sufficient to
constitute "employment" by the Company.
(t) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(u) "Fair Market Value" means, as of any date, the value of
Common Stock determined as follows:
(i) Where there exists a public market for the Common Stock,
the Fair Market Value shall be (A) the closing sales price for a Share for the
last market trading day prior to the time of the determination (or, if no sales
were reported on that date, on the last trading date on which sales were
reported) on the New York Stock Exchange, the NASDAQ National Market or the
principal securities exchange on which the Common Stock is listed for trading,
whichever is applicable or (B) if the Common Stock is not traded on any such
exchange or national market system, the average of the closing bid and asked
prices of a Share on the NASDAQ Small Cap Market, in each case, as reported in
The Wall Street Journal or such other source as the Administrator deems
reliable; or
(ii) In the absence of an established market of the type
described in (i), above, for the Common Stock, the Fair Market Value thereof
shall be determined by the Administrator in good faith, and such determination
shall be conclusive and binding on all persons. Determinations of Fair Market
Value pursuant to this subsection (ii) shall be made in accordance with Section
260.140.50 of Title 10 of the California Code of Regulations.
(v) "Grantee" means an Employee, Director or Consultant who
receives an Award under the Plan.
(w) "Incentive Stock Option" means an Option intended to qualify
as an incentive stock option within the meaning of Section 422 of the Code.
(x) "Non-Qualified Stock Option" means an Option not intended to
qualify as an Incentive Stock Option.
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<PAGE> 4
(y) "Officer" means a person who is an officer of the Company
within the meaning of Section 16 of the Exchange Act and the rules and
regulations promulgated thereunder.
(z) "Option" means a stock option granted pursuant to the Plan.
(aa) "Parent" means a "parent corporation," whether now or
hereafter existing, as defined in Section 424(e) of the Code.
(bb) "Performance - Based Compensation" means compensation
qualifying as "performance-based compensation" under Section 162(m) of the Code.
(cc) "Performance Shares" means Shares or an award denominated in
Shares which may be earned in whole or in part upon attainment of performance
criteria established by the Administrator.
(dd) "Performance Units" means an award which may be earned in
whole or in part upon attainment of performance criteria established by the
Administrator and which may be settled for cash, securities or a combination or
cash or securities as determined by the Administrator.
(ee) "Plan" means this 1996 Stock Incentive Plan, as amended and
restated.
(ff) "Restricted Stock" means Shares issued under the Plan to the
Grantee for such consideration, if any, and subject to such restrictions on
transfer, rights of first refusal, repurchase provisions, forfeiture provisions,
and other terms and conditions as established by the Administrator.
(gg) "Rule 16b-3" means Rule 16b-3 promulgated under the Exchange
Act or any successor thereto.
(hh) "SAR" means a stock appreciation right entitling the Grantee
to Shares or cash compensation measured by appreciation in the value of Common
Stock.
(ii) "Share" means a share of the Common Stock.
(jj) "Subsidiary" means a "subsidiary corporation," whether now
or hereafter existing, as defined in Section 424(f) of the Code.
(kk) "Subsidiary Disposition" means the disposition by the
Company of its equity holdings in any subsidiary corporation effected by a
merger or consolidation involving that subsidiary corporation, the sale of all
or substantially all of the assets of that subsidiary corporation or the
Company's sale or distribution of substantially all of the outstanding capital
stock of such subsidiary corporation.
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<PAGE> 5
3. Stock Subject to the Plan.
(a) Subject to the provisions of Section 10, below, the maximum
aggregate number of Shares which may be issued pursuant to Awards initially
shall be 6,704,099 Shares, and commencing with the first business day of each
calendar year thereafter beginning with 2000, such maximum aggregate number of
Shares shall be increased by a number equal to three percent (3%) of the number
of Shares outstanding as of December 31st of the immediately preceding calendar
year. Notwithstanding the foregoing, the maximum aggregate number of Shares
available for grant of Incentive Stock Options shall be 4,250,000 Shares, and
such number shall not be subject to annual adjustment as described above. The
Shares to be issued pursuant to Awards may be authorized, but unissued, or
reacquired Common Stock.
