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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
   Form 10-K/A    (Mark One) þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended April 3, 2004o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For 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. Employerincorporation or organization)
    
    Identification No.)
 14661 Franklin Avenue
Tustin, California 92780(Address of principal executive offices, zip code) Registrants telephone number, including area code:
(714) 481-7800 Securities registered pursuant to Section 12(b) of the Act:
None Securities registered pursuant toSection 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 þ No o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes o No þ The aggregate market value of the voting and non-voting common equity held
by non-affiliates of the Registrant was $31,666,721 on October 4, 2003, 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 34,581,655 on June 25, 2004. Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K 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. DOCUMENTS INCORPORATED BY REFERENCE None.




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TABLE OF CONTENTS  PART IItem 1. BusinessItem 2. PropertiesItem 3. Legal ProceedingsItem 4. Submission of Matters to a Vote of Security HoldersPART IIItem 5. Market for the Registrants Common Equity and Related Stockholder MattersItem 6. Selected Financial DataItem 7. Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 7A. Quantitative and Qualitative Disclosures About Market RisksItem 8. Financial Statements and Supplementary DataItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresPART IIIItem 10. Directors and Executive Officers of the RegistrantItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners And Management And Related Stockholders MattersItem 13. Certain Relationships And Related TransactionsITEM 14. Principal Accounting Fees And ServicesPART IVItem 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-KSIGNATURESEXHIBIT INDEXEXHIBIT 23.1EXHIBIT 23.2EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2    Table of Contents  EXPLANATORY NOTE On September 30, 2004, in connection with its earlier filing of a
Registration Statement on Form S-3, MTI Technology Corporation received a
letter from the U.S. Securities and Exchange Commission commenting upon MTIs
disclosure in the registration statement and, because the registration
statement incorporates by reference MTIs periodic reports filed pursuant to
the Securities Exchange Act of 1934, as amended, also commenting upon MTIs
disclosure in its Annual Report on Form 10-K for its fiscal year ended April 3,
2004. This Amendment No. 3 to Form 10-K is being filed to reflect revisions to
MTIs prior disclosures prompted by the SECs comments. While certain footnote
disclosure in the financial statements has been modified, this Amendment does
not include any changes to the financial results reported in the financial
statements included in MTIs original Form 10-K. 
 PART I 
 Item 1.Business Introduction MTI Technology Corporation was incorporated in California in March 1981
and reincorporated in Delaware in October 1992. Our principal executive
offices are located at 14661 Franklin Avenue, Tustin, California 92780. Our
telephone number at that location is (714) 481-7800. References in this Form
10-K to we, our, us, the Company and MTI refer to MTI Technology
Corporation and its consolidated subsidiaries. All references to years refer to our fiscal years ended April 1, 2000,
April 7, 2001, April 6, 2002, April 5, 2003, and April 3, 2004, as applicable,
unless the calendar year is specified. References to dollar amounts that
appear in the tables and in the Notes to Consolidated Financial Statements are
in thousands, except share and per share data amounts, unless otherwise
specified. The fiscal year ended April 7, 2001, consisted of 53 weeks. All
other fiscal years consisted of 52 weeks. Overview We are a system integrator providing storage solutions for the mid-range
enterprise market. Historically, we partnered with independent storage
technology companies to develop, integrate and maintain high-performance,
high-availability storage solutions for the mid-range and Global 2000 companies
worldwide. We continue to service select third party hardware and software,
and our Professional Services organization provides planning, consulting and
implementation support for storage products from other leading vendors. We
believe that there is as much value in creating, integrating, implementing and
providing umbrella services around these various technologies as there is in
developing the raw technology. As of March 31, 2003, we have become a reseller and service provider of
EMC Automated Networked Storage systems and software, pursuant to a reseller
agreement with EMC Corporation, a world leader in information storage systems,
software, networks and services. Although we intend to focus primarily on EMC
products, we will continue to support and service our customers that continue
to use our MTI-branded RAID controller technology and our partnered independent
storage technology. We believe that we can differentiate ourselves through our
ability to offer a full spectrum of services on a wide range of storage
products covering online storage, replicated site environments and data
protection from leading technology companies. We sell our solutions and
services to Global 2000 companies for their data center computing environments. Under the terms of the EMC reseller agreement, we will combine our core
services capabilities, including storage networking assessment, installation,
resource management and enhanced data protection, with the complete line of EMC
Automated Networked Storage systems and software, focusing on the CLARiiON®
family of systems. We are developing and implementing solutions that
incorporate a broad array of third party products which, we believe, are the
finest commercial technologies available to meet customer requirements in the
areas of Storage Area Networks, Network Attached Storage, high-availability
systems for enhanced business continuance, data protection systems
incorporating enhanced backup and recovery, Information Lifecycle Management
(ILM), archiving and 1




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tape automation, while minimizing our past dependencies on MTI-branded
RAID controller technology. We also enhance the value of our storage solutions
through our 24 hour, seven days per week support and service infrastructure,
which includes an international network of 113 on-site field engineers, a
storage solution laboratory, and our global technical support centers. The
sale of EMC products accounted for 52% of product revenue in fiscal year 2004.
The terms of the EMC reseller agreement do not allow us to sell data storage
hardware that competes with EMC products. We differentiate ourselves from other resellers of EMC products in the
following two ways: 1) We are the only EMC reseller that sells EMC products
exclusively. We believe this gives us an advantage over other resellers in
that we receive sponsorship from EMC in the way of favorable
pricing, rebates and access to training; 2) We are a service-enabled EMC
reseller. Many resellers only sell hardware and software and rely on other
service providers to fulfill the maintenance and professional services
requirements for their customers. Not only do we sell hardware and software,
we are able to provide a full offering of professional services and maintenance
to our customers. The total storage solutions that we deliver to the market are generally
compatible with Sun Solaris, HP-UX, Windows NT, Novell Netware, IBM AIX, and
Linux operating systems. Having the ability to work on these operating
platforms enables us to meet varied customer demands. Our customers represent
a cross-section of industries and governmental agencies and range from small
businesses to Fortune 500 companies. No single customer accounted for more
than ten percent of total revenue during fiscal years 2004, 2003 and 2002. We have a history of recurring losses and net cash used in operations. In
fiscal years 2003 and 2004 we incurred net losses of $11.2 million and $3.9
million, respectively. Our cash used in operations was $10.9 million in fiscal
year 2004. We had $2.7 million in working capital as of April 3, 2004. Our
future growth is dependent upon many factors, including but not limited to,
recruiting, hiring, training and retaining significant numbers of qualified
personnel, forecasting revenues, controlling expenses and managing assets. If
we are not successful in these areas, our future results of operations could be
adversely affected. Our Strategy Our strategy is to simplify the storage, availability, protection and
management of large amounts of data by delivering fully integrated solutions to
our customers based on EMC Automated Networked Storage systems and other
vendors best-of-breed technologies and high value services. We provide customers access to technology through strategic partnerships
with leading storage vendors including EMC, Legato, Brocade, Quantum, and
StorageTek. The core value of our vendor relationships is our commitment to
providing services and solutions around these technologies. From basic
services such as installation and integration to advanced services by our
Professional Services Consulting group designing and implementing fully
integrated solutions, we assist our customers with the full potential of the
technologies we implement in their operations. In order to continue to provide the broadest array of storage solutions,
we require access to a full complement of technology from the leaders in the
industry. Through our relationship with EMC and other vendors, we can now
offer our customers effective solutions addressing some of their most urgent
business and regulatory requirements. Significant Business Developments Sale of Securities On June 17, 2004, we sold 566,797 shares of Series A Convertible Preferred
Stock in a private placement financing at $26.46 per share, which raised $15
million in gross proceeds, before consideration of professional fees. The sale
included issuance to the investors of warrants to purchase 1,624,308 shares of
the Companys common stock with an exercise price of $3.10 per share. The
shares of common stock into which the warrants are exercisable represent
twenty-five percent (25%) of the aggregate number of shares of common stock
into which the Series A 2




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Convertible Preferred Stock are convertible plus an additional 207,315
shares of common stock. Each share of Series A Convertible Preferred Stock is
convertible into common stock at an initial conversion rate of ten shares of
common stock for each share of Series A Convertible Preferred Stock, subject to
adjustments upon certain dilutive issuances of securities by the Company at the
initial stated price per share. The Series A Convertible Preferred Stock
carries a cumulative dividend of 8% per year payable when and if declared by
the Board of Directors. The warrants are exercisable on or after December 20,
2004, and expire on June 17, 2015. As part of the private placement, a
representative of the investors has joined the Companys Board of Directors. EMC Partnership Effective March 31, 2003, we became part of EMCs Authorized Service
Network. As a result, we are part of a worldwide network of professional
service organizations enabling us to offer enhanced service and consulting
capabilities to our customers. Also during fiscal year 2004, as a result of our increased sales volume,
we became an EMC Premier Velocity Partner. This designation entitles us to
more favorable pricing structures as well as additional sponsorship from EMC. In the fourth quarter of fiscal year 2004, we amended the EMC reseller
agreement to extend the terms of the agreement an additional three years. The
EMC reseller agreement will expire on March 31, 2009. Thereafter, and subject
to mutual agreement, the EMC reseller agreement shall be automatically renewed
for successive one-year renewal periods until terminated by either party with a
90-day notice. Financial Restructurings and Reductions in Staff During the fourth quarter of fiscal year 2002, we recorded a restructuring
charge of $4.9 million which consisted of $4.3 million in charges related to
the abandonment of either underutilized or historically unprofitable
facilities, $0.3 million in charges related to headcount reduction of 56
employees, and $0.3 million in charges related to the disposal of certain fixed
assets. The cash outflow of the restructuring charge was $0.3 million, related
to severance paid to employees, of which $0.1 million was paid in fiscal year
2002. The remaining $0.2 million was paid in the first quarter of fiscal year
2003. During fiscal year 2003, we recorded an additional restructuring charge of
$1.4 million which consisted of charges of $0.5 million related to headcount
reduction of 39 employees, or 15% of the Companys workforce, $0.5 million
related to the disposal or abandonment of fixed assets and $0.4 million due to
lower than anticipated lease payments from sub-lessees in certain facilities.
Of the 39 positions terminated, 14, 3, 6, 1, 14 and 1 were from the Sales,
Marketing, General and Administrative, Customer Service, Research and
Development and Manufacturing departments, respectively. In the first quarter of fiscal year 2004, we recorded an additional $0.04
million restructuring charge due to lower than anticipated lease payments from
sub-lessees in our Sunnyvale, California facility. Also in the first quarter
of fiscal year 2004, we eliminated 18 full-time positions, 1, 16 and 1 from the
domestic general and administrative, global customer solutions and
manufacturing departments, respectively. As a result of this reduction in
workforce, we expect to realize quarterly cost savings of $0.3 million. In the second quarter of fiscal year 2004, we reversed $0.3 million of the
restructuring charge due to higher than anticipated lease payments from
sub-lessees and usage of space in our Westmont, Illinois facility. In the third quarter of fiscal year 2004, we eliminated 21 full-time
positions, 8 from our field service department, 7 from our manufacturing
department, 2 from our general and administrative department and 4 from our
sales department. As a result of this reduction in workforce, we expect to
realize quarterly cost savings of $0.5 million. 3




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EMC Asset Purchase Agreement Effective February 9, 1996, we entered into an asset purchase agreement
with EMC, in which we sold to EMC substantially all of our existing patents,
patent applications and related rights. We were entitled to receive $30.0
million over the life of the EMC asset purchase agreement. The final payment
of $5.0 million was received in January 2001. We also were entitled to receive
royalty payments in the aggregate of up to a maximum of $30.0 million over the
term of the EMC asset purchase agreement. As part of the maximum $30.0 million in royalties, minimum royalties of
$10.0 million were to be received in five annual installments, beginning within
30 days of the first anniversary of the effective date of the EMC asset
purchase agreement, and within 30 days of each subsequent anniversary thereof.
As of March 2001, we had received all installments. Also, as a result of a
computer and technology agreement between EMC and IBM announced in March 1999,
the minimum royalties of $10.0 million were to be increased to $15.0 million.
Payments were to be received under the EMC asset purchase agreement in five
equal annual installments. We received the first three annual installments in
March 2000, March 2001 and March 2002. On April 1, 2003, we entered into an
amended asset purchase agreement with EMC, pursuant to which EMC paid to us
$5.9 million, which fully satisfied all obligations of EMC under the asset
purchase agreement. Also, we granted EMC immunity from suit for patent
infringement with respect to our patents. We also received from EMC an irrevocable, non-cancelable, perpetual and
royalty-free license to exploit, market and sell the technology protected under
the applicable patents. This license will terminate in the event of a change
in control of the Company involving certain acquirers. As part of the EMC
asset purchase agreement, MTI and EMC granted to each other a 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 EMC asset purchase agreement for a
period of five years, which expired February, 2001. See Note 12 of Notes to
Consolidated Financial Statements. Subsequent to the fiscal year ended April 3, 2004, we assigned to EMC all
of our rights, title and interest in and to all our remaining patents and
patent applications. Our Market Our primary market focus is the worldwide mid-range open systems-based
market for storage solutions. EMC currently fulfills approximately 39% of the
storage infrastructure for this market. We believe this represents a
significant market opportunity for us. We believe that we can continue to
increase our revenue by leveraging EMCs leadership position in the market. The growth of IT-managed data is creating a significant market opportunity
for enterprise storage solution providers. Worldwide IT storage capacity
deployments are growing and storage is considered to be a major IT discipline
in most organizations with storage spending exceeding server and networking
expenditures. Storage expenditures are shifting to services and we believe
that complexity, not a lack of technology, is now the key weakness in the IT
storage environment. There are currently many powerful networking, software
and integrated appliance products available that address storage
manageability and automate key storage management functions. Historically, we
have sold many of these state-of-the-art products ranging from fibre-channel
storage area network (SAN), network area storage (NAS), direct attached storage
(DAS) and content addressable storage (CAS), to data replication and backup
systems. Understanding and working with the vast array of storage offerings is
complex and expensive for the IT customer. As a result, we believe that the
market will shift to consuming traditional storage and storage automation
products in the context of a full-service solution in which the responsibility
for designing, integrating, and maintaining the storage environment will be
assigned to an outside storage services specialist like ourselves. We believe that the trend towards acquiring fully integrated storage
solutions will be particularly strong in the mid-range of the enterprise
storage market, where companies tend to host their own mission critical
applications yet do not have the staffing resources of mainframe environments.
Despite increasing demand for additional storage requirements over the last few
years, we believe that companies in the mid-range segment do not have
sufficient access to fully integrated storage solution providers. The majority
of system integrators and resellers tend to either 4




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be too small, lack the necessary multi-national infrastructure or do not
have the required technology relationships to satisfy the needs of the
mid-range market. In addition, too few vendors, resellers, and integrators
focus purely on storage. Therefore, we believe that our size, partnerships and
professional services focus present a unique opportunity to exploit market
shifts and growth. Our Storage Solution We deliver storage solutions to solve many common and demanding customer
problems. These solutions are built on what we believe to be the best-of-breed
platform complemented by other strategic partners such as EMC, Legato, Brocade,
Quantum, StorageTek, and ADIC. We believe that we integrate these solutions
into a complete, easy-to-operate and reliable storage environment to meet the
customers specific business objectives. Our technical specialists assess the
customers environment and custom design each solution to address the
customers specific needs, both in terms of technical configuration and vendor
product selection. Leveraging our technical resources and vendor
relationships, we select, along with our customers input, a platform that will
interoperate and meet the solution objectives. We then custom design and
deliver these solutions with a full range of value-added service offerings from
installation and implementation to ongoing maintenance, support, management,
residency and knowledge transfer. Our solutions approach provides us the
opportunity to not only meet their hardware and software requirements, but also
advise and implement comprehensive business process (e.g. ILM, business
continuance, regulatory compliance) improvements thus enhancing our value
proposition. Moreover, as a provider of both products and professional
services and on going support, we are able to reduce the customers overhead
costs. Our solutions are divided into three areas that address different aspects
of the storage environment:  
    
    Storage infrastructure solutions that center on
state-of-the-art, high-performance, high-availability networked
storage systems from EMC (DAS, SAN, NAS and CAS). These solutions
are designed to deliver fast, reliable, and resilient on-line
storage systems that are easily and rapidly deployed. Our solutions
are integrated with easy to use Storage Resource Management software
that allow our customers to improve system administration
productivity;
    
    Backup Solutions that incorporate leading edge solutions from
platform vendors such as Legato in combination with state-of-the-art
tape libraries from Quantum, StorageTek and ADIC; and
    