(b) If an Award expires or becomes unexercisable without having
been exercised in full, or is surrendered pursuant to an Award exchange program,
or if any unissued Shares are retained by the Company upon exercise of an Award
in order to satisfy the exercise price for such Award or any withholding taxes
due with respect to such Award, such unissued or retained Shares shall become
available for future grant or sale under the Plan (unless the Plan has
terminated). Shares that actually have been issued under the Plan pursuant to an
Award shall not be returned to the Plan and shall not become available for
future distribution under the Plan, except that if unvested Shares are
forfeited, or repurchased by the Company at their original purchase price, such
Shares shall become available for future grant under the Plan.
4. Administration of the Plan.
(a) Plan Administrator.
(i) Administration with Respect to Directors and Officers.
With respect to grants of Awards to Directors or Employees who are also Officers
or Directors of the Company, the Plan shall be administered by (A) the Board or
(B) a Committee designated by the Board, which Committee shall be constituted in
such a manner as to satisfy the Applicable Laws and to permit such grants and
related transactions under the Plan to be exempt from Section 16(b) of the
Exchange Act in accordance with Rule 16b-3. Once appointed, such Committee shall
continue to serve in its designated capacity until otherwise directed by the
Board.
(ii) Administration With Respect to Consultants and Other
Employees. With respect to grants of Awards to Employees or Consultants who are
neither Directors nor Officers of the Company, the Plan shall be administered by
(A) the Board or (B) a Committee designated by the Board, which Committee shall
be constituted in such a manner as to satisfy the Applicable Laws. Once
appointed, such Committee shall continue to serve in its designated capacity
until otherwise directed by the Board. The Board may authorize one or more
Officers to grant such Awards and may limit such authority by requiring that
such Awards must be reported to and ratified by the Board or a Committee within
six (6) months of the grant date, and if so ratified, shall be effective as of
the grant date.
(iii) Administration With Respect to Covered Employees.
Notwithstanding the foregoing, grants of Awards to any Covered Employee intended
to qualify as Performance-Based Compensation shall be made only by a Committee
(or subcommittee of a
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<PAGE> 6
Committee) which is composed solely of two or more Directors eligible to serve
on a committee making Awards qualifying as Performance-Based Compensation. In
the case of such Awards granted to Covered Employees, references to the
"Administrator" or to a "Committee" shall be deemed to be references to such
Committee or subcommittee.
(b) Powers of the Administrator. Subject to Applicable Laws, the
provisions of the Plan (including any other powers given to the Administrator
hereunder) and except as otherwise provided by the Board, the Administrator
shall have the authority, in its discretion:
(i) to select the Employees, Directors and Consultants to
whom Awards may from time to time be granted hereunder;
(ii) to determine whether and to what extent Awards are
granted hereunder;
(iii) to determine the number of Shares to be covered by each
Award granted hereunder;
(iv) to approve forms of Award Agreement for use under the
Plan;
(v) to determine the terms and conditions of any Award
granted hereunder;
(vi) to amend the terms of any outstanding Award granted
under the Plan including a reduction in the exercise price (or base amount on
which appreciation is measured) of any Award to reflect a reduction in the Fair
Market Value of the Common Stock since the grant date of the Award, provided
that any amendment that would adversely affect the Grantee's rights under an
outstanding Award shall not be made without the Grantee's written consent;
(vii) to construe and interpret the terms of the Plan and
Awards granted pursuant to the Plan; and
(viii) to take such other action, not inconsistent with the
terms of the Plan, as the Administrator deems appropriate.
(c) Effect of Administrator's Decision. All decisions,
determinations and interpretations of the Administrator shall be final and
binding on the Grantees and any other holders of Awards intended by the
Administrator to be affected thereby.
5. Eligibility. Awards other than Incentive Stock Options may be
granted to Employees, Directors and Consultants. Incentive Stock Options may be
granted only to Employees. An Employee, Director or Consultant who has been
granted an Award may, if otherwise eligible, be granted additional Awards.
Awards may be granted to such Employees of the Company and its subsidiaries who
are residing in foreign jurisdictions as the Administrator in its sole
discretion may determine from time to time. The Administrator may establish
additional terms, conditions, rules or procedures to accommodate the rules or
laws of applicable foreign jurisdictions and to afford Grantees favorable
treatment under such laws; provided, however, that
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<PAGE> 7
no Award shall be granted under any such additional terms, conditions, rules or
procedures with terms or conditions which are inconsistent with the provisions
of the Plan.