    Replication services on a local level and/or on a wide area
basis to create operational copies of current data or for enhanced
data protection and business continuity utilizing software and
hardware services from EMC, Legato and other leading Storage
Application Software vendors. Global Customer Solutions The quality and reliability of the products we sell and the continuing
support of these products are important elements of our business. As we move
forward with our reseller partnership with EMC, we believe that the expertise
of our professional services staff and the delivery of high quality customer
service will be of even greater importance to our customer base. Additionally,
as part of EMCs Authorized Service Network, we are part of a worldwide network
of professional service organizations enabling us to offer enhanced service and
consulting capabilities to our customers. As part of our strategy to build a worldwide organization devoted to
addressing customers storage related needs, we have engineered a major
realignment within the service elements of the business. During the first
quarter of fiscal year 2004, we created a new function called Global Customer
Solutions (GCS), consisting of 112 people, to better align and utilize our
resources as we embrace our new business model as a reseller of the full line
of EMC storage solutions. GCS is the umbrella function for all of our customer
support functions. The GCS functions encompass all of product procurement,
integration, logistics support, software and hardware technical support, Field
Service Operations and Professional Services Consultancy. We have consolidated
our legacy product sustaining function in two separate primary product support
centers, one located at our corporate headquarters in Tustin, California, and a
second located in Godalming, England. As a part of our consolidation efforts
and to avoid 5




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duplication at the two facilities, the Godalming, England facility handles
primarily our European customer base and sustaining for our S and D series RAID
storage, while the Tustin, California facility continues to sustain our
traditional RAID storage, and primarily handle our U.S. customer base. As
necessary, technical professionals from either facility are dispatched
worldwide to address and solve our customer requirements. We currently offer a variety of customer services that include system and
software maintenance of MTI and EMC-manufactured products, as well as other
open-system platforms, consulting services, storage-management integration and
training. We offer on-site service response 24 hours-a-day, seven-days-a-week,
365 days-a-year. Service revenue represented approximately 44%, 51%, and 41%
of our total revenue in fiscal years 2004, 2003, and 2002, respectively. Currently, we are selling most EMC hardware products with up to 3-year
24x7 warranties and EMC software products with 90-day warranties. As a result,
the amount of service contracts associated with those hardware product sales is
expected to decrease in value. Depending upon the conversion of our current
customer base to EMC products from MTI proprietary products, service revenues
may continue to decrease. As sales of EMC products increase, we expect sales
of back-up products, which are not a part of the EMC reseller agreement, to
increase. The back-up products carry shorter warranty periods, thus providing
us an opportunity for increased maintenance contract revenue. Furthermore,
technology refresh activity will increase the demand for our professional
services which is expected to be a significant driver of our future growth in
the services arena. Sales and Marketing Since 1996, we have focused our business on the storage needs of the
open-systems based and mid-range enterprise computing market. We have over
4,000 customers who have relied on us to design, implement and service portions
of the storage environments that support their critical business applications.
On March 31, 2003, we signed a reseller agreement with EMC. The vast majority
of our sales and marketing efforts are focused on selling and servicing storage
solutions purchased from EMC and its wholly-owned subsidiary, Legato Systems.
Our market strategy is to become the preferred provider for sales, professional
services and maintenance to the mid-range enterprise market for EMC-branded
storage solutions. In order to accomplish this, we will marry our expert
on-site professional and support services with industry-leading storage
solutions that represent the best technology available today and access to
future technologies developed by the strongest brands in the storage industry.
We believe that the EMC product set best meets these requirements and will
allow us to be successful in our market strategy. We believe that in todays technology storage marketplace, buying
decisions are based much more on return on investment than in the past.
Todays buyers are more business managers than traditional technology buyers
and purchases are made to solve existing business issues. Therefore, product
brand is of the utmost importance. Our EMC relationship allows us to have
access to a world-class product brand to meet the demands of todays
marketplace. We differentiate ourselves from other resellers through our dedicated
focus on EMC storage solutions, our multi-national direct-end sales force and
on-site professional service and maintenance organization. Our marketing is
focused around direct lead generation through select localized telemarketing
and other marketing strategies. We expanded our direct end-user sales force
during fiscal year 2004 and we expect to continue to expand throughout fiscal
year 2005. Order Backlog As a reseller of EMC Automated Networked Storage Systems and software, our
backlog levels will depend on the availability of EMC products. EMC generally
ships products within ten days upon receipt of a purchase order. A significant
portion of our sales occurs in the last month of a quarter. Consequently, our
backlog at the end of a quarter is dependant upon our ability to place a
purchase order with EMC soon enough to allow EMC adequate time to assemble,
test and ship orders prior to the end of the quarter. As a result, we believe
that order backlog as of any particular date is not meaningful as it is not
necessarily indicative of future sales levels. As of April 3, 2004, our order
backlog was $2.9 million as compared to $1.8 million as of April 5, 2003. 6




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Manufacturing and Integration Services As of April 3, 2004, MTI ceased manufacturing operations. Our
manufacturing and integration services operations that are located in Dublin,
Ireland, and Tustin, California have transitioned to central procurement, order
fulfillment and logistics operations. Order fulfillment for North America is
managed through Tustin, California and products are generally drop-shipped
directly from suppliers such as EMC, Legato, Brocade, Quantum, StorageTek, and
ADIC. Order fulfillment for Europe is managed directly through Dublin,
Ireland. We continue to have a smaller scale product integration capability in
Dublin, Ireland to fulfill the need for our legacy RAID products. Competition The market for data storage solutions is extremely competitive,
characterized by rapidly changing technology. We have a number of competitors
in various markets, including Hitachi Data Systems, Hewlett-Packard Company,
Sun Microsystems, Inc., IBM, and Network Appliance, Inc., each of which has
substantially greater name recognition, marketing capabilities, and financial
and personnel resources than we have. As a reseller of EMC-centric solutions,
we believe that we have a competitive advantage of selling products of the
highest levels of functionality, performance and availability in the
information storage market. Since our goal is to enable customers to purchase a single, integrated
storage solution, rather than multiple components requiring integration by the
customer, we believe the principal elements of competition include quality of
professional services consulting, ongoing support and maintenance coupled with
responsiveness to costumers and market needs, as well as price, product
quality, reliability and performance. There can be no assurance that we will
be able to compete successfully or that competition will not have a
materially-adverse effect on our results of operations. See Factors That May
Affect Future Results  The markets for the products and services that we sell
are intensely competitive which may lead to reduced sales of our products,
reduced profits and reduced market share for our business in Item 7 of this
Form 10-K. Proprietary Rights We have relied on a combination of patent, copyright, trademark and
trade-secret laws, employee and third party non-disclosure agreements and
technical measures to protect our proprietary rights in our products. Since we
shifted our strategy to become an EMC reseller, our reliance on property rights
is less relevant. Pursuant to the EMC asset purchase agreement, we sold to EMC substantially
all of our then-existing patents, patent applications, and related rights. We
have an irrevocable, non-cancelable, perpetual and royalty-free license to
exploit, market and sell the technology protected under the patents sold to
EMC. The license we were granted pursuant to the terms and conditions of that
agreement will terminate in the event of a change of control of the Company
involving certain identified acquirers. On April 1, 2003, we entered into an
amended asset purchase agreement with EMC, under which EMC paid us $5.9
million, which satisfied all obligations of EMC under the February 9, 1996,
Asset Purchase Agreement. Also, we granted EMC immunity from suit for patent
infringement with respect to our patents. Subsequent to the fiscal year ended April 3, 2004, we assigned to EMC all
of our rights, title and interest in and to all of our remaining patents and
patent applications. Employees As of April 3, 2004, we had 254 full-time employees worldwide, including
80 in sales and marketing, 112 in global customer solutions, 20 in procurement
and quality assurance, and 42 in general administration and finance. None of
our employees are represented by a labor union, and we consider our relations
with our employees to be good. 7




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Availability of SEC Filings All reports filed by MTI with the SEC are available free of charge via
EDGAR through the SEC website at www.sec.gov. In addition, the public may read
and copy materials filed by MTI with the SEC at the SECs public reference room
located at 450 Fifth St. N.W., Washington, D.C., 20549. Information regarding
operation of the SECs public reference room can be obtained by calling the SEC
at 1-800-SEC-0330. MTI also provides copies of its Forms 8-K, 10-K 10-Q, Proxy
and Annual Report at no charge to investors upon request and makes its reports
available through its website at www.mti.com, as soon as reasonably practicable
after filing such material with the SEC. 
 Item 2.Properties Our corporate offices, including marketing, sales and support, general
administration, and finance functions are located in Tustin, California, in a
leased facility consisting of approximately 41,130 square feet. These premises
are occupied under a lease agreement that expires on September 30, 2005. In
July 2002, we completed consolidating our manufacturing facility into our
28,500 square feet facility in Dublin, Ireland, for which the lease expires in
2023. We also lease 16,000 square feet, 19,500 square feet, 11,800 square feet
and 1,500 square feet facilities in Godalming, England, Chatou, France,
Wiesbaden, Germany and Munich, Germany, respectively, which are used for sales
and services. We abandoned 21,700 square feet, 11,160 square feet, 2,635 square feet,
3,200 square feet, 2,050 square feet and 3,400 square feet of our facilities
located in Sunnyvale, California, Westmont, Illinois, Raleigh, North Carolina,
Dublin, Ireland, Godalming, England, and Chatou, France, respectively, in the
fourth quarter of fiscal year 2002. However, we are still obligated under the
Sunnyvale, California, Westmont, Illinois, Raleigh, North Carolina, Dublin,
Ireland, Godalming, England, and Chatou, France lease agreements that expire on
July 31, 2006, June 30, 2005, April 30, 2005, October 14, 2023, November 5,
2012 and April 30, 2007, respectively. We have been able to sublet portions of
our Sunnyvale, California, Westmont, Illinois, Raleigh, North Carolina, and
Dublin, Ireland offices. We will continue to seek sub-tenants in order to
further reduce our cost from the closure of our facilities. However, due to
current economic conditions, there can be no assurance that we will be able to
sub-lease the facilities in a timely manner. We also lease approximately 11 sales and support offices located throughout the U.S. and Europe. 
 Item 3.Legal Proceedings Between July and September 2000, several complaints were filed in the
United States District Court for the Central District of the California against
us and several current or former officers seeking unspecified damages for our
alleged violation of the Securities Exchange Act of 1934, as amended, by
failing to disclose certain adverse information primarily during fiscal year
2000. On or about December 5, 2000, the several complaints were consolidated
as In re MTI Technology Corp. Securities Litigation II. On October 17, 2002, the parties reached a tentative settlement in
principle of this action. On or about December 3, 2002, the parties executed
and submitted to the court for preliminary approval their agreement to settle
the litigation. On May 19, 2003, the District Court preliminarily approved the
settlement. On July 28, 2003, the District Court gave final approval of the
settlement, all but $0.1 million of which was paid by our insurers, in return
for a release of all claims against us and the other defendants, and dismissed
the litigation with prejudice. The settlement has now become final under its
terms, as the time to appeal from the dismissal has run. We are also, from time to time, subject to claims and suits arising in the
ordinary course of business. In our opinion, the ultimate resolution of these
matters are not expected to have a materially-adverse effect on our
consolidated financial position, results of operations or liquidity. 
 Item 4.Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of MTIs stockholders during the
fourth quarter of fiscal year 2004. 8




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PART II 
 Item 5.Market for the Registrants Common Equity and Related Stockholder
Matters Principal Market and Prices On May 30, 2002, we received a notification letter from Nasdaq for
non-compliance with Marketplace Rule 4450(a)(5) because the bid price of our
common stock had closed at less than $1.00 per share over the previous 30
consecutive trading days. We had 90 calendar days, or until August 28, 2002,
to regain compliance. On August 16, 2002, our securities ceased trading on the
Nasdaq National Market and began trading on the Nasdaq SmallCap Market. We
were granted an additional 90 calendar days, or until November 26, 2002, to
demonstrate compliance with the minimum $1.00 per share requirement or meet
initial listing criteria of Marketplace Rule 4310(c)(8)(D), which entitled us
to an additional 180 calendar day grace period from Nasdaq to demonstrate
compliance. On November 26, 2002, we received a letter from Nasdaq extending
our listing on the SmallCap Market. As a result of the extension, we had until
May 27, 2003 to comply with the minimum bid price requirement of the SmallCap
Market, which requires us to maintain a $1.00 minimum bid price for a minimum
of 10 consecutive trading days. During April 2003, the closing bid price of
our common stock was $1.00 per share or greater for more than 10 consecutive
trading days and on May 6, 2003, we received a notification letter from Nasdaq
notifying us that we regained compliance with the Rule. As a result, our
common stock will continue to be quoted on the Nasdaq SmallCap Market so long
as we continue to satisfy the ongoing Nasdaq compliance requirements. The following table sets forth the range of high and low sales prices per
share of our common stock for each quarterly period as reported on The Nasdaq
National Market and the Nasdaq SmallCap Market for the periods indicated. The
price of our common stock at the close of business on June 25, 2004, was $2.24.
See Factors That May Affect Future Results  We may fail to comply with
Nasdaq Marketplace Rules Sales PricesHigh
    
    LowFiscal Year 2003First Quarter
    
    
    0.9900
    
    
    
    0.4200Second Quarter
    
    
    0.5700
    
    
    
    0.2500Third Quarter
    
    
    0.7900
    
    
    
    0.2800Fourth Quarter
    
    
    1.3400
    
    
    
    0.4000Fiscal Year 2004First Quarter
    
    
    1.1900
    
    
    
    0.8500Second Quarter
    
    
    1.9800
    
    
    
    0.9000Third Quarter
    
    
    2.8700
    
    
    
    1.5700Fourth Quarter
    
    
    3.7300
    
    
    
    2.2300
 Number of Common Stockholders The approximate number of record holders of our common stock as of June
25, 2004, was 356. Dividends We have never declared or paid any dividends. We currently expect to
retain any earnings for use in the operation of our business and, therefore, do
not anticipate declaring or paying any cash dividends in the foreseeable
future. Warrants On January 16, 2004, Silicon Valley bank converted all of its warrants to
purchase 190,678 shares of our common stock into 40,176 shares of common stock
through a cashless warrant exercise. 9




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##### Table of Contents



Issuer Purchases of Equity Securities During the fourth quarter of fiscal 2004, there were no purchases made by
or on behalf of the Company or any affiliated purchaser, as defined in Rule
10b-18(a)(3) of the Securities Exchange Act of 1934, as amended, of shares of
the Companys common stock that is registered by the Company pursuant to
Section 12 of the Securities Exchange Act of 1934, as amended. Recent Sales of Unregistered Securities On June 17, 2004, the Company sold 566,797 shares of Series A Convertible
Preferred Stock in a private placement financing at $26.46 per share, which
raised $15 million in gross proceeds, before consideration of professional
fees. The sale included issuance to the investors of warrants to purchase
1,624,308 shares of the Companys common stock with an exercise price of $3.10
per share. The shares of common stock into which the warrants are exercisable
represent twenty-five percent (25%) of the aggregate number of shares of common
stock into which the Series A Convertible Preferred Stock are convertible plus
an additional 207,315 shares of common stock. Each share of Series A
Convertible Preferred Stock is convertible into common stock at an initial
conversion rate of ten shares of common stock for each share of Series A
Convertible Preferred Stock, subject to adjustments upon certain dilutive
issuances of securities by the Company. The Series A Convertible Preferred
Stock carries a cumulative dividend of 8% per year payable when and if declared
by the Board of Directors. The warrants are exercisable on or after December
20, 2004, and expire on June 17, 2015. As part of the private placement, a
representative of the investors has joined the Companys Board of Directors. 10




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Item 6.Selected Financial Data Fiscal Year EndedApril 3,
    
    April 5,
    
    April 6,
    
    April 7,
    
    April 1,2004
    
    2003
    
    2002
    
    2001
    
    2000Selected Statement of Operations Data:Net product revenue
    
    $
    46,442
    
    
    $
    40,101
    
    
    $
    69,519
    
    
    $
    111,820
    
    
    $
    177,770Service revenue
    
    
    36,723
    
    
    
    42,285
    
    
    
    48,399
    
    
    
    49,870
    
    
    
    49,327Total revenue (1)
    
    
    83,165
    
    
    
    82,386
    
    
    
    117,918
    
    
    
    161,690
    
    
    
    227,097Product gross profit (2)
    
    
    8,943
    
    
    
    7,153
    
    
    
    13,053
    
    
    
    39,291
    
    
    
    71,202Service gross profit
    
    
    10,333
    
    
    
    14,645
    
    
    
    18,648
    
    
    
    14,628
    
    
    
    18,871Gross profit (1)
    
    
    19,276
    
    
    
    21,798
    
    
    
    31,701
    
    
    
    53,919
    
    
    
    90,073Operating expense:Selling, general and administrative
    
    
    26,405
    
    
    
    27,754
    
    
    
    43,211
    
    
    
    66,249
    
    
    
    64,506Research and development
    
    
    776
    
    
    
    5,238
    
    
    
    12,742
    
    
    