6. Terms and Conditions of Awards.
(a) Type of Awards. The Administrator is authorized under the
Plan to award any type of arrangement to an Employee, Director or Consultant
that is not inconsistent with the provisions of the Plan and that by its terms
involves or might involve the issuance of (i) Shares, (ii) an Option, a SAR or
similar right with an exercise or conversion privilege at a fixed or variable
price related to the Common Stock and/or the passage of time, the occurrence of
one or more events, or the satisfaction of performance criteria or other
conditions, or (iii) any other security with the value derived from the value of
the Common Stock. Such awards include, without limitation, Options, SARs, sales
or bonuses of Restricted Stock, Dividend Equivalent Rights, Performance Units or
Performance Shares, and an Award may consist of one such security or benefit, or
two or more of them in any combination or alternative.
(b) Designation of Award. Each Award shall be designated in the
Award Agreement. In the case of an Option, the Option shall be designated as
either an Incentive Stock Option or a Non-Qualified Stock Option. However,
notwithstanding such designation, to the extent that the aggregate Fair Market
Value of Shares subject to Options designated as Incentive Stock Options which
become exercisable for the first time by a Grantee during any calendar year
(under all plans of the Company or any Parent or Subsidiary) exceeds $100,000,
such excess Options, to the extent of the Shares covered thereby in excess of
the foregoing limitation, shall be treated as Non-Qualified Stock Options. For
this purpose, Incentive Stock Options shall be taken into account in the order
in which they were granted, and the Fair Market Value of the Shares shall be
determined as of the date the Option with respect to such Shares is granted.
(c) Conditions of Award. Subject to the terms of the Plan, the
Administrator shall determine the provisions, terms, and conditions of each
Award including, but not limited to, the Award vesting schedule, repurchase
provisions, rights of first refusal, forfeiture provisions, form of payment
(cash, Shares, or other consideration) upon settlement of the Award, payment
contingencies, and satisfaction of any performance criteria. The performance
criteria established by the Administrator may be based on any one of, or
combination of, increase in share price, earnings per share, total stockholder
return, return on equity, return on assets, return on investment, net operating
income, cash flow, revenue, economic value added, personal management
objectives, or other measure of performance selected by the Administrator.
Partial achievement of the specified criteria may result in a payment or vesting
corresponding to the degree of achievement as specified in the Award Agreement.
(d) Deferral of Award Payment. The Administrator may establish
one or more programs under the Plan to permit selected Grantees the opportunity
to elect to defer receipt of consideration upon exercise of an Award,
satisfaction of performance criteria, or other event that absent the election
would entitle the Grantee to payment or receipt of Shares or other consideration
under an Award. The Administrator may establish the election procedures, the
timing of such elections, the mechanisms for payments of, and accrual of
interest or other earnings, if any, on amounts or Shares so deferred, and such
other terms, conditions, rules and
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procedures that the Administrator deems advisable for the administration of any
such deferral program.
(e) Term of Award. The term of each Award shall be the term
stated in the Award Agreement, provided, however, that the term of an Incentive
Stock Option shall be no more than ten (10) years from the date of grant
thereof. However, in the case of an Incentive Stock Option granted to a Grantee
who, at the time the Option is granted, owns stock representing more than ten
percent (10%) of the voting power of all classes of stock of the Company or any
Parent or Subsidiary, the term of the Incentive Stock Option shall be five (5)
years from the date of grant thereof or such shorter term as may be provided in
the Award Agreement.
(f) Transferability of Awards. Incentive Stock Options may not be
sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner
other than by will or by the laws of descent or distribution and may be
exercised, during the lifetime of the Grantee, only by the Grantee.
Non-Qualified Stock Options may not be transferred other than by will or the
laws of descent or distribution, or as otherwise permitted by Rules
260.140.41(d) and 260.140.42(c) of Title 10 of the California Code of
Regulations. Other Awards shall be transferable to the extent provided in the
Award Agreement.
(g) Time of Granting Awards. The date of grant of an Award shall
for all purposes be the date on which the Administrator makes the determination
to grant such Award, or such other date as is determined by the Administrator.
Notice of the grant determination shall be given to each Employee, Director or
Consultant to whom an Award is so granted within a reasonable time after the
date of such grant.
(h) Vesting Period. Incentive Stock Options and Non-Qualified
Stock Options shall vest and be exercisable at the rate of at least twenty
percent (20%) per year over five (5) years from the date the option is granted,
or as otherwise permitted under Rule 260.140.41(f) of Title 10 of the California
Code of Regulations.