    19,095
    
    
    
    16,017Restructuring charges, net
    
    
    (211
    )
    
    
    1,467
    
    
    
    4,911
    
    
    
    393
    
    
    
    Total operating expenses
    
    
    26,970
    
    
    
    34,459
    
    
    
    60,864
    
    
    
    85,737
    
    
    
    80,523Operating income (loss)
    
    
    (7,694
    )
    
    
    (12,661
    )
    
    
    (29,163
    )
    
    
    (31,818
    )
    
    
    9,550Other income, net (3)
    
    
    631
    
    
    
    1,008
    
    
    
    4,182
    
    
    
    4,258
    
    
    
    3,822Gain (loss) on foreign currency transactions
    
    
    29
    
    
    
    639
    
    
    
    (542
    )
    
    
    (552
    )
    
    
    (323
    )Equity in net loss and write-down of net
investment of affiliate
    
    
    
    
    
    
    
    
    
    
    (9,504
    )
    
    
    (4,800
    )
    
    
    (2,824
    )Income (loss) before income taxes
    
    
    (7,034
    )
    
    
    (11,014
    )
    
    
    (35,027
    )
    
    
    (32,912
    )
    
    
    10,225Income tax expense (benefit) (4)
    
    
    (3,168
    )
    
    
    205
    
    
    
    24,598
    
    
    
    3,529
    
    
    
    (15,095
    )Net income (loss)
    
    $
    (3,866
    )
    
    $
    (11,219
    )
    
    $
    (59,625
    )
    
    $
    (36,441
    )
    
    $
    25,320Earnings (loss) per share:Basic
    
    $
    (0.12
    )
    
    $
    (0.34
    )
    
    $
    (1.83
    )
    
    $
    (1.13
    )
    
    $
    0.84Diluted
    
    $
    (0.12
    )
    
    $
    (0.34
    )
    
    $
    (1.83
    )
    
    $
    (1.13
    )
    
    $
    0.76Weighted average shares used in per share
computations:Basic
    
    
    33,482
    
    
    
    32,852
    
    
    
    32,548
    
    
    
    32,233
    
    
    
    30,268Diluted
    
    
    33,482
    
    
    
    32,852
    
    
    
    32,548
    
    
    
    32,233
    
    
    
    33,232Selected Balance Sheet Data:Cash and cash equivalents
    
    $
    3,017
    
    
    $
    9,833
    
    
    $
    8,420
    
    
    $
    16,320
    
    
    $
    8,791Working capital
    
    
    2,743
    
    
    
    2,071
    
    
    
    8,263
    
    
    
    27,514
    
    
    
    51,434Total assets
    
    
    46,612
    
    
    
    44,556
    
    
    
    61,698
    
    
    
    128,960
    
    
    
    180,947Short-term debt
    
    
    4,109
    
    
    
    1,901
    
    
    
    2,035
    
    
    
    127
    
    
    
    1,500Long-term debt, less current maturities
    
    
    95
    
    
    
    286
    
    
    
    461
    
    
    
    621
    
    
    
    Total stockholders equity
    
    
    7,141
    
    
    
    8,974
    
    
    
    20,113
    
    
    
    78,750
    
    
    
    113,495
  (1)
    
    On March 31, 2003, we became an exclusive reseller of EMC products
and services. See further discussion of this transition and its impact
on results of operations in the Results of Operations section of
Managements Discussion and Analysis.(2)
    
    Includes charges related to inventory write-offs of $2,281, $2,825,
$8,850, $1,950 and $1,469 for fiscal years 2000, 2001, 2002, 2003 and
2004, respectively.(3)
    
    Includes $4,800, $4,800 and $3,600 in fiscal year 2000, 2001 and
2002, respectively, related to the gain on sale of patents. See note
12 of the Notes to Consolidated Financial Statements.
Includes $1,200 in fiscal year 2003 related to the gain on sale of SCO
common stock.(4)
    
    Includes tax expense and (benefit) related to deferred tax asset
valuation allowance adjustments of $(15,100), $9,000 and $24,300 for
fiscal years 2000, 2001 and 2002. Fiscal year 2004 includes a tax 11




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benefit of $(3,200) related to an IRS settlement refund. See note 8 to
the Notes to the Consolidated Financial Statements. 
 Item 7.Managements Discussion and Analysis of Financial Condition and Results
of Operations The statements included in this report that are not historical or based on
historical facts constitute forward-looking statements that involve known and
unknown risks, uncertainties and other factors that may cause our actual
results, performance or achievements or industry results to be materially
different from any future results, performance or achievements, expressed or
implied by these forward-looking statements. Forward-looking statements
include, but are not limited to, statements about our efforts in reselling
EMCs products, our restructuring activities and strategic shift, the ability
of our securities to trade on any market or exchange system, revenue, margin,
the effect of accounting changes, attempts to raise additional funds,
MTI-branded product sales and changes in product mix, customers, reductions in
research and development expenditures, foreign currency hedging activity,
anticipated decreases in spending, dependence on new products and quarterly
fluctuations. Our transition from a manufacturer to a storage solution
provider and focus of sales efforts on the mid-range enterprise market may not
be successful. We may fail to achieve anticipated revenue levels and
efficiencies of operation. There can be no assurance that we will be
successful with our new operating strategy, that we will be able to retrain our
employees in an expeditious manner or to hire employees during this period of
strategy shift. Estimates made in connection with our critical accounting
policies may differ from actual results. Given these uncertainties, investors
in our common stock are cautioned not to place undue reliance on our
forward-looking statements. The forward-looking statements in this report
speak only as of the date of this report and we do not undertake to revise or
update any of them. We urge you to review and carefully consider the various
disclosures we make in this report and our other reports filed with the
Securities and Exchange Commission. This discussion and analysis should be read in conjunction with the
Consolidated Financial Statements of the Company and Notes thereto contained
elsewhere in this report and the section of this report titled Factors That
May Affect Future Results. Executive Overview MTI Technology Corporation is a system integrator providing storage
solutions for the mid-range enterprise market primarily designed around EMC
products. We generate revenues from the resale of third-party hardware and
software products and the sale of professional services and maintenance
contracts. Prior to March 31, 2003, the Company was a manufacturer of
proprietary hardware and software products targeting the mid-range enterprise
market. The recent shift in strategy from a developer of technology to a reseller
of third-party solutions has had the following primary financial implications:  
    
    We recorded an increase in product revenue in each quarter of
fiscal 2004 and significantly increased the number of new customers
compared to fiscal 2003. The growth in product revenue and penetration
of new accounts can be attributed to designing solutions around EMC
products which are well regarded in the industry.
    
    Maintenance revenue has been negatively impacted due to the
comprehensive warranty characteristics of EMC products. We resell EMC
hardware products with up to a three year warranty with a seven day,
twenty-four hour service level. In contrast, MTI proprietary products
were generally sold with a one year warranty with a five day, nine hour
service level. Therefore, the sale of proprietary products provided an
opportunity to generate maintenance revenue earlier due to the shorter
warranty period and allowed the Company to generate maintenance revenue
during the warranty period by selling maintenance contracts increasing
the service level to seven days a week, twenty-four hours a day.
    
    We eliminated research and development costs and significantly
reduced manufacturing and marketing expenses. These cost reductions
were primarily the result of reductions in staff and the abandonment of
underutilized facilities. 12




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
    
    We have experienced reduced product margins due to the reliance on
EMC to develop and manufacture the products we resell. We believe the new business strategy provides a significant opportunity to
grow revenues, expand margins and achieve profitability. In order to be
successful we believe we must continue to invest in our professional services
organization by adding skilled labor and infrastructure. This provides the best
opportunity to achieve profitability as we gain expertise in developing highly
complex solution sets that few companies can deliver. In order to make the
necessary investment in our professional service organization we require
significant working capital. To address this concern, in the first quarter of
fiscal year 2005 we raised $15 million in a private placement led by Advent
International. Our exclusive reliance on EMC products as the core product solution has
inherent challenges such as obtaining sufficient product quantities to satisfy
customer requirements, developing the ability to ship products to meet customer
imposed deadlines, developing the ability to control the cost of the product,
and developing the ability of EMC to respond to changing technology. Critical Accounting Policies The preparation of the consolidated financial statements requires
estimates and judgments that affect the reported amounts of revenues, expenses,
assets and liabilities. We base our estimates on historical experience and on
various other assumptions that we believe to be reasonable under the
circumstances and which form the basis for making judgments about the carrying
values of assets and liabilities. Critical accounting policies are defined as
those that are most important to the portrayal of the Companys financial
condition and results of operations, and require managements most difficult,
subjective or complex judgments, often as a result of the need to make
estimates about the effect of matters that are inherently uncertain and could
potentially produce materially different results under different assumptions
and conditions. For a detailed discussion of the application of the following
critical accounting policies and other accounting policies, see Notes to the
Consolidated Financial Statements. Revenue recognition.We derive revenue from sales of products and
services. The following summarizes the major terms of the contractual
relationships with customers and the manner in which we account for sales
transactions. Product Revenue Product revenue consists of the sale of disk and tape based hardware and
software. We recognize revenue pursuant to Emerging Issues Task Force No.
00-21, Revenue Arrangements with Multiple Deliverables (EITF 00-21) and Staff
Accounting Bulletin No. 104, Revenue Recognition in Financial Statements (SAB
104). In accordance with these revenue recognition guidelines, if the
arrangement between MTI and the customer does not require significant
production, modification, or customization of hardware or software, revenue is
recognized when all of the following criteria are met:  o
    
    persuasive evidence of an arrangement existso
    
    delivery has occurredo
    
    fee is fixed or determinableo
    
    collectibility is probable Generally, product sales are not contingent upon customer testing,
approval and/or acceptance. However, if sales require customer acceptance or
include significant post-delivery obligations, revenue is recognized upon
customer acceptance or fulfillment of any post delivery obligations. Product sales with post-delivery
obligations generally relate to professional services, including installation
services or other projects. Professional services revenue is not recognized
until the services have been completed. In transactions where we sell directly to an end user, generally
there are no acceptance clauses. However, we also sell to leasing companies
who in turn lease the product to their lessee, the end user. For this type of
sale, generally there are lessee acceptance criteria in the purchase order or
contract. For these transactions, we defer the revenue until written
acceptance is received from the lessee. Generally, our credit terms
with customers range from net 30 to net 60. 13




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##### Table of Contents



Product returns are estimated in accordance with Statement of Financial
Accounting Standards No. 48, Revenue Recognition When Right of Return Exists
(Statement 48). Customers have a limited right of return which allows them to
return non-conforming products. Accordingly, reserves for estimated future
returns are provided in the period of sale based on contractual terms and
historical data and are recorded as a reduction of revenue. In bundled sales transactions that include software combined with hardware
and services, the software is considered incidental to the overall product
solution, and therefore we apply EITF 00-21 to account for these multiple
element transactions  see disclosure below. Sales of software products on a
standalone basis are not frequent. These sales are generally add-on sales to
customers that have previously purchased hardware. For sales transactions that
include software products on a stand-alone basis, coupled with software
maintenance contracts, we apply Statement of Position 97-2, Software Revenue
Recognition (SOP 97-2) as amended by Statement of Position 98-9 Modification
of SOP 97-2 with Respect to Certain Transactions (SOP 98-9). The total
arrangement revenue is allocated between the software and the services using
the residual method, whereby revenue is first allocated to the undelivered
element, the services, using VSOE. VSOE for software service contracts is
established based on stand-alone renewal rates. Revenue is recognized from
software licenses, provided all the revenue recognition criteria noted above
have been met, at the time the license is delivered to the customer. We
recognize revenue from software maintenance agreements ratably over the term of
the related agreement. Service revenue Service revenue is generated from the sale of professional services,
maintenance contracts and time and materials billings. The following describes
how we account for service transactions, provided all the other revenue
recognition criteria noted above have been met. Generally,
professional services revenue, which includes installation, training,
consulting and engineering services, is recognized upon completion of the
services. If the professional
service project includes independent milestones, revenue is recognized as
milestones are met and upon acceptance from the customer. Maintenance revenue is generated from the sale of hardware and software
maintenance contracts. These contracts generally range from one to three
years. Maintenance revenue is recorded as deferred revenue and is recognized
as revenue ratably over the term of the related agreement. Multiple element arrangements We consider sales contracts that include a combination of systems,
software or services to be multiple element arrangements. Revenue recognition
with multiple elements whereby software is incidental to the overall product
solution is recorded in accordance with EITF 00-21. An item is considered a
separate element if it involves a separate earnings process. If an arrangement
includes undelivered elements that are not essential to the functionality of
the delivered elements, we use the residual method, whereby we defers the fair
value of the undelivered elements with the residual revenue allocated to the
delivered elements. Discounts are allocated only to the delivered elements.
Fair value is determined by examining renewed service contracts and based upon
the price charged when the element is sold separately or prices provided by
vendors if sufficient standalone sales information is not available.
Undelivered elements typically include installation, training, warranty,
maintenance and professional services. Other We consider sales transactions that are initiated by EMC and jointly
negotiated and closed by EMC and MTIs sales-force as Partner Assisted
Transactions (PATs). We recognize revenue from PATs on a gross basis, in
accordance with EITF 99-19, because we bear the risk of returns and
collectability of the full accounts receivable. Product revenue of the
delivered items is recorded at residual value upon pickup by a common carrier
for Free Carrier (FCA) origin shipments. For FCA destination shipments, product
revenue is recorded upon delivery to the customer. If we subcontract the
undelivered items such as maintenance and professional services to EMC or other
third parties, we record the costs of those items as deferred costs and
amortize the costs using the straight-line method over the life of the
contract. We defer the revenue for the undelivered items at fair value based
upon list prices with EMC according to EITF 00-21. At times, MTIs customers
prefer to enter into service agreements directly with EMC. In such instances,
we may assign the obligation to perform services to EMC, or other third
parties, and therefore, we do not record revenue nor defer any costs related to
the services. Finally, upon assignment 14




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of maintenance and professional services to EMC, EMC may elect to
subcontract the professional services to MTI. In this case, we defer the
revenue for the professional services at fair value according to EITF 00-21. For certain sales transactions, an escrow account is utilized to
facilitate payment obligations between all parties involved in the transaction.
In these transactions, generally the end-user or lessor will fund payment into
the escrow account and the bank will distribute the payment to each party in
the transaction pursuant to mutually agreed upon escrow instructions. MTI only
receives cash which represents the net margin on the sales transaction. For
these transactions, we recognize revenue on a net basis as we do not bear
credit risk in the transaction. We may allow customers that purchase new equipment to trade-in used
equipment to reduce the purchase price under the sales contract. These trade-in
credits are considered discounts and are allocated to the delivered elements in
accordance with EITF 00-21. Thus, product revenue from trade-in transactions is
recognized net of trade-in value. Shipping Products are generally drop-shipped directly from suppliers to MTIs
customers. Upon the suppliers delivery to a carrier, title and risk of loss
pass to the Company. Revenue is recognized at the time of shipment when
shipping terms are Free Carrier (FCA) shipping point as legal title and risk of
loss to the product pass to the customer. For FCA destination shipments,
revenue is recorded upon delivery to the customer. For legacy sales, product
is shipped from our facility in Ireland. MTI retains title and risk of loss
until the product clears U.S. customs and therefore revenue is not recognized
until the product clears customs for FCA origin shipments and upon delivery to
the customer for FCA destination shipments. Product warranty.We record warranty expense at the time revenue is
recognized and maintain a warranty accrual for the estimated future warranty
obligation based upon the relationship between historical and anticipated costs
and sales volumes. Factors that affect our warranty liability include the
number of units sold, historical and anticipated rates of warranty calls and
repair cost. During the third quarter of fiscal year 2004, we reviewed our
historical costs of warranty for EMC products sold over the last nine months,
since we entered into the reseller agreement with EMC. Based on our review,
and given the favorable warranty rate experienced on EMC products to date, we
determined that it was not necessary to record any additional provision for
warranty related to EMC products for the third and fourth quarters of fiscal
year 2004. We will continue to assess the adequacy of our warranty accrual
each quarter and we will begin to record warranty provision on EMC products
sold beginning in the first quarter of fiscal year 2005. The recorded warranty
rate for EMC products will likely be lower than fiscal 2004 given our favorable
warranty experience with EMC products. Should actual warranty calls and repair
cost differ from our estimates, the amount of actual warranty costs could
materially differ from our estimates. Allowance for doubtful accounts.We maintain an allowance for doubtful
accounts for estimated returns and losses resulting from the inability of our
customers to make payments for products sold or services rendered. We analyze
accounts receivable, customer credit-worthiness, current economic trends and
changes in our customer payment terms when evaluating the adequacy of the
allowance for doubtful accounts. All new customers are reviewed for
credit-worthiness upon initiation of the sales process. Historically, we have
not experienced significant losses on accounts receivable, however, if the
financial condition of our customers deteriorates, resulting in an inability to
make payments, additional allowances may be required. Income taxes.We are required to estimate our income taxes, which
includes estimating our current income taxes as well as measuring the temporary
differences resulting from different treatment of items for tax and accounting
purposes. These temporary differences result in deferred tax assets or
liabilities. We apply Statement of Financial Accounting Standards No.
(Statement) 109, Accounting for Income Taxes; under the asset and liability
method, 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 and operating loss and tax credit carryforwards using
enacted tax rates in effect for the year in which the differences are expected
to reverse, net of a valuation allowance. We have recorded a full valuation
allowance against our deferred tax assets as management has determined that it
is more likely than not that these assets will not be utilized. In the event
that actual results differ from our estimates, our provision for income taxes
could be materially impacted. 15




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Valuation of goodwill.We assess the impairment of goodwill in accordance
with Financial Accounting Standards Board Statement 142 on an annual basis or
whenever events or changes in circumstances indicate that the carrying value
may not be recoverable. Factors we consider important which could trigger an
impairment review include significant under-performance relative to expected
historical or projected future operating results, significant changes in the
manner of our use of acquired assets or the strategy for our overall business,
and significant negative industry or economic trends. Upon the adoption of
Statement 142 and the completion of the transitional impairment test in fiscal
year 2002, we concluded that there was no impairment of goodwill. We completed
our annual assessment for goodwill impairment in the fourth quarter of fiscal
year 2004. Based upon factors such as the market valuation approach,
comparison between the reporting units estimated fair value using discounted
cash flow projections over the next three years, and carrying value, we
concluded that there was no impairment of our goodwill. Changes in assumptions
and estimates included within this analysis could produce significantly
different results than those identified above and those recorded in the
consolidated financial statements. We will update our assessment during the
fourth quarter of fiscal year 2005 or as other facts and circumstances
indicate. Inventories.Our inventory consists of logistics inventory and production
inventory. Logistics inventory is used for product under maintenance contracts
and warranty, and is not for sale. As of April 3 2004, we had net logistics
inventory of $3.1 million, of which substantially all of such inventory is
related to legacy products, and net production inventory of $3.1 million.
Inventories are valued at the lower of cost (first-in, first-out) or market,
net of an allowance for obsolete, slow-moving, and unsalable inventory. The
allowance is based upon managements review of inventories on-hand, historical
product sales, and future sales forecasts. Historically, we used rolling
forecasts based upon anticipated product orders to determine our component and
product inventory requirements. As a reseller, we procure inventory primarily
upon receipt of purchase orders from customers; as such, the risk of EMC
production inventory obsolescence is low. Our logistics inventory reserve is
based on a combined analysis of historical usage, current and anticipated
maintenance contract renewals and future product sales. If we overestimate our
product or component requirements, we may have excess inventory, which could
lead to additional excess and obsolete charges. Results of Operations The following table sets forth selected items from the Consolidated
Statements of Operations as a percentage of total revenue for the periods
indicated, except for product gross profit and service gross profit, which are
expressed as a percentage of the related revenue. This information should be
read in conjunction with the Selected Financial Data and Consolidated Financial
Statements included elsewhere herein: Fiscal Year EndedApril 3,
    
    April 5,
    
    April 6,2004
    
    2003
    
    2002Net product revenue
    
    
    55.8
    %
    
    
    48.7
    %
    
    
    59.0
    %Service revenue
    
    
    44.2
    
    
    
    51.3
    
    
    
    41.0Total revenue
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Product gross profit
    
    
    19.3
    
    
    
    17.8
    
    
    
    18.8Service gross profit
    
    
    28.1
    
    
    
    34.6
    
    
    
    38.5Gross profit
    
    
    23.2
    
    
    
    26.5
    
    
    
    26.9Selling, general and administrative
    
    
    31.8
    
    
    
    33.7
    
    
    
    36.6Research and development
    
    
    0.9
    
    
    
    6.4
    
    
    
    10.8Restructuring charges
    
    
    (0.3
    )
    
    
    1.8
    
    
    
    4.2Operating loss
    
    
    (9.2
    )
    
    
    (15.4
    )
    
    
    (24.7
    )Other income, net
    
    
    0.8
    
    
    
    1.2
    
    
    
    3.6Gain (loss) on foreign currency transactions
    
    
    
    
    
    
    0.8
    
    
    
    (0.5
    )Equity in net loss and write-down of net investment of affiliate
    
    
    
    
    
    
    
    
    
    
    (8.1
    )Income tax (expense) benefit
    
    
    3.8
    
    
    
    (0.2
    )
    
    
    (20.9
    )Net loss
    
    
    (4.6
    )%
    
    
    (13.6
    )%
    
    
    (50.6
    )%
 16




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Fiscal Year 2004 Compared to Fiscal Year 2003 Net product revenue: Net product revenue for fiscal year 2004 increased
$6.3 million, or 16% from fiscal year 2003. This increase was comprised of a
$3.0 million and a $3.3 million, or 15% and 17%, increase in domestic product
and international product revenue, respectively. The increase in net product
revenue is primarily a result of entering into the EMC reseller agreement in
the fourth quarter of fiscal 2003. Our ability to sell these products enabled
us to further penetrate the mid-range storage market as evidenced by the
addition of 242 new customer accounts during fiscal year 2004. Also
contributing to the increase in net product revenue was the addition of:  
    
    a Vice-President of U.S. sales, with 20 years of storage
experience, responsible for North American sales; and
    
    five additional veteran salespersons during fiscal 2004 who
accounted for $5.2 million or 23% of total net product revenue in
fiscal 2004. The increase in net product revenue was driven primarily by strong demand
for EMC server and software products, which generally have a higher average
selling price than our proprietary products. Server and software products
increased from fiscal 2003 by $6.2 million and $2.3 million, respectively,
offset by a decrease of $2.2 million from tape library sales. The decline in
tape library revenue is attributable to a shift in focus towards developing
expertise selling the EMC product set. Service revenue: Service revenue was $36.7 million for fiscal year 2004,
a decrease of $5.6 million, or 13%, from fiscal year 2003. This decrease was
attributable to decreased maintenance revenue of $6.2 million, offset by
increased professional services revenue of $0.6 million. Subsequent to the end
of fiscal year 2003, we became a reseller and service provider of EMC Automated
Networked Storage Systems and software. Commencing with the sale of the EMC
array of products, most EMC hardware products are sold with up to a 3-year 24x7
warranty. As a result, the revenue associated with post-warranty service
contracts for those hardware product sales will not occur until expiration of
the warranty period. Therefore, service revenues decreased from fiscal year
2003 to fiscal year 2004. However, as sales of EMC products increase, we
expect that sales of back-up products, which are not a part of the EMC
resellers agreement, will increase and those products carry shorter warranty
periods thus providing the opportunity for increased maintenance contracts.
Another factor that contributed to the decrease in maintenance revenue is the
expiration of maintenance contracts without offsetting renewed and new
maintenance contracts related to MTI-branded products. In order to mitigate
these decreases, during fiscal 2004 we became a member of the EMC Authorized
Services Network and are now able to provide end-to-end service for EMCs
CLARiiON family of systems. Product gross profit: Product gross profit was $8.9 million for fiscal
year 2004, an increase of $1.8 million, or 25%, from fiscal year 2003. The
gross profit percentage of net product sales was 19% for fiscal year 2004 as
compared to 18% for fiscal year 2003. The increase in product gross profit was
primarily the result of an increase in product sales, principally EMC server
and software products, coupled with a $1.7 million reduction in inventory
obsolescence related charges as compared to fiscal year 2003, partially offset
by lower standard product margin percentages on a transaction-by-transaction
basis. Service gross profit: Service gross profit for fiscal year 2004 decreased
$4.3 million, or 29%, from fiscal year 2003. The gross profit percentage for
service revenue was 28% in fiscal year 2004, as compared to 35% for fiscal year
2003. We attribute the decreases in service gross profit to reduced field
service revenue, particularly maintenance revenue which is supported by a
relatively fixed cost structure. In an effort to improve our service gross
profit, the following actions have been taken:  
    
    effective October 1, 2003, we outsourced our domestic
Customer Response Center operations to Directpointe, Inc., a related
party, for a minimum monthly charge of $0.01 million; and
    
    in the third quarter of fiscal year 2004, we eliminated eight
full time positions in our field service operations. We expect
these reductions to provide quarterly cost savings of $0.2 million. 17




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Selling, general and administrative expenses: Selling, general and
administrative expenses for fiscal year 2004 decreased $1.3 million, or 5%,
from fiscal year 2003. The decrease was primarily due to a 19% or $1.2 million
decrease in fixed charges such as depreciation, rent, insurance, property taxes
and utilities expenses; a 37% or $0.4 million decrease in marketing expense; an
11% or $0.8 million decrease in outside purchases such as consulting and
professional services, tax services, bank fees and bad debt expense and an 11%
or $0.1 million decrease in supplies. The decrease in fixed charges was
primarily the current year impact of asset disposals and facilities
abandonments in the prior fiscal year. The decreases in marketing, outside
purchases and supplies expenses were the result of a directed program to cut
expenses in order to return to profitability The above decreases were offset by
a 4% or $0.5 million increase in salary and benefits expense and a 3% or $0.1
million increase in travel and lodging expense. These increases were a result
of increased headcount in our sales department. Also, during fiscal year 2003,
we recovered $0.6 million from accounts that were previously determined to be
uncollectible, as compared to bad debt expense of $0.03 million in fiscal 2004. Research and development expenses: Research and development expenses in
fiscal year 2004 decreased $4.5 million, or 85%, from fiscal year 2003. These
decreases were primarily attributable to decreases in salary and benefit
expenses of $2.5 million resulting from the headcount reductions that occurred
primarily during fiscal year 2003 and the first quarter of fiscal year 2004,
decreases in outside consulting expense of $1.0 million, decreases in rent,
utilities, repair and maintenance, depreciation, insurance and property tax
expenses of $0.8 million and decreases in travel and lodging and supplies
expenses of $0.2 million. These decreases were the result of our change to our
business model from the sale of MTI-branded products to the sale of co-branded
solutions serving the storage and enhanced data protection market. Restructuring Charges: We recorded a net restructuring benefit of $0.2
million in fiscal 2004. This was the result of a reversal of the restructuring
reserve in the second quarter of fiscal year 2004 of $0.3 million due to higher
than anticipated lease payments from sub-lessees and usage of space in our
Westmont, Illinois facilities. This benefit was partially offset by an
additional charge in the first quarter of fiscal year 2004 of $0.1 million due
to lower than anticipated lease payments from sub-lessees in our Sunnyvale,
California facility. We recorded a $1.0 million restructuring charge in the first quarter of
fiscal year 2003, which consisted of charges of approximately $0.5 million
related to a headcount reduction of 39 employees, or 15% of our workforce, and
$0.5 million related to the disposal or abandonment of fixed assets. Of the 39
employees terminated, 14, 3, 6, 1, 14, and 1 were from the Sales, Marketing,
General and Administrative, Customer Service, Research and Development, and
Manufacturing departments, respectively. The cash outflow of the restructuring
charge is $0.5 million related to severance, which was paid during fiscal year
2003. In the third quarter of fiscal year 2003, we recorded a $0.2 million
restructuring charge due to lower than anticipated lease payments from
sub-lessees in our Sunnyvale, California and Raleigh, North Carolina
facilities. In the fourth quarter of fiscal year 2003, we recorded a $0.2 million
restructuring charge due to lower than anticipated lease payments from
sub-lessees in our European facilities. The changes to the restructuring reserve from its inception in the fourth
quarter of fiscal year 2002 are as follows (in millions): 18




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Abandoned facilities:Balance as of April 6, 2002
    
    $
    4.3Add: Fiscal year 2003 restructuring charges
    
    

    0.4Less: Fiscal year 2003 utilization
    
    
    (1.8
    )Balance as of April 5, 2003
    
    
    2.9Less: Fiscal year 2004 restructuring reversal
    
    
    (0.2
    )Less: Fiscal year 2004 utilization
    
    
    (0.9
    )Balance as of April 3, 2004
    
    
    1.8Workforce reduction:Balance as of April 6, 2002
    
    
    0.2Add: Fiscal year 2003 severance charges
    
    
    0.5Less: Fiscal year 2003 severance payments
    
    
    (0.7
    )Balance as of April 5, 2003 and April 3, 2004
    
    
    Total accrued restructuring, as of April 3, 2004
    
    $
    1.8
 Other income, net: Other income, net, which includes interest income and
expense, in fiscal year 2004 decreased $0.4 million, or 37%, over fiscal year
2003. This decrease was primarily due to the $1.2 million gain on the sale of
a security investment included in fiscal year 2003. Additional interest
expense of $0.1 million in fiscal year 2004 due to higher borrowings on the
line of credit also contributed to the decrease. These decreases were
partially offset by $0.7 million in interest income related to the IRS refund
recorded in fiscal year 2004. Gain (loss) on foreign currency transactions: We recorded a $0.03 million
gain on foreign currency transactions during fiscal year 2004, as compared to a
$0.6 million gain in fiscal year 2003. During fiscal year 2004, the Euro
appreciated against the U.S. dollar in approximately the same percentage as
compared to fiscal year 2003; however, these foreign currency gains were offset
by losses caused by the appreciation of the British Pound Sterling against the
Euro. Income taxes: We recorded a net tax benefit of $3.2 million for fiscal
year 2004, as compared to a net tax expense of $0.2 million for fiscal year
2003. The net tax benefit is due to the IRS settlement on income tax audits
for fiscal years 1992 through 1996 which resulted in a tax payable of $0.2
million for which we had accrued $1.7 million and an income tax receivable of
$1.7 million for fiscal years 1982 through 1990 based upon the carry-back of
the net operating losses which were confirmed by the IRS for the fiscal years
1993 through 1995. Fiscal Year 2003 Compared to Fiscal Year 2002 Net product revenue: Net product revenue for fiscal year 2003 decreased
$29.4 million, or 42% from fiscal year 2002. This decrease was primarily
because of a $27.7 million and a $1.7 million, or 58% and 8%, decrease in
domestic product and international product revenue, respectively. In terms of
product mix on a worldwide basis, this decrease was the result of decreased
revenue of $22.8 million, $3.6 million and $3.0 million from server products,
tape libraries and tape related software products, respectively. Server
products revenue in fiscal year 2003 from the Vivant product family was $14.7
million, down 59% from $36.0 million in fiscal 2002. The decrease was
primarily due to the decrease in sales volume rather than average sales price.
In general, we have found that our customer base has become much more cautious
in its buying patterns and purchasing is being confined to an as-needed basis,
with increasing levels of customer justification and management approval
required during the sales process. This more difficult sales environment was
partially a result, but not solely a result, of the global economic downturn,
coupled with the U.S. war against Iraq. As a result, our customers delayed or
reduced their expenditures, including those for information technology, thus
decreasing the current demand for our information-storage systems and software.
Additionally, aggressive competition in the form of pricing discounts offered
by Hitachi Data Systems, Hewlett-Packard Company, Sun Microsystems, Inc., IBM,
and Network Appliance, Inc., each of which has substantially greater name
recognition, marketing capabilities and financial and personnel resources than
we have, have contributed to the decrease in our sales. Service revenue: Service revenue was $42.3 million for fiscal year 2003,
a decrease of $6.1 million, or 13%, from fiscal year 2002. This decrease was
attributable to decreased maintenance revenue of $4.1 million, decreased
consulting revenue of $1.2 million and other decreased service revenue of $0.8
million. The decrease in 19