(i) Individual Option and SAR Limit. The maximum number of Shares
with respect to which Options and SARs may be granted to any Employee in any
fiscal year of the Company shall be 500,000. The foregoing limitation shall be
adjusted proportionately in connection with any change in the Company's
capitalization pursuant to Section 10, below. To the extent required by Section
162(m) of the Code or the regulations thereunder, in applying the foregoing
limitation with respect to an Employee, if any Option or SAR is canceled, the
canceled Option or SAR shall continue to count against the maximum number of
Shares with respect to which Options and SARs may be granted to the Employee.
For this purpose, the repricing of an Option (or in the case of a SAR, the base
amount on which the stock appreciation is calculated is reduced to reflect a
reduction in the Fair Market Value of the Common Stock) shall be treated as the
cancellation of the existing Option or SAR and the grant of a new Option or SAR.
7. Award Exercise or Purchase Price, Consideration, Taxes and Reload
Options.
(a) Exercise or Purchase Price. The exercise or purchase price,
if any, for an Award shall be as follows:
8
<PAGE> 9
(i) In the case of an Incentive Stock Option:
(A) granted to an Employee who, at the time of the grant
of such Incentive Stock Option owns stock representing more than ten percent
(10%) of the voting power of all classes of stock of the Company or any Parent
or Subsidiary, the per Share exercise price shall be not less than one hundred
ten percent (110%) of the Fair Market Value per Share on the date of grant.
(B) granted to any Employee other than an Employee
described in the preceding paragraph, the per Share exercise price shall be not
less than one hundred percent (100%) of the Fair Market Value per Share on the
date of grant.
(ii) In the case of a Non-Qualified Stock Option, the per
Share exercise price shall be not less than eighty-five percent (85%) of the
Fair Market Value per Share on the date of grant unless otherwise determined by
the Administrator.
(iii) In the case of Awards intended to qualify as
Performance-Based Compensation, the exercise or purchase price, if any, shall be
not less than one hundred percent (100%) of the Fair Market Value per Share on
the date of grant.
(iv) In the case of other Awards, such price as is determined
by the Administrator.
(b) Consideration. Subject to Applicable Laws, the consideration
to be paid for the Shares to be issued upon exercise or purchase of an Award
including the method of payment, shall be determined by the Administrator (and,
in the case of an Incentive Stock Option, shall be determined at the time of
grant). In addition to any other types of consideration the Administrator may
determine, the Administrator is authorized to accept as consideration for Shares
under the Plan the following:
(i) cash;
(ii) check;
(iii) surrender of Shares (including withholding of Shares
otherwise deliverable upon exercise of the Award) which have a Fair Market Value
on the date of surrender equal to the aggregate exercise price of the Shares as
to which said Award shall be exercised (but only to the extent that such
exercise of the Award would not result in an accounting compensation charge with
respect to the Shares used to pay the exercise price unless otherwise determined
by the Administrator);
(iv) delivery of a properly executed exercise notice together
with such other documentation as the Administrator and the broker, if
applicable, shall require to effect an exercise of the Award and delivery to the
Company of the sale or loan proceeds required to pay the exercise price; or
(v) any combination of the foregoing methods of payment.
9
<PAGE> 10
(c) Taxes. No Shares shall be delivered under the Plan to any
Grantee or other person until such Grantee or other person has made arrangements
acceptable to the Administrator for the satisfaction of federal, state, and
local income and employment tax withholding obligations, including, without
limitation, obligations incident to the receipt of Shares or the disqualifying
disposition of Shares received on exercise of an Incentive Stock Option. Upon
exercise of an Award, the Company shall withhold from Grantee an amount
sufficient to satisfy such tax obligations.
(d) Reload Options. In the event the exercise price or tax
withholding of an Option is satisfied by the Company or the Grantee's employer
withholding Shares otherwise deliverable to the Grantee, the Administrator may
issue the Grantee an additional Option, with terms identical to the Award
Agreement under which the Option was exercised, but at an exercise price as
determined by the Administrator in accordance with the Plan.
8. Exercise of Award.
(a) Procedure for Exercise; Rights as a Stockholder.
(i) Any Award granted hereunder shall be exercisable at such
times and under such conditions as determined by the Administrator under the
terms of the Plan and specified in the Award Agreement.