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maintenance revenue is primarily due to the expiration of maintenance
contracts without offsetting renewed and new maintenance contracts. We
attribute the lower number of renewals to the loss of customers to our
competitors, customers that have updated their technology which is now covered
by warranty, and customers that have ceased operations. The decrease in
consulting and other revenue is primarily attributable to decreased product
revenue. In fiscal year 2003, we changed our Service and Business Systems
operations throughout the world to operate under one leadership in an attempt
to minimize duplication of costs, increase efficiencies and exploit successful
operations. Product gross profit: Product gross profit was $7.2 million for fiscal
year 2003, a decrease of $5.9 million, or 45%, from fiscal year 2002. The
gross profit percentage of net product sales was 18% for fiscal year 2003 as
compared to 19% for fiscal year 2002. This decrease was primarily due to
continued pricing pressures and changes in product mix. In fiscal year 2003,
we sold more library and software products than server products, particularly
the Vivant product family, and library and software products carry lower
margins than server products. The unfavorable change in product mix was
partially offset by improved manufacturing efficiencies, our ability to sell
$1.2 million of non-Vivant inventory that was previously fully reserved and
reduced inventory charges from $7.0 million, which consisted primarily of
additional reserves for Gladiator 6700, 8700 and 8900 inventories, in the
fiscal year 2002 to $3.2 million, which consisted primarily of reserves for
Vivant, VCACHE and S-200, in fiscal year 2003. Service gross profit: Service gross profit for fiscal year 2003 decreased
$4.0 million, or 22%, from fiscal year 2002. The gross profit percentage for
service revenue was 35% in fiscal year 2003, as compared to 39% for fiscal year
2002. In addition to the relatively fixed cost structure, we attribute the
decreases in service gross profit to a 23% decrease in domestic customer
service revenue, particularly maintenance revenue, partially offset by a 5%
increase in international customer service revenue. Selling, general and administrative expenses: In fiscal year 2003,
selling, general and administrative expenses decreased $15.5 million, or 36%,
over fiscal year 2002. The decrease was primarily due to a 32% or $7.5 million
decrease in salary and benefit expenses which resulted from reduced headcounts
of 22%; a 54% or $3.0 million decrease in outside purchases such as consulting
and professional services, tax services, bank fees and bad debt expense; a 64%
or $1.7 million decrease in marketing and promotional expenses; an 18% or $1.3
million decrease in fixed charges such as rent and utilities expenses; a 52% or
$1.4 million decrease in supplies and telecommunication expenses; and a 26% or
$0.6 million decrease in travel and lodging expenses. During fiscal year 2003,
we recovered $0.6 million from accounts that were previously determined to be
uncollectible, as compared to bad debt expense of $1.9 million in the preceding
fiscal year. The decreased expenditures were the result of a directed program
to bring expenditures in line with the reduced product and service revenues and
resultant margins noted above. Research and development expenses: Research and development expenses in
fiscal year 2003 decreased $7.5 million, or 59%, from fiscal year 2002. These
decreases were primarily attributable to decreases in salary and benefit
expenses of $4.1 million resulting from a 47% headcount reduction over fiscal
year 2002, decreases in project costs of $0.9 million, decreases in rent,
utilities, repair and maintenance expenses, depreciation, insurance and
property tax expenses of $2.0 million, decreases in travel and lodging,
consulting and loss on disposal of fixed assets of $0.4 million, and decreases
in communication expenses of $0.1 million. As part of our change in business
model we have changed our emphasis from the sale of MTI-branded products to the
sale of co-branded solutions serving the storage and enhanced data protection
market. Our focus towards EMC networked storage systems will result in limited
partnering of products beyond the EMC line of products and those products
related to backup functions. The primary goal of the restructuring was to
refocus on the design and implementation of storage solutions at a
significantly lower cost. In support of this, our Engineering department has
been redeployed within our professional services organization. Other income, net: Other income, net, which includes interest income and
expense, in fiscal year 2003 decreased $3.2 million, or 76%, over fiscal year
2002. This decrease was primarily due to an absence of income from sale of
patents to EMC as we received the final annual payment in advance of $5.0
million from the sale of certain patents in January 2001 and recorded the
payments as other income proportionately during the fourth quarter of fiscal
year 2001 and the first nine months of fiscal year 2002. Thus, we recorded
other income of $0 related to the sale of patents in fiscal year 2003, as
compared to $3.6 million in fiscal year 2002. Other factors contributing to 20




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the decrease in other income, net, were decreases in interest income and
sales tax refund. These decreases were partially offset by a gain on the sale
of a security investment of $1.2 million in fiscal year 2003. Equity in net loss and write-down of net investment of affiliate: Equity
in net loss of affiliate for fiscal year 2002 represents our proportionate
share of The SCO Group, Inc.s (SCO) net losses and amortization of the
goodwill related to the investment made in SCO in August 1999. The original
investment in SCO was $7.6 million and included: (a) cash payment of $3.0
million, (b) note payable of $3.0 million 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 $1.6 million, including the
issuance of a warrant to purchase 150,000 shares of our common stock. The
excess of our investment in SCO over the related underlying equity in net
assets of $6.9 million was being amortized on a straight-line basis over seven
years. However, we adopted Statement 142 as of April 8, 2001, the beginning of
fiscal year 2002, and therefore, ceased to amortize the remaining balance of
goodwill related to the investment in SCO of $4.2 million, which was written
off during the third quarter of fiscal year 2002 due to an other than temporary
decline in value and recognizing our proportional share of SCOs net loss.
Such loss has been included in Equity in net loss and write-down of net
investment of affiliate in our fiscal year 2002 Consolidated Statement of
Operations. Gain (loss) on foreign currency transactions: We recorded a $0.6 million
gain on foreign currency transactions during fiscal year 2003, as compared to a
$0.5 million loss in fiscal year 2002. The $1.1 million increase in the gain
on foreign currency transactions was primarily due to the weakening U.S. dollar
against the Euro. Income taxes: We recorded a net tax expense of $0.2 million for fiscal
year 2003, as compared to a net tax expense of $24.6 million for fiscal year
2002. In fiscal year 2002, we recorded a net tax expense of $24.6 million of
which $24.3 million was related to the valuation allowance for deferred-tax
assets recorded in the first quarter of fiscal year 2002. Because of the
continued decline in the market value of our investment in SCO and continued
softness in the domestic and European markets for our products, management
believed that it was more likely than not that we would not realize the
benefits of the net deferred tax assets existing on April 6, 2002. Liquidity and Capital Resources As of April 3, 2004, working capital was $2.7 million, as compared to $2.1
million at the end of the prior fiscal year, and we had cash and cash
equivalents of $3.0 million as of April 3, 2004, as compared to $9.8 million as
of April 5, 2003. The $6.8 million decrease in cash and cash equivalents was
the result of net cash used in operating and investing activities of $11.0
million and $0.1 million, respectively, partially offset by net cash provided
by financing activities of $3.4 million and $0.9 million from the effect of
exchange rate changes on cash and cash equivalents. Net cash used in operating activities was $11.0 million in fiscal year
2004, compared to net cash provided by operating activities of $0.4 million in
fiscal year 2003. A significant factor contributing to the cash used in
operating activities was an increase in accounts receivable of $8.5 million.
This was the result of increasing revenue particularly in the last two quarters
of fiscal year 2004. Also contributing to the cash used in operating
activities was an increase of $4.1 million in prepaid expenses, other
receivables and other assets. This was primarily due to an increase of $1.4
million related to pre-paid maintenance contracts and $2.5 million related to
the IRS income tax refund recorded in fiscal year 2004. This refund was
received subsequent to the end of the year. These increases were partially
offset by a $5.1 million increase in accounts payable. This increase was
primarily due to increased payables to EMC related to increased product sales
at the end of fiscal year 2004. If we are able to execute our growth strategy,
we expect cash used in operations to decrease significantly in fiscal year
2005, primarily as a result of increased revenue generated from sales of EMC
products and our professional services organization as well as improved
accounts receivable collection efforts. Subsequent to April 3, 2004, we executed a letter of credit with Comerica
bank for $6.0 million, for the benefit of EMC. This additional letter of
credit is incremental to the existing EMC credit line of $5.0 million, thereby
extending our purchasing credit limit with EMC to $11.0 million. This
additional letter of credit is secured by a $6.0 million certificate of
deposit. Our credit limit with EMC is for purchases only. Our credit terms
with EMC are net 45 days from shipment. Our credit terms with our customers
generally range from 30 to 60 days. 21




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Often there is a gap between when we pay EMC and when we ultimately
collect the receivable from our customer. This gap is funded by our working
capital as well as our line of credit with Comerica. Net cash used in investing activities was $0.1 million in fiscal year 2004
compared to net cash provided by investing activities of $0.7 million in fiscal
year 2003. Capital expenditures in fiscal year 2004 used cash of $0.2 million.
This usage was partially offset by proceeds from the sale of property, plant
and equipment of $0.1 million. Due to our plan to increase headcount in fiscal
year 2005, we expect that our capital expenditures will increase mainly due to
the purchase of additional computer equipment. Net cash provided by financing activities was $3.4 million in fiscal year
2004 compared to cash used in financing activities of $0.2 million in fiscal
year 2003. Current year borrowings on the line of credit provided cash of $5.4
million which was partially offset by payments on the line of credit and
capital lease obligations of $3.2 million and $0.2 million, respectively.
Proceeds from the issuance of shares and exercise of options and warrants
provided cash of $1.3 million. In November 2002, we entered into a loan agreement with Comerica Bank for
a line of credit of $7.0 million at an interest rate equal to the prime rate.
The line of credit is secured by a letter of credit that is guaranteed by the
Canopy Group, Inc. (Canopy), our major stockholder. Canopys guarantee was
to mature on November 30, 2003, but on June 30, 2003, we received an extension
on the $7.0 million letter of credit until June 30, 2004. The Comerica loan
agreement was to mature on October 31, 2003, but on June 30, 2003, we received
a renewal on the line of credit for $7.0 million until May 31, 2004. On June
18, 2004, we received an additional extension on the letter of credit until
June 30, 2005. Also on June 18, 2004, we received an additional renewal on the
Comerica line of credit until May 31, 2005. Ralph J. Yarro, III, one of our
Directors, is also a Director, President and Chief Executive Officer of Canopy.
Darcy G. Mott, one of our Directors, is also a Vice President, Treasurer and
Chief Financial Officer of Canopy. Canopy beneficially owns approximately 44%
of our outstanding common stock. The Comerica loan agreement contains negative covenants placing
restrictions on our ability to engage in any business other than the businesses
currently engaged in, suffer or permit a change in control, and merge with or
acquire another entity. Although we are currently in compliance with all of
the terms of the Comerica loan agreement, and believe that we will remain in
compliance, there can be no assurance that we will be able to continue to
borrow under the Comerica loan agreement through the expiration date. Upon an
event of default, Comerica may terminate the Comerica loan agreement and
declare all amounts outstanding immediately due and payable. As of April 3,
2004, there was $3.9 million outstanding and $3.1 million available for
borrowing under the Comerica line of credit. On June 17, 2004, the Company sold 566,797 shares of Series A Convertible
Preferred Stock in a private placement financing at $26.46 per share, which
raised $15 million in gross proceeds, before consideration of professional
fees. The sale included issuance to the investors of warrants to purchase
1,624,308 shares of the Companys common stock with an exercise price of $3.10
per share. The shares of common stock into which the warrants are exercisable
represent twenty-five percent (25%) of the aggregate number of shares of common
stock into which the Series A Convertible Preferred Stock are convertible plus
an additional 207,315 shares of common stock. Each share of Series A
Convertible Preferred Stock is convertible into common stock at an initial
conversion rate of ten shares of common stock for each share of Series A
Convertible Preferred Stock, subject to adjustments upon certain dilutive
issuances of securities by the Company at the initial stated price per share.
The Series A Convertible Preferred Stock carries a cumulative dividend of 8%
per year payable when and if declared by the Board of Directors. The warrants
are exercisable on or after December 20, 2004, and expire on June 17, 2015. As
part of the private placement, a representative of the investors has joined the
Companys Board of Directors. The Companys principal source of liquidity is cash and cash equivalents,
the Comerica line of credit under the Comerica loan agreement and expected cash
flows from operations. Fiscal year 2004 represented our first full year of
operations under our reseller agreement with EMC. Since the inception of this
relationship, we have recorded sequential quarterly growth in both product
revenues and total revenues and reduced our operating loss by 39%. We believe
that as we continue to execute our growth strategy, we will see increased
liquidity through cash generated by operating activities. We believe that our
current working capital, coupled with the borrowing ability under the Comerica
line of credit as well as the cash generated from the sale of the Series A
Convertible Preferred Stock is adequate to fund operations for at least the
next 12 months. We believe that the increase in liquidity as a 22




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result of the Series A Convertible Preferred Stock offering will provide
us with the required capital to grow our business and improve profitability.
Using the proceeds from the offering, we plan to add experienced sales
professionals in our sales organization and add technical professionals in our
professional services organization. We believe we are able to manage our cash
flow by reducing discretionary spending and limiting headcount additions in
order to meet needs and opportunities as they arise. Our future growth is
dependent upon many factors, including but not limited to, recruiting, hiring,
training and retaining significant numbers of qualified personnel, forecasting
revenues, controlling expenses and managing assets. In particular, significant
growth will require that we train, integrate and retain qualified sales
personnel in various geographic regions. The inability to recruit, train and
retain additional personnel in a timely manner could have a material adverse
effect on our results of operations. See Factors That May Affect Future
Results. The following represents a comprehensive list of our contractual
obligations and commitments as of April 3, 2004: Payments Due by Fiscal PeriodTotal
    
    2005
    
    2006
    
    2007
    
    2008
    
    2009
    
    Thereafter(In millions)Line of Credit
    
    $
    3.9
    
    
    $
    3.9
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Operating Lease Obligations
    
    
    10.8
    
    
    
    3.3
    
    
    
    2.7
    
    
    
    1.5
    
    
    
    1.1
    
    
    
    0.5
    
    
    
    1.7Capital Lease Obligations
    
    
    0.3
    
    
    
    0.2
    
    
    
    0.1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    15.0
    
    
    $
    7.4
    
    
    $
    2.8
    
    
    $
    1.5
    
    
    $
    1.1
    
    
    $
    0.5
    
    
    $
    1.7
 Inflation and Foreign Currency Exchange We recorded a $0.03 million foreign exchange gain during fiscal year 2004,
which resulted from the weakening U.S. dollar against the Euro, partially
offset by the appreciation of the British Pound Sterling against the Euro. In
fiscal 2004, approximately 50% of total revenue was generated outside the
United States, particularly in Germany, France and the United Kingdom. Sales
denominated in currencies other than the U.S. dollar expose us to market risk
from unfavorable movements in foreign exchange rates between the U.S. dollar
and the foreign currency, particularly the British Pound Sterling and the Euro.
In fiscal year 2004, we did not enter into forward exchange contracts to sell
foreign currency to fix the U.S. dollar amount we will receive on sales
denominated in that currency. Historically, in order to minimize the risk of
foreign exchange loss, we have entered into foreign currency forward contracts.
However, in order to conserve cash, we ended our hedging program in fiscal
year 2003. The Company has assets and liabilities outside the United States that are
subject to fluctuations in foreign currency exchange rates. Assets and
liabilities outside the United States are primarily located in Ireland,
Germany, France and the United Kingdom. The Companys investments in foreign
subsidiaries with a functional currency other than the U.S. dollar are
generally considered long-term. Accordingly, the Company does not hedge these
net investments. Factors That May Affect Future Results This Annual Report on Form 10-K contains forward-looking statements.
Statements in this document that are not historical facts, including statements
relating to future plans and developments, financial goals and operating
performance that are based on our managements current beliefs and assumptions
constitute forward-looking statements and are subject to change based on a
number of factors, including those outlined in this section. Any other
statements contained herein (including without limitation statements to the
effect that we estimate, expect, anticipate, plan, believe,
project, continue, may, will, could, or would or statements
concerning potential or opportunity or variations thereof or comparable
terminology or the negative thereof) that are not statements of historical fact
are also forward-looking statements. Forward-looking statements speak only as
of the date they are made, and we undertake no obligation to update publicly
any of them in light of new information or future events. Our actual results
may differ materially from those discussed in these statements. The sections
entitled Factors That May Affect Future Results, Managements Discussion and
Analysis of Financial Condition and Results of Operations and Business
contain a discussion of some of the factors that could contribute to those 23




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differences. Factors that could contribute to these differences include
those discussed below and elsewhere in this Form 10-K. We are dependent upon EMC as the main supplier for our storage solutions, and
disruptions in supply or significant increases in costs could harm our business
materially. Effective March 31, 2003, we entered into a Reseller Agreement with EMC
where we became a reseller of EMC storage products. The agreement gives us a
right to sell and license EMC hardware and software products but also restricts
our ability to resell data storage hardware platforms that compete with EMC
products. As a result of the agreement, we depend on EMC to manufacture and
supply us with their storage products. We may fail to obtain required storage
products in a timely manner or to obtain it in the quantities we desire in the
future. If EMC were to decide to modify their channel strategy, they may cease
supplying us with their storage products. If EMC were to unexpectedly cancel
the reseller agreement, we may be unable to find other vendors as a replacement
in a timely manner. Any interruption or delay in the supply of EMC storage
products, or the inability to obtain these products at acceptable prices and
within a reasonable amount of time, would impair our ability to meet scheduled
product deliveries to our customers and could cause customers to cancel orders.
This lost storage product revenue could harm our business, financial condition
and operating results rendering us unable to continue operating at our current
level of operations. The storage market is characterized by rapid technological change, and our
success will depend on EMCs ability to develop new products. The market for data storage products is characterized by rapid technology
changes. The market is sensitive to changes in customer demands and very
competitive with respect to timely innovation. New product introductions
representing new or improved technology or industry standards may cause our
existing products to become obsolete. When we became a reseller of EMC
disk-based storage products, we agreed not to sell data storage hardware
platforms that compete with EMC products. EMCs ability to introduce new or
enhanced products into the market on a timely basis at competitive price levels
will affect our future results. The markets for the products and services that we sell are intensely
competitive, which may lead to reduced sales of our products, reduced profits
and reduced market share for our business. The market for our products and services is intensely competitive. If we
fail to maintain or enhance our competitive position, we could experience
pricing pressures and reduced sales, margins, profits and market share, each of
which could materially harm our business. Furthermore, new products and
technologies developed by third parties may depress the sales of existing
products and technologies. Our customers requirements and the technology
available to satisfy those requirements are continually changing. We must be
able to respond to these changes in order to remain competitive. Since we
emphasize integrating third party products, our ability to respond to new
technologies will be substantially dependent upon our contractual relationships
with the third parties whose products we sell, particularly EMC. In addition,
we must be able to quickly and effectively train our employees with respect to
any new products or technologies developed by our third party suppliers and
resold by us. Since we are not exclusive resellers, the third party products
we sell are available from a large number of sources. Therefore, we must
distinguish ourselves by the quality of our service and support. The principal
elements of competition in our markets include:  
    
    quality of professional services consulting and support;
    
    responsiveness to customer and market needs;
    
    product price, quality, reliability and performance; and
    
    ability to sell, service and deploy new technology. 24




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We have a number of competitors in various markets, including:
Hewlett-Packard, Sun Microsystems, IBM, Hitachi and Network Appliance, each of
which has substantially greater name recognition, marketing capabilities, and
financial, technological, and personnel resources than MTI. Our future operating results may depend on the success of our cost reduction
initiatives. In fiscal year 2003, we implemented restructuring activities in an effort
to reduce costs. These measures included reductions in our workforce and the
partial or complete closure of certain under-utilized facilities, including
offices in Sunnyvale, California; Boston, Massachusetts; Austin, Texas; Denver,
Colorado; Orlando, Florida; Westmont, Illinois; Raleigh, North Carolina;
Dublin, Ireland; Godalming, England; and Chatou, France. We reduced the number
of our full-time employees by approximately 50% within the last two fiscal
years (from 549 as of April 7, 2001, to 277 as of July 3, 2004). We cannot predict with any certainty the long-term impact of our workforce
reductions. Reductions in our workforce could negatively impact our financial
condition and results of operations by, among other things, making it difficult
to motivate and retain the remaining employees, which in turn may affect our
ability to deliver our products in a timely fashion. We also cannot assure you
that these measures will be successful in achieving the expected benefits
within the expected time frames or that the workforce reductions will not
impair our ability to achieve our current or future business objectives. We may need additional financing to continue to carry on our existing
operations and such additional financing may not be available. We require substantial working capital to fund our operations. We use
cash generated from our operations, equity capital and bank financings to fund
capital expenditures, as well as to invest in and operate our existing
operations. We believe that our working capital, expected cash flow from operating
activities and amounts available under our loan agreement with Comerica Bank
will be sufficient to meet our operating and capital expenditure requirements
for at least the next 12 months. We have granted a lien on all of our assets
to the Canopy Group, Inc., which liens secures Canopys guaranty of our
indebtedness to Comerica Bank, and we would not be able to obtain additional
secured financing without the agreement of Canopy and Comerica. Projections
for our capital requirements are subject to numerous uncertainties, including
the cost savings expected to be realized from the restructuring, the amount of
service and product revenue generated in fiscal 2005 and general economic
conditions. If we do not realize substantial cost savings from our
restructuring and achieve profitability, we may require additional funds in
order to carry on our operations, and may seek to raise such funds through bank
borrowings or public or private offerings of equity or debt securities 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 us. If additional financing is required but not available to us, we would have
to implement additional measures to conserve cash and reduce costs, which may
include, among other things, making additional cost reductions. However, there
is no assurance that such measures would be successful. Our failure to raise
required additional funds or to secure an additional credit facility would
adversely affect our ability to:  
    
    grow the business;
    
    maintain or enhance our product offerings;
    
    respond to competitive pressures; and
    
    continue operations. Additional funds raised through the issuance of equity securities or
securities convertible into our common stock may include restrictive covenants
and have the following negative effects on the then current holders of our
common stock: 25




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
    
    dilution in percentage of ownership in MTI;
    
    economic dilution if the pricing terms offered to investors
are more favorable to them than the current market price; and
    
    subordination of the rights, preferences or privileges of
common stockholders to the rights, preferences or privileges of new
security holders. We are party to long term, non-cancelable facility leases for facilities which
we do not use and may not be able to sublease on terms that will offset our
lease obligations, which may result in a continuing unfavorable impact on our
cash position. We are party to long term, non-cancelable facility leases with respect to
facilities we no longer utilize and which are located in geographic regions
that have undergone a significant decrease in real property values. For
example, we no longer utilize our facilities in Sunnyvale, California,
Westmont, Illinois, Raleigh, North Carolina and various facilities in Europe.
As a result, we are obligated to continue making lease payments related to our
unutilized facilities, and we have been able to sublease these facilities for
rent aggregating $0.5 million in fiscal year 2004. In the aggregate, in fiscal
year 2005 and 2006, we are obligated to pay gross lease payments of
approximately $1.3 million and $1.0 million, respectively, for facility space
which we no longer utilize, and we cannot assure you that we will be able to
sublease the unutilized facilities on terms that will significantly offset
these obligations. A significant portion of our revenues occurs in the last month of a given
quarter. Consequently, our results of operations for that quarter may be
difficult to predict. We have experienced, historically, a significant portion of our orders,
sales and shipments in the last month or weeks of each quarter. In fiscal year
2004, 57%, 55%, 60% and 62%, respectively, of our total revenue was recorded in
the last month of each successive quarter. We expect this pattern to continue,
and possibly to increase, in the future. This uneven pattern makes our ability
to forecast revenues, earnings and working capital requirements for each
quarter difficult and uncertain. If we do not receive orders that we have
anticipated or complete shipments within a given quarter, our results of
operations could be harmed materially for that quarter. Additionally, due to receiving a significant portion of our orders in the
last month of the quarter, we may experience a situation in which we have
exceeded our credit limits with our vendors thereby making our ability to ship
to our customers very difficult. If we experience such situations and are
unable to extend our credit limits with our vendors, this could materially harm
our results of operations. Our quarterly results may fluctuate from period-to-period. Therefore,
historical results may not be indicative of future results or be helpful in
evaluating the results of our business. We have experienced quarterly fluctuations in operating results and we
anticipate that these fluctuations may continue into the future. These
fluctuations have resulted from, and may continue to be caused by, a number of
factors, including:  
    
    the introduction of new products by our competitors and competitive pricing pressures;
    
    the size, timing and terms of customer orders;
    
    the timing of the introduction of new products and new versions of best-of-breed products;
    
    shifts in our product or services mix;
    
    changes in our operating expenditures; and
    
    decreases in our gross profit as a percentage of revenues for mature products. 26




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Accordingly, we believe that quarter-to-quarter comparisons of our
operating results are not necessarily meaningful and that such comparisons
cannot be relied upon as indications of our future performance. We cannot
assure you that we will be profitable on a quarter-to-quarter basis or that our
future revenues and operating results will meet or exceed the expectations of
securities analysts and investors. Failure to be profitable on a quarterly
basis or to meet such expectations could cause a significant decrease in the
trading price of our common stock. The table below quantifies the fluctuations
in our period-to-period results in fiscal year 2004. (amounts in thousands) NETTOTAL
    
    GROSS
    
    OPERATING PROFIT
    
    INCOMEREVENUE
    
    PROFIT
    
    (LOSS)
    
    (LOSS)2004:Fourth quarter
    
    $
    23,651
    
    
    $
    5,482
    
    
    $
    (1,521
    )
    
    $
    (742
    )Third quarter
    
    
    21,210
    
    
    
    4,674
    
    
    
    (1,857
    )
    
    
    1,458Second quarter
    
    
    20,526
    
    
    
    4,428
    
    
    
    (1,768
    )
    
    
    (1,725
    )First quarter
    
    
    17,778
    
    
    
    4,692
    
    
    
    (2,548
    )
    
    
    (2,857
    )Total
    
    $
    83,165
    
    
    $
    19,276
    
    
    $
    (7,694
    )
    
    $
    (3,866
    )
 Our solutions are complex and may contain undetected software or hardware
errors that could be difficult, costly, and time-consuming to repair. Although we have not experienced significant undetected software or
hardware errors to date, given the complex nature of our solutions, we believe
the risk of undetected software or hardware errors may occur in networking
products primarily when they are first introduced or as new versions of
products are released. These errors, if significant, could:  
    
    adversely affect our sales;
    
    cause us to incur significant warranty and repair costs;
    
    cause significant customer relations problems;
    
    harm our competitive position;
    
    hurt our reputation; and
    
    cause purchase delays. And any of these effects could materially harm our business or results of
operations. All domestic employment at MTI, including employment of our domestic key
personnel, is at will. Both the Company and its U.S. employees have the right to terminate
employment at any time, with or without advance notice, and with or without
cause. We believe that our success is dependent, to a significant extent, upon
the efforts and abilities of our salespeople, technical staff and senior
management team, particularly our executive officers, who have been
instrumental in setting our strategic plans. The loss of the services of our
key personnel, especially to our competitors, could materially harm our
business. The failure to retain key personnel, or to implement a succession
plan to prepare qualified individuals to join us upon the loss of a member of
our key personnel, could materially harm our business. We are subject to financial and operating risks associated with international
sales and services. International sales and services represented approximately 50% of our
total sales and service revenue for fiscal year 2004. Prior to fiscal year
2004, international sales and service also represented a significant portion of
total revenue. As a result, our results of operations are subject to the
financial and operating risks of conducting business internationally,
including:  
    
    unexpected changes in, or impositions of, legislative or regulatory requirements; 27




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
    
    fluctuating exchange rates, tariffs and other barriers;
    
    difficulties in staffing and managing foreign subsidiary operations;
    
    import or export restrictions;
    
    greater difficulties in accounts receivable collection and longer payment cycles;
    
    potentially adverse tax consequences;
    
    potential hostilities and changes in diplomatic and trade relationships;
    
    changes in a countrys economic or political conditions; and
    
    differing customer and/or technology standards requirements. All of our sales and services in international markets are priced in the
applicable local currencies and are subject to currency exchange rate
fluctuations. From time to time, we enter into foreign currency exchange
contracts on a limited basis in an attempt to minimize foreign currency
exposure. Such contracts can be costly or limited in their effectiveness. If
we are faced with significant changes in the regulatory and business climate in
our international markets, our business and results of operations could suffer. We may have difficulty managing any future growth effectively. During fiscal year 2003 as part of the restructuring plan, we completely
ceased manufacturing our legacy products, resulting in workforce reductions of
manufacturing, R&D and sales positions and the partial and complete closures of
under-utilized facilities. At the same time, we made a strategic shift from
manufacturing our products to reselling EMC products when we entered into the
Reseller Agreement with EMC on March 31, 2003. Historically, we have not experienced difficulty managing growth.
However, as a result of the restructuring plan and our transition to becoming a
reseller, our facilities, personnel, operating and financial systems may not be
sufficient to effectively manage our expected future growth and, as a result,
we may lose our ability to respond to new opportunities promptly. Additionally,
our expected revenue growth may not materialize and increases in our operating
expenses in response to the expected revenue growth may harm our operating
results and financial condition. Our growth is currently focused on increasing EMC product sales and
providing a broad range of professional services. To accomplish these goals,
we are dependent upon many factors, including but not limited to, recruiting,
hiring, training and retaining significant numbers of qualified sales and
professional services personnel in various geographic regions. We may face inherent costly damages or litigation costs if third parties claim
that the products we sell infringe upon their intellectual property rights. Although we have not experienced material costs with respect to
proprietary rights infringement cases, there is risk that our business
activities may infringe upon the proprietary rights of others, and other
parties may assert infringement claims against us. Though the majority of our
future product sales are expected to be third party products, and the
applicable third party manufacturers will defend their own intellectual
property rights, in the event such claims are made against our suppliers, we
may be faced with a situation in which we cannot sell the products and thus our
results of operations could be significantly and adversely affected. In
addition, we may receive communications from other parties asserting that our
own intellectual property infringes on their proprietary rights. If we become
liable to any third party for infringing its intellectual property rights, we
could be required to pay substantial damage awards and to develop
non-infringing technology, obtain licenses, or to cease selling the
applications that contain the infringing intellectual property. Litigation is
subject to inherent uncertainties, and any outcome unfavorable to us could
materially harm our business. Furthermore, we could incur substantial costs in 28




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defending against any intellectual property litigation, and these costs
could increase significantly if any dispute were to go to trial. Our defense
of any litigation, regardless of the merits of the complaint, likely would be
time-consuming, costly, and a distraction to our management personnel. Adverse
publicity related to any intellectual property litigation also could harm the
sale of our products and damage our competitive position. If we and/or our partners are unable to comply with evolving industry standards
and government regulations, we may be unable either to sell our solutions or to
be competitive in the marketplace. Our solutions must comply with current industry standards and government
regulations in the U.S. and internationally. Any new products and product
enhancements that we sell in the future also must meet industry standards and
government regulations at the time they are introduced. Failure to comply with
existing or evolving industry standards or to obtain timely domestic or foreign
regulatory approvals could materially harm our business. In addition, such
compliance may be time-consuming and costly. Our solutions integrate SAN, NAS, DAS and CAS technologies into a single
storage architecture. Components of these architectures must comply with
evolving industry standards, and we depend upon our suppliers to provide us
with products that meet these standards. If our suppliers or customers do not
support the same industry standards that we do, or if competing standards
emerge that we do not support, market acceptance of our products could suffer. Our stock ownership is concentrated in a few stockholders who may be able to
influence corporate decisions. Our stock ownership is concentrated in a few stockholders who may be able
to influence corporate decisions. As a result of this, these few stockholders
may be able to influence actions of the Company that require stockholder
approval, in particular with regard to significant corporate transactions.
Among other things, this may delay or prevent a change in control of the
Company that may be favored by other stockholders, and may in general make it
difficult for the Company to effect certain actions without the support of the
larger stockholders. Ralph J. Yarro III, one of our Directors, is also a Director and the

President and Chief Executive Officer of The Canopy Group, Inc. (Canopy),
which beneficially owns approximately 35% of our outstanding common stock. In
addition, the selling stockholders named in this prospectus, as a result of
their acquisition of securities issued in our June 2004 private placement
described more fully in the Selling Stockholders section of this prospectus,
the selling stockholders beneficially own approximately 17% of the Companys
outstanding common stock. Our stock price may be volatile, which could lead to losses by investors and to
securities litigation. The value of an investment in our company could decline due to the impact
of any of the following factors upon the market price of our common stock:  
    
    the timing and announcement of new products or services by
us, our partners or by our competitors;
    
    failure of our results from operations to meet the
expectations of public market analysts and investors;
    
    speculation in the press or investment community about our business or our competitive position;
    
    the volume of trading in our common stock; and
    
    market conditions and the trading price of shares of technology companies generally. In addition, stock markets, particularly The Nasdaq SmallCap Market, where
our shares are listed, have experienced extreme price and volume fluctuations,
and the market prices of securities of companies such as ours have been highly
volatile. These fluctuations have often been unrelated to the operating
performance of such companies. Fluctuations such as these may affect the
market price of our common stock. In the past, securities 29