(ii) An Award shall be deemed to be exercised when written
notice of such exercise has been given to the Company in accordance with the
terms of the Award by the person entitled to exercise the Award and full payment
for the Shares with respect to which the Award is exercised has been received by
the Company. Until the issuance (as evidenced by the appropriate entry on the
books of the Company or of a duly authorized transfer agent of the Company) of
the stock certificate evidencing such Shares, no right to vote or receive
dividends or any other rights as a stockholder shall exist with respect to
Shares subject to an Award, notwithstanding the exercise of an Option or other
Award. The Company shall issue (or cause to be issued) such stock certificate
promptly upon exercise of the Award. No adjustment will be made for a dividend
or other right for which the record date is prior to the date the stock
certificate is issued, except as provided in the Award Agreement or Section 10,
below.
(b) Exercise of Award Following Termination of Employment,
Director or Consulting Relationship.
(i) An Award may not be exercised after the termination date
of such Award set forth in the Award Agreement and may be exercised following
the termination of a Grantee's Continuous Status as an Employee, Director or
Consultant only to the extent provided in the Award Agreement.
(ii) Where the Award Agreement permits a Grantee to exercise
an Award following the termination of the Grantee's Continuous Status as an
Employee, Director or Consultant for a specified period, the Award shall
terminate to the extent not exercised on the last day of the specified period or
the last day of the original term of the Award, whichever occurs first.
10
<PAGE> 11
(iii) Any Award designated as an Incentive Stock Option to
the extent not exercised within the time permitted by law for the exercise of
Incentive Stock Options following the termination of a Grantee's Continuous
Status as an Employee, Director or Consultant shall convert automatically to a
Non-Qualified Stock Option and thereafter shall be exercisable as such to the
extent exercisable by its terms for the period specified in the Award Agreement.
(c) Buyout Provisions. The Administrator may at any time offer to
buy out for a payment in cash or Shares, an Award previously granted, based on
such terms and conditions as the Administrator shall establish and communicate
to the Grantee at the time that such offer is made.
9. Conditions Upon Issuance of Shares.
(a) Shares shall not be issued pursuant to the exercise of an
Award unless the exercise of such Award and the issuance and delivery of such
Shares pursuant thereto shall comply with all Applicable Laws, and shall be
further subject to the approval of counsel for the Company with respect to such
compliance.
(b) As a condition to the exercise of an Award, the Company may
require the person exercising such Award to represent and warrant at the time of
any such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares if, in the
opinion of counsel for the Company, such a representation is required by any
Applicable Laws.
10. Adjustments Upon Changes in Capitalization. Subject to any required
action by the stockholders of the Company, the number of Shares covered by each
outstanding Award, and the number of Shares which have been authorized for
issuance under the Plan but as to which no Awards have yet been granted or which
have been returned to the Plan, as well as the price per share of Common Stock
covered by each such outstanding Award, shall be proportionately adjusted for
any increase or decrease in the number of issued shares of Common Stock
resulting from a stock split, reverse stock split, stock dividend, combination
or reclassification of the Common Stock, or any other similar event resulting in
an increase or decrease in the number of issued shares of Common Stock. Such
adjustment shall be made by the Administrator, and its determination in that
respect shall be final, binding and conclusive. Except as expressly provided
herein, no issuance by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall affect, and no
adjustment by reason hereof shall be made with respect to, the number or price
of Shares subject to an Award.
11. Corporate Transactions/Changes in Control/Subsidiary Dispositions.
(a) The Administrator shall have the authority exercisable either
in advance of any actual or anticipated Corporate Transaction or at the time of
an actual Corporate Transaction and either at the time of the grant of any Award
or at any time while an Award remains outstanding to provide for the automatic
full vesting and exercisability of one or more outstanding unvested Awards under
the Plan and the termination of restrictions on transfer and repurchase or
forfeiture rights on such Awards, in connection with a Corporate Transaction.
The
11
<PAGE> 12
Administrator also shall have the authority to condition any such Award
vesting and exercisability or release from such limitations upon the subsequent
termination of the Continuous Status of an Employee or Consultant of the Grantee
within a specified period following the effective date of the Corporate
Transaction. The Administrator may provide that any Awards so vested or released
from such limitations in connection with a Corporate Transaction, shall remain
fully exercisable until the expiration or sooner termination of the Award.
(b) Effective upon the consummation of the Corporate Transaction,
all outstanding Awards under the Plan shall terminate and cease to remain
outstanding, except to the extent assumed by the successor company or its
Parent.