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class action litigation has often been instituted against companies
following periods of volatility in their stock price. This type of litigation
could result in substantial costs and could divert our managements attention
and resources. We may fail to comply with Nasdaq Marketplace Rules. Our securities have been trading on the Nasdaq SmallCap Market since
August 16, 2002. We are currently in compliance with Nasdaq SmallCap Market
continued listing requirements. However, we failed to comply with Nasdaq
Marketplace Rules particularly with the minimum bid price requirement in fiscal
year 2002, and may once again fail to comply with the minimum bid price
requirement, or other continued listing requirements of the Nasdaq SmallCap
Market. If that happens and we do not regain compliance by the end of the
applicable grace period, our stock will be delisted and we would likely seek
listing of our common stock on the over-the-counter market, which is viewed by
many investors as a less liquid marketplace. As a result, the price per share
of our common stock would likely decrease materially and the trading market for
our common stock, our ability to issue additional securities and our ability to
secure additional financing would likely be materially and adversely affected. We have adopted anti-takeover defenses that could affect the price of our
common stock. Our restated certificate of incorporation and amended and restated bylaws
contain various provisions, including notice provisions and provisions
authorizing us to issue preferred stock, that may make it more difficult for a
third party to acquire, or may discourage acquisition bids for, our company.
Also, the rights of holders of our common stock may be affected adversely by
the rights of holders of any preferred stock that we may issue in the future
that would be senior to the rights of the holders of our common stock.
Furthermore, we are subject to the provisions of Section 203 of the Delaware
General Corporation Law regulating corporate takeovers. These provisions could
also limit the price that investors might be willing to pay in the future for
shares of our common stock. Our stockholders may be diluted by the conversion of outstanding Series A
Convertible Preferred Stock and the exercise of warrants to purchase common
stock issued in our June 2004 private placement. There are currently 566,797 shares of our Series A Convertible Preferred
Stock outstanding, which are held by the selling stockholders and which are

convertible at any time into an aggregate of 5,667,970 shares of common stock.
Dividends accrue on the Series A Convertible Preferred Stock at an annual rate
of 8%, and the holders of Series A Convertible Preferred Stock may convert the
accrued dividends into shares of common stock to the extent the Company has not
previously paid such dividends in cash. The holders of Series A Convertible
Preferred Stock are also entitled to antidilution protection, pursuant to which
the conversion price would be reduced using a weighted-average calculation in
the event the Company issues certain additional securities at a price per share
less than the conversion price then in effect. In addition, the holders of
Series A Convertible Preferred Stock have preemptive rights to purchase a pro
rata portion of certain future issuances of equity securities by the Company. There are currently warrants outstanding to purchase up to 1,624,308
shares of our common stock, which are held by the selling stockholders. The
exercise price for such warrants is $3.10 per share. The warrants will become
exercisable on December 20, 2004. If the selling stockholders convert Series A Convertible Preferred Stock
or exercise the warrants they hold, the Company would be required to issue
additional shares of common stock, resulting in dilution of existing common
stockholders and potentially a decline in the market price of our common stock. 
 Item 7A.Quantitative and Qualitative Disclosures About Market Risks Our European operations transact in foreign currencies and may be exposed
to financial market risk resulting from fluctuations in foreign currency
exchange rates, particularly the British Pound Sterling and the Euro. In the
prior year, in order to minimize the risk of foreign exchange loss, we entered
into foreign currency forward contracts. However, in order to conserve cash,
we ended our hedging program in fiscal year 2003. 30




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Our exposure to short-term interest rate fluctuations is limited to our
short-term borrowings under our line of credit. Our line of credit allows
borrowings up to $7.0 million and therefore a 1% increase in interest rates
would increase annual interest expense by $0.07 million if the line of credit
were fully utilized. 
 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
15(a)(1) and 15(a)(2) of Part IV of this report. 
 Item 9.Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure Effective September 25, 2003, we dismissed KPMG LLP (KPMG) as our
certifying accountants. Our Audit Committee and Board of Directors approved
this action. The reports of KPMG on our financial statements for the past two fiscal
years ended April 6, 2002, and April 5, 2003, contained no adverse opinion or
disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope or accounting principles. During our two most recent fiscal years ended April 6, 2002, and April 5,
2003, and the subsequent interim period through September 25, 2003, there were
no disagreements with KPMG on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of KPMG, would have caused
KPMG to make reference thereto in connection with its reports on the financial
statements for such years. On September 30, 2003, we engaged Grant Thornton LLP as our new
independent accountant. Our Audit Committee and Board of Directors approved
this action. We have agreed to indemnify and hold KPMG harmless against and from any
and all legal costs and expenses incurred by KPMG in a successful defense of
any legal action or proceeding that arises as a result of KPMGs consent to the
inclusion of its audit report on the Companys past financial statements
included in this Form 10-K. 
 Item 9A.Controls and Procedures Evaluation of Disclosure Controls and Procedures The Company carried out an evaluation, under the supervision and with the
participation of the Companys management, including the Companys Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
Companys disclosure controls and procedures as of the end of the period
covered by this report, pursuant to Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended. Based on that evaluation, the
Companys Chief Executive Officer and Chief Financial Officer have concluded
that the Companys disclosure controls and procedures, as of the end of the
period covered by this report, were effective in timely alerting them to
material information relating to the Company required to be included in the
Companys periodic filings. Changes in Internal Control Over Financial Reporting There has been no change in the Companys internal control over financial
reporting during the Companys most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the Companys internal
control over financial reporting. 31




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PART III 
 Item 10.Directors and Executive Officers of the Registrant Directors NAME
    
    AGE
    
    POSITION(S)
    
    COMMITTEE(S)Thomas P. Raimondi, Jr.
    
    
    46
    
    
    Chairman of the Board of Directors,
President and Chief Executive
Officer, Nominee
    
    Nominating (until September 8, 2004)Franz L. Cristiani(1)
    
    
    62
    
    
    Director, Nominee
    
    AuditVal Kreidel
    
    
    49
    
    
    Director, Nominee
    
    NominatingDarcy G. Mott
    
    
    51
    
    
    Director, Nominee
    
    CompensationJohn Repp
    
    
    65
    
    
    Director, Nominee
    
    Audit and CompensationKent D. Smith(2)
    
    
    55
    
    
    Director, Nominee
    
    Audit and CompensationRalph J. Yarro, III(3)
    
    
    39
    
    
    Director, Nominee
    
    NominatingMichael Pehl
    
    
    43
    
    
    Director, Nominee
    
    Compensation (effective June 17, 2004)
   (1)
    
    Chairman of the Audit Committee and Lead Director(2)
    
    Chairman of the Compensation Committee(3)
    
    Chairman of the Nominating Committee There are no family relationships among the directors or executive
officers of the Company. Thomas P. Raimondi, Jr. was named President and Chief Executive Officer of
the Company in December 1999 and Chairman of the Board of Directors in July
2002. From April 2001 until July 2002, Mr. Raimondi was Vice Chairman of the
Board of Directors. From July 1998 to December 1999, Mr. Raimondi was the
Companys Chief Operating Officer. Mr. Raimondi served as Senior Vice
President and General Manager from May 1996 until July 1998 and was Vice
President, Strategic Planning, Product Marketing and Director of Marketing from
1987 until May 1996. Mr. Raimondi joined the Company in 1987. Since September
1999 Mr. Raimondi has served as a member of the Board of Directors of The SCO
Group, Inc., (SCO) (formerly Caldera Systems Inc.), a systems software
company. Franz L. Cristiani was elected a director of the Company in December 2000.
From 1976 to 1999, Mr. Cristiani was a partner with Arthur Andersen & Company
(Arthur Andersen), specializing in accounting services offered to public
companies. Mr. Cristiani is presently self-employed. Mr. Cristiani has been a
member of the Board of Directors of BioMarin Pharmaceutical Inc. since June
2002 and Natures Sunshine Produce Inc., since May 2004. Mr. Cristiani was a
member of the Board of Directors of U.S. Aggregates, Inc. from December 1999 to
February 2001. Val Kreidel was elected a director of the Company in January 1994. Ms.
Kreidel has served as a financial analyst for NFT Ventures, Inc. and DSC
Ventures, Inc., private investment companies, since May 1989. From May 1985 to
May 1989, Ms. Kreidel served as a Vice President of Atlantic Financial Savings
Bank in its Real Estate Loan Department. Since 1984, Ms. Kreidel has been
employed as an analyst for The Canopy Group, Inc. (Canopy), a technology
investment company. Darcy G. Mott, a certified public accountant, was elected a director of
the Company in July 2002. Mr. Mott has served as Vice President, Treasurer and
Chief Financial Officer of Canopy since May 1999. Mr. Mott has served as a
member of the Board of Directors of SCO since March 2002. Mr. Mott also serves
as a member of the Board of Directors of various privately held companies. John Repp has been a director of the Company since February 1998. Mr.
Repp has been a sales consultant to several technology firms, including the
Company, since 1996. From 1989 to 1995, Mr. Repp was the Vice President of
Sales for Seagate Technology, Inc. (Seagate), a software developer and
manufacturer of disk drives. 32




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##### Table of Contents



Prior to joining Seagate, Mr. Repp spent twenty-two years with Control
Data Corporation in various positions in sales and operations. Kent D. Smith was elected a director of the Company in August 2001. Mr.
Smith has been Vice President, Sales of Wily Technology Inc. since June 2002.
Mr. Smith was a partner with Smith, Diamond and Associates, a consulting firm
specializing in sales and services consulting for technology companies, from
February 2001 to June 2002. From 1995 to 2001, Mr. Smith was an Executive Vice
President for Worldwide Sales with Legato Systems, Inc. (Legato), an
organization that delivers worldwide enterprise class software solutions and
services. Prior to that, Mr. Smith was Chief Operating Officer of Legato.
From 1994 to 1995, Mr. Smith was Vice President, Emerging Market Products for
Verifone, Inc. (Verifone), a global provider of secure electronic payment
solutions for financial institutions, merchants and consumers. Prior to
joining Verifone, Mr. Smith served as General Manager of IBM Corporation,
China, from 1989 to 1993, and as a sales representative, sales manager, sales
executive and regional manager of IBM Corporation from 1974 to 1988. Ralph J. Yarro, III was elected a director of the Company in March 2000.
Mr. Yarro has worked for Canopy since April 1995 and is currently Canopys
President, Chief Executive Officer and a member of its Board of Directors. Mr.
Yarro is also the Chairman of the Board of Directors of SCO since September
1998. Mr. Yarro also serves as a member of the Board of Directors of various
privately held companies. Michael Pehl was elected a director of the Company in June 2004. Mr. Pehl
is an Operating Partner of Advent International Corporation. Prior to working
with Advent, he was President and COO of Razorfish Inc., which he joined in
1999 following the merger of Razorfish and iCube. Mr. Pehl was Chairman and
CEO of iCube from 1996 to 1999. Prior to iCube, he founded and spearheaded
International Consulting Solutions (ICS), an SAP implementation and business
process consultancy. Executive Officers The following table sets forth the names and ages of all executive
officers of the Company as of
July 9, 2004. A summary of the background and experience of each of these
individuals is set forth below. NAME
    
    AGE
    
    POSITION(S)Thomas P. Raimondi, Jr.
    
    
    46
    
    
    Chairman, President and Chief Executive OfficerKeith Clark
    
    
    51
    
    
    Executive Vice President Worldwide OperationsTodd Schaeffer
    
    
    38
    
    
    Chief Financial Officer and SecretaryRichard L. Ruskin
    
    
    45
    
    
    Executive Vice President for Sales and MarketingBill Decker
    
    
    62
    
    
    Senior Vice President of the Office of the PresidentNick Boland
    
    
    48
    
    
    Senior Vice President European Finance
 Thomas P. Raimondi, Jr. was named President and Chief Executive Officer of
the Company in December 1999 and Chairman of the Board of Directors in July
2002. From April 2001 until July 2002, Mr. Raimondi was Vice Chairman of the
Board of Directors. From July 1998 to December 1999, Mr. Raimondi was the
Companys Chief Operating Officer. Mr. Raimondi served as Senior Vice
President and General Manager from May 1996 until July 1998 and was Vice
President, Strategic Planning, Product Marketing and Director of Marketing from
1987 until May 1996. Mr. Raimondi joined the Company in 1987. Since September
1999 Mr. Raimondi has served as a member of the Board of Directors of SCO. Keith Clark was named our Executive Vice President Worldwide Operations in
February 2003. Mr. Clark was our Senior Vice President and General Manager
Europe from April 2000 to February 2003 and our Vice President European
Operations from April 1994 to April 2000. Mr. Clark joined the Company in
January 1990 as European Client Services Manager. Before joining the Company,
Mr. Clark served in a number of senior-management positions within Europe
during a ten-year period for System Industries, Inc., a data-storage company in
the DEC marketplace. Todd Schaeffer was named our Chief Financial Officer in August 2003. Mr.
Schaeffer was our Vice President, Corporate Controller and Chief Accounting
Officer from September 2001 to August 2003. Mr. Schaeffer 33




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served as Director of Accounting and Finance from June 2000 to September
2001 and Manager of Financial Planning and Analysis from June 1998 to May 2000.
Mr. Schaffer joined the Company in 1995 and was our Senior Financial Analyst
from February 1995 to June 1998. Before joining MTI, from September 1992 to
February 1995, Mr. Schaeffer was a Senior Accountant at KPMG LLP. Richard L. Ruskin was named Executive Vice President for Sales and
Marketing in September 2003. Mr. Ruskin rejoins the Company in the role he
held at MTI from 1997- 2001. Mr. Ruskin spent a total of 11 years at MTI,
starting as Regional Sales Manager in 1990 and eventually running the sales and
marketing efforts for several years. Between 2001 and 2003, Mr. Ruskin ran the
sales and Field Operations organization for Storability Software, a provider of
Storage management software. Prior to joining MTI in 1990, Mr. Ruskin spent
seven years in various Sales Management positions at System Industries, a
pioneer in the plug compatible storage industry. Mr. Ruskin has now spent the
last 20 years exclusively in the data storage business. Bill Decker was named Senior Vice President of the Office of the President
in March 2003. Mr. Decker was our Senior Vice President of Business
Development from March 1997 to March 2003. Mr. Decker joined the Company in
March 1995 as Sales Manager. Prior to joining the Company, Mr. Decker served
in Sales and Operations as a Partner in National Peripherals Inc. (NPI), for 6
years, prior to MTI acquiring NPI in 1995. Prior to NPI, Mr. Decker served 10
years with ADP in various executive level positions managing sales and service
operations. 10 years prior were spent with Central Data Corporation in sales
and sales management, selling large scale computer systems and peripheral
products. Mr. Decker has 40 years experience in the data storage industry. Nick Boland was named our Senior Vice President European Finance in April
2000. Mr. Boland was our Vice President European Finance from April 1994 to
April 2000 and our European Financial Controller from December 1993 to April
1994. Mr. Boland joined the Company in December 1993 as European Financial
Controller. Before joining the Company, Mr. Boland served in a number of
senior-management positions within Europe during a ten-year period for System
Industries, Inc., a data-storage company in the DEC marketplace. Audit Committee The members of the Audit Committee during fiscal year 2004 were Messrs.
Cristiani, Repp and Smith. The Board of Directors has determined that the
members of the Audit Committee are independent, as that term is defined in Rule
4200(a)(14) of the Nasdaq Rules. Mr. Cristiani was a partner with Arthur Andersen from 1976 to 1999,
specializing in the auditing of public companies. The Board of Directors has
determined, in accordance with Section 407 of the Securities Exchange Act of
1934, as amended, that Mr. Cristiani is an Audit Committee financial expert. Stockholder Recommendation Of Board Candidates Any stockholder desiring to submit a recommendation for consideration by
the Nominating Committee of a candidate that the stockholder believes is
qualified to be a Board nominee at any upcoming stockholders meeting may do so
by submitting that recommendation in writing to the Nominating Committee not
later 120 days prior to the first anniversary of the date on which the proxy
materials for the prior years annual meeting were first sent to stockholders.
However, if the date of the upcoming annual meeting has been changed by more
than 30 days from the date of the prior years meeting, the recommendation must
be received within a reasonable time before the Company begins to print and
mail its proxy materials for the upcoming annual meeting. In addition, the
recommendation should be accompanied by the following information: (i) the name
and address of the nominating stockholder and of the person or persons being
recommended for consideration as a candidate for Board membership; (ii) the
number of shares of voting stock of the Company that are owned by the
nominating stockholder, his or her recommended candidate and any other
stockholders known by the nominating stockholder to be supporting the
candidates nomination; (iii) a description of any arrangements or
understandings, that relate to the election of directors of the Company,
between the nominating stockholder, or any person that (directly or indirectly
through one or more intermediaries) controls, or is controlled by, or is under
common control with, such stockholder and any other person or persons (naming
such other person or persons); (iv) such other information regarding each such
recommended candidate as would be required to be included in a proxy statement
filed pursuant to the proxy rules of the Securities and Exchange Commission;
and (v) the written consent of each such recommended candidate 34




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##### Table of Contents



to be named as a nominee and, if nominated and elected, to serve as a
director. Such nominations should be sent to the Nominating Committee care of
the Corporate Secretary, MTI Technology Corporation, 14661 Franklin Avenue,
Tustin, California 92780. Compliance With Section 16(A) Of The Securities Exchange Act Of 1934 Section 16(a) of the Securities and Exchange Act of 1934, as amended,
requires that the Companys executive officers and directors file reports of
beneficial ownership on Form 3 and changes in beneficial ownership on Forms 4
and 5 with the Securities and Exchange Commission (SEC). Based solely on its
review of the Forms 3, 4 and 5 filed on behalf of its executive officers and
directors, the Company believes that, during the fiscal year ended April 3,
2004, all Section 16(a) filing requirements applicable to its executive
officers and directors were complied with pursuant to the SEC rules. Code Of Business Conduct We have adopted a Code of Business Conduct for our directors, officers and
employees, that also includes specific ethical policies and principles that
apply to our Chief Executive Officer and other key accounting and financial
personnel. Copies of our Code of Business Conduct can be found on our website
at www.mti.com. We intend to disclose, at this location on our website, any
amendments to that Code and any waivers of the requirements of that Code that
may be granted to our Chief Executive Officer or Chief Financial Officer. 
 Item 11.Executive Compensation Compensation Of Directors And Executive Officers And Other Information The following table sets forth for each of the Companys last three
completed fiscal years the compensation of Thomas P. Raimondi, Jr., the
Companys Chairman, President and Chief Executive Officer, and the four most
highly compensated executive officers as of the fiscal year ended April 3,
2004, other than Mr. Raimondi whose total annual salary and bonus for the last
fiscal year exceeded $100,000 (collectively, the Named Executive Officers). SUMMARY COMPENSATION TABLE ANNUAL COMPENSATION LONG TERMCOMPENSATION AWARDSNUMBER OFSECURITIESNAME AND PRINCIPAL
    
    
    
    
    
    
    
    
    
    
    
    
    
    OTHER ANNUAL
    
    UNDERLYING
    
    ALL OTHERPOSITION
    
    YEAR
    
    SALARY ($)
    
    BONUS ($)
    
    COMPENSATION ($)
    
    OPTIONS (#)
    
    COMPENSATION ($)Thomas P.
Raimondi, Jr.
    