(c) The Administrator shall have the authority, exercisable
either in advance of any actual or anticipated Change in Control (other than a
Change in Control which is also a Corporate Transaction) or at the time of an
actual Change in Control and either at the time of the grant of an Award or at
any time while an Award remains outstanding, to provide for the automatic full
vesting and exercisability of one or more outstanding unvested Awards under the
Plan and the termination of restrictions on transfer and repurchase or
forfeiture rights on such Awards, in connection with a Change in Control. The
Administrator also shall have the authority to condition any such Award vesting
and exercisability or release from such limitations upon the subsequent
termination of the Continuous Status as an Employee or Consultant of the Grantee
within a specified period following the effective date of the Change in Control.
The Administrator may provide that any Awards so vested or released from such
limitations in connection with a Change in Control, shall remain fully
exercisable until the expiration or sooner termination of the Award.
(d) The Administrator shall have the authority, exercisable
either in advance of any actual or anticipated Subsidiary Disposition or at the
time of an actual Subsidiary Disposition and either at the time of the grant of
an Award or at any time while an Award remains outstanding, to provide for the
automatic full vesting and exercisability of one or more outstanding unvested
Awards under the Plan and the termination of restrictions on transfer and
repurchase or forfeiture rights on such Awards, in connection with a Subsidiary
Disposition, but only with respect to those Grantees who are at the time engaged
primarily in Continuous Service as an Employee or Consultant with the subsidiary
corporation involved in such Subsidiary Disposition. The Administrator also
shall have the authority to condition any such Award vesting and exercisability
or release from such limitations upon the subsequent termination of the affected
Grantee's Continuous Service as an Employee or Consultant with that subsidiary
corporation within a specified period following the effective date of the
Subsidiary Disposition. The Administrator may provide that any Awards so vested
or released from such limitations in connection with a Subsidiary Disposition,
shall remain fully exercisable until the expiration or sooner termination of the
Award.
(e) The portion of any Incentive Stock Option accelerated under
this Section 11 in connection with a Corporate Transaction, Change in Control or
Subsidiary Disposition shall remain exercisable as an Incentive Stock Option
under the Code only to the extent the $100,000 dollar limitation of Section
422(d) of the Code is not exceeded. To the extent such dollar limitation is
exceeded, the accelerated excess portion of such Option shall be exercisable as
a Non-Qualified Stock Option.
12
<PAGE> 13
12. Term of Plan. The Plan shall become effective upon the earlier to
occur of its adoption by the Board or its approval by the stockholders of the
Company. It shall continue in effect for a term of ten (10) years unless sooner
terminated.
13. Amendment, Suspension or Termination of the Plan.
(a) The Board may at any time amend, suspend or terminate the
Plan. To the extent necessary and desirable to comply with Applicable Laws, the
Company shall obtain stockholder approval of any Plan amendment in such a manner
and to such a degree as required.
(b) No Award may be granted during any suspension or after
termination of the Plan.
(c) Any amendment, suspension or termination of the Plan shall
not affect Awards already granted, and such Awards shall remain in full force
and effect as if the Plan had not been amended, suspended or terminated, unless
mutually agreed otherwise between the Grantee and the Administrator, which
agreement must be in writing and signed by the Grantee and the Company.
14. Reservation of Shares.
(a) The Company, during the term of the Plan, will at all times
reserve and keep available such number of Shares as shall be sufficient to
satisfy the requirements of the Plan.
(b) The inability of the Company to obtain authority from any
regulatory body having jurisdiction, which authority is deemed by the Company's
counsel to be necessary to the lawful issuance and sale of any Shares hereunder,
shall relieve the Company of any liability in respect of the failure to issue or
sell such Shares as to which such requisite authority shall not have been
obtained.
15. No Effect on Terms of Employment. The Plan shall not confer upon
any Grantee any right with respect to continuation of employment or consulting
relationship with the Company, nor shall it interfere in any way with his or her
right or the Company's right to terminate his or her employment or consulting
relationship at any time, with or without cause.
16. Stockholder Approval. The Plan became effective when adopted by the
Board on June 27, 1996, and was approved by the Company's shareholders on
October 3, 1996. On July 10, 1997, the Board adopted and approved an amendment
and restatement of the Plan to adopt a limit on the number of Shares with
respect to which Options and SARs may be granted to any Employee in any fiscal
year of the Company to enable Options and SARs to qualify as Performance-Based
Compensation (the "Amendment"), subject to shareholder approval of the
Amendment.
17. Information. Pursuant to Rules 260.140.41(j) and 260.140.46 of the
California Code of Regulations, Grantees shall receive financial statements of
the Company at least annually.
13
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