    
    2004
    
    
    
    337,000
    
    
    
    
    
    
    
    *
    
    
    
    450,000
    
    
    
    30,968
    (2)President, Chief Executive
    
    
    2003
    
    
    
    353,687
    
    
    
    
    
    
    
    *
    
    
    
    336,000
    
    
    
    18,653
    (1)Officer and Chairman of
the Board
    
    
    2002
    
    
    
    398,846
    
    
    
    
    
    
    
    *
    
    
    
    53,125
    
    
    
    19,934
    (1)Keith Clark
    
    
    2004
    
    
    
    330,333
    (3)
    
    
    26,782
    
    
    
    41,218
    (4)
    
    
    200,000
    
    
    
    6,222
    (5)Executive Vice President,
    
    
    2003
    
    
    
    302,619
    (3)
    
    
    
    
    
    
    31,821
    (4)
    
    
    250,000
    
    
    
    6,111
    (5)Worldwide Operations
    
    
    2002
    
    
    
    271,908
    (3)
    
    
    
    
    
    
    *
    
    
    
    31,250
    
    
    
    3,132
    (5)Todd Schaeffer
    
    
    2004
    
    
    
    192,461
    
    
    
    
    
    
    
    *
    
    
    
    200,000
    
    
    
    3,497
    (2)Chief Financial Officer and
    
    
    2003
    
    
    
    160,625
    
    
    
    5,000
    
    
    
    *
    
    
    
    55,000
    
    
    
    884
    (2)Secretary
    
    
    2002
    
    
    
    125,942
    
    
    
    154
    
    
    
    *
    
    
    
    55,579
    
    
    
    Nick
Boland(6)
    
    
    2004
    
    
    
    340,414
    (7)
    
    
    
    
    
    
    52,566
    (8)
    
    
    150,000
    
    
    
    8,420
    (9)Senior Vice President,
    
    
    2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    European Finance
    
    
    2002
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Richard L.
Ruskin(10)
    
    
    2004
    
    
    
    158,654
    
    
    
    
    
    
    
    *
    
    
    
    200,000
    
    
    
    618
    (2)Executive Vice President,
    
    
    2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Sales and Marketing
    
    
    2002
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
   *
    
    Amount does not exceed the lesser of $50,000 or ten percent of the total
annual salary and bonus reported for the individual. 35




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##### Table of Contents



(1)
    
    Includes the amounts of $18,013 and $19,081 for medical reimbursements
for fiscal year 2003 and 2002, respectively. Also includes the amounts of
$640 and $853 for life insurance premium paid by the Company for fiscal
year 2003 and 2002, respectively, with respect to term life insurance for
the benefit of the Named Executive Officers.(2)
    
    Represents medical reimbursements.(3)
    
    Mr. Clarks salary was paid in British Pounds and translated to U.S.
Dollars at the applicable exchange rates. The annual increases were due
to the weakening U.S. Dollar against the British Pound.(4)
    
    Includes the amounts of $22,025 and $17,024 for auto allowance for fiscal
year 2004 and 2003, respectively. Also includes the amounts of $19,193
and $14,797 for pension for fiscal year 2004 and 2003, respectively.(5)
    
    Includes the amount of $2,506 and $2,732 for medical reimbursements for
fiscal year 2004 and 2003, respectively. Also includes the amounts of
$3,716, $3,379 and $3,132 for life insurance premium paid by the Company
for fiscal year 2004, 2003 and 2002, respectively, with respect to term
life insurance for the benefit of the Named Executive Officers.(6)
    
    Mr. Boland was elected as an officer of the Company on August 21, 2003.(7)
    
    Mr. Bolands salary was paid in Euro and translated to U.S. Dollars at
the applicable exchange rates.(8)
    
    Includes the amounts of $27,107 for auto allowance and $25,459 for
pension for fiscal year 2004.(9)
    
    Includes the amount of $4,100 for medical reimbursements for fiscal year
2004. Also includes the amounts of $4,320 for life insurance premium paid
by the Company for fiscal year 2004, with respect to term life insurance
for the benefit of the Named Executive Officers.(10)
    
    Mr. Ruskin was elected as an officer of the Company on November 19, 2003. Summary of Option Grants The following table sets forth the individual grants of stock options made
by the Company during the fiscal year ended April 3, 2004 to each of the Named
Executive Officers. OPTION GRANTS IN LAST FISCAL YEAR INDIVIDUAL GRANTS
    
    POTENTIAL REALIZABLEVALUE AT ASSUMED% OF
    
    
    
    
    
    
    
    
    
    ANNUAL RATES OF STOCKTOTAL
    
    
    
    
    
    
    
    
    
    PRICE APPRECIATION FOROPTIONS
    
    
    
    
    
    
    
    
    
    OPTION TERM(2)NUMBER OF
    
    GRANTEDSECURITIES
    
    TOUNDERLYING
    
    EMPLOYEESOPTIONS
    
    IN FISCAL
    
    PRICE
    
    EXPIRATION
    
    5%
    
    10%NAME
    
    GRANTED (#)
    
    YEAR(1)
    
    ($/SH)(1)
    
    DATE
    
    ($)
    
    ($)Thomas P. Raimondi, Jr.(3)
    
    
    450,000
    
    
    
    13
    %
    
    
    2.20
    
    
    
    11/19/2013
    
    
    
    622,606
    
    
    
    1,577,805Todd Schaeffer(3)
    
    
    200,000
    
    
    
    6
    %
    
    
    2.20
    
    
    
    11/19/2013
    
    
    
    276,714
    
    
    
    701,247Keith Clark(3)
    
    
    200,000
    
    
    
    6
    %
    
    
    2.20
    
    
    
    11/19/2013
    
    
    
    276,714
    
    
    
    701,247Nick Boland(3)
    
    
    150,000
    
    
    
    4
    %
    
    
    2.20
    
    
    
    11/19/2013
    
    
    
    207,535
    
    
    
    525,935Richard L. Ruskin(4)
    
    
    200,000
    
    
    
    6
    %
    
    
    1.75
    
    
    
    09/22/2013
    
    
    
    220,113
    
    
    
    557,810
   (1)
    
    Based on an aggregate of 3,385,000 options granted to directors and
employees of the Company in fiscal year 2004, including the Named
Executive Officers.(2)
    
    The potential realizable value is calculated based on the term of the
option at its time of grant (ten years). It is calculated by assuming
that the stock price appreciates at the indicated annual rate compounded
annually for the entire term of the option and that the option is
exercised and sold on the last day of its term for the appreciated stock
price. No gain to the option holder is possible unless the stock price
increases over the option term.(3)
    
    These options will fully vest on November 19, 2006.(4)
    
    These options will fully vest on September 22, 2005. All options grants presented within this table have provisions accelerating the
vesting in the event of a change in control. Summary Of Options Exercised The following table sets forth information concerning exercises of stock
options during the year ended April 3, 2004 by each of the Named Executive
Officers and the value of unexercised options at April 3, 2004. 36




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AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES NUMBER OFSECURITIES
    
    VALUE OFUNDERLYING
    
    UNEXERCISED IN-UNEXERCISED
    
    THE-MONEYOPTIONS AT FISCAL
    
    OPTIONS AT FISCALYEAR END (#)
    
    YEAR END ($)SHARESACQUIREDON
    
    VALUEEXERCISE
    
    REALIZED(1)
    
    EXERCISABLE/
    
    EXERCISABLE/NAME
    
    (#)
    
    ($)
    
    UNEXERCISABLE
    
    UNEXERCISABLE(2)Thomas P. Raimondi, Jr.
    
    
    
    
    
    
    
    
    
    
    733,663/343,812
    
    
    
    15,583/265,440Todd Schaeffer
    
    
    
    
    
    
    
    
    
    
    152,580/209,999
    
    
    
    252,966/261,585Keith Clark
    
    
    
    
    
    
    
    
    
    
    551,250/262,500
    
    
    
    779,843/368,906Nick Boland
    
    
    
    
    
    
    
    
    
    
    382,938/195,312
    
    
    
    371,768/245,507Richard L. Ruskin
    
    
    
    
    
    
    
    
    
    
    50,000/150,000
    
    
    
    82,500/247,500
   (1)
    
    Value realized is based on estimated fair market value of Common Stock on
the date of exercise minus the exercise price.(2)
    
    Value is based on the closing price of the Companys Common Stock on the
Nasdaq SmallCap Market as of April 2, 2004 ($3.40), minus the exercise
price. Directors Fees And Options Each non-employee director received annual compensation in the amount of
$25,000, paid in quarterly installments at the beginning of each fiscal
quarter. In addition, each Compensation Committee member, Audit Committee
member, Chair of the Audit Committee and Lead Director received annual fees of
$2,500, $5,000, $5,000 and $15,000 respectively. The Companys employee
director, Mr. Raimondi, did not receive any cash compensation for serving on
the Board of Directors for the fiscal year ended April 3, 2004, but was
reimbursed for expenses incurred in attending the meetings. Since February
1999, the Company has included each non-employee director with the named
executives of the Company in the Companys executive medical plan. During
fiscal 2004, the Company paid $11,553, $12,403 and $413 for medical expenses
not otherwise covered by insurance for Messrs. Repp, Cristiani and Smith,
respectively. Since March 2000, the Company has included each non-employee director with
the named executives of the Company in the Companys investment and tax
planning program. During fiscal year 2004, no expenses were reimbursed to, or
fees incurred on behalf of, any director under this program. Each non-employee director of the Company is granted a nonqualified option
to purchase 50,000 shares of Common Stock under the 2001 Non-Employee Director
Option Program (the Program) upon election or appointment to the Board of
Directors. These options will vest and become exercisable in three equal
installments on each anniversary of the grant date. In addition, the Program
provides that each non-employee director who is a director immediately prior to
an annual meeting of the Companys stockholders and who continues to be a
director after such meeting, provided that such director has served as such for
at least 11 months, will be granted an option to purchase 25,000 shares of
Common Stock on the related annual meeting date. Options granted under the
Program vest and become appreciable in three equal installments on each
anniversary of their respective grant date. On August 21, 2003, the Company
granted each non-employee director an option to purchase 25,000 shares of
Common Stock with an exercise price of $1.07. Severance Agreements The Company has entered into Severance Agreements with all Named Executive
Officers. These agreements have two-year terms and are automatically renewable
for successive one-year terms thereafter. Pursuant to their terms, if the
executives employment with the Company is terminated within 12 months of a
change in control of the Company (as defined in the agreement), the level of
benefits the executive will receive depends on the reason for such termination.

If the termination is for cause (as defined in the agreement), by reason 37




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of the executives disability or death or by the employee for other than
good reason (as defined in the agreement), the Company will pay the employee
all accrued, unpaid compensation, and, except where terminated by the Company
for cause, a pro rata portion of the annual bonus under the Companys bonus
plan (no bonus plan is currently in effect). If the executive is terminated
for any other reason by the Company or the executive terminates his employment
with good reason, the Company will pay to the executive (i) all accrued,
unpaid compensation, (ii) a pro rata portion of the annual bonus under the
Companys bonus plan and (iii) an amount equal to one year of annual base
salary and annual bonus under the bonus plan (no bonus plan is currently in
effect), and, for a period of 12 months following termination, will provide the
executive and his dependents medical insurance benefits. Compensation Committee Interlocks And Insider Participation As of April 3, 2004, the Compensation Committee consisted of Messrs. Mott,
Repp, and Smith. None of these persons is or has been an officer or employee
of the Company or any of its subsidiaries. In addition, there are no
Compensation Committee interlocks among the Company and other entities
involving its executive officers and members of the Board of Directors who
serve as executive officers of such entities. Compensation Committee Report On Executive Compensation The Compensation Committee members are Darcy G. Mott, John Repp and Kent
D. Smith. Mr. Smith serves as the Chairman of the Compensation Committee. It
has been determined that the members of the Compensation Committee are
independent under NASD Marketplace Rule 4200 and responsible for establishing
and administering the policies that govern the compensation of executive
officers, including the Chief Executive Officer and the other Named Executive
Officers. The Compensation Committee has furnished the following report on
executive compensation: COMPENSATION COMMITTEE REPORT The Compensation Committee (Committee) of the Board of Directors reviews
and administers the Companys various incentive plans, including the cash
compensation levels of members of management, the Companys bonus plan and the
Companys stock incentive plans. General Compensation Policy. The Committees fundamental compensation
policy is to make a substantial portion of an executives total potential
compensation contingent upon the financial performance of the Company.
Accordingly, in addition to each executives base salary, the Company offers
stock option awards to provide incentives to the executive officers through an
equity interest in the Company. The Committee believes that the stockholders
benefit by aligning the long-term interests of stockholders and employees. Stock Option Awards. The Company has granted stock options under its
various stock option plans generally at prices equal to the fair market value
of the Companys Common Stock at the date of grant. The grants to executive
officers are based on their responsibilities and relative positions in the
Company and are considered an integral component of total compensation. The
Committee believes the granting of options to be beneficial to stockholders,
because such grants increase managements incentive to enhance stockholder
value. Option grants were proposed by the Chief Executive Officer and reviewed
by the Committee based on the individuals potential contribution to the
Companys overall performance. No specific quantitative weight was given to
any particular performance measure. The Committee believes that stock option
grants are necessary to retain and motivate key employees of the Company. Chief Executive Officer Compensation. In March 2000, the base annual
salary rate of Mr. Raimondi, the Chief Executive Officer, was set at $425,000
upon recommendation by the Committee and approval of the Board of Directors.
That salary was determined primarily based upon the Committees review of the
salaries of chief executive officers at companies in the computer industry of
similar size and in the same geographic area as the Company. In July 2002, Mr.
Raimondi voluntarily reduced, on a temporary basis, his base annual salary rate
to assist in the Companys cost-cutting efforts. The reduced salary rate is
still in effect and Mr. Raimondis total annual salary as of the fiscal year
ended April 3, 2004 was $337,000. Mr. Raimondi did not receive an annual cash
bonus in FY2004. At this point in the Companys history, the Committee feels
that equity incentive based 38




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compensation for Mr. Raimondi is in the best interests of the Company and
its stockholders, in that it preserves cash, and is the best method of
compensating Mr. Raimondi in that equity incentive compensation better aligns
Mr. Raimondis compensation with the interests of the Companys stockholders.
Stock option grants to Mr. Raimondi are currently generally determined by the
Board of Directors, upon recommendation of the Committee, based upon
operational and financial accomplishments. Mr. Raimondi was awarded options to
purchase 450,000 shares of Common Stock during fiscal 2004. The options were
granted on November 19, 2003 at the fair market value exercise price per share
and will fully vest on November 19, 2006. Policy Regarding Deductibility of Compensation. Section 162(m) of the
Internal Revenue Code (Section 162(m)) provides that for federal income tax
purposes, the otherwise allowable deduction for compensation paid or accrued to
a covered employee of a publicly held corporation is limited to no more than $1
million per year. The Company is not presently affected by Section 162(m)
because, for the fiscal year ended April 3, 2004, no executive officers
compensation exceeded $1 million, and the Company does not believe that the
compensation of any executive officer will exceed $1 million for the 2005
fiscal year. Options granted under the Companys Stock Incentive Plan will be
considered performance-based compensation. As performance-based compensation,
compensation attributable to options granted under the Companys Stock
Incentive Plan and awarded to covered employees will not be subject to the
compensation deduction limitations of Section 162(m).  COMPENSATION COMMITTEE
Kent D. Smith, Chairman
Darcy G. Mott
John Repp The foregoing Compensation Committee Report shall not be deemed to be
incorporated by reference in any previous or future documents filed by the
Company with the Securities and Exchange Commission under the Securities Act of
1933 or the Securities Exchange Act of 1934, except to the extent that the
Company specifically incorporates the foregoing Compensation Committee Report
by reference in any such document. Company Stock Price Performance The following performance graph assumes an investment of $100 on March 31,
1999 and compares the change to April 3, 2004 in the market prices of the
Common Stock with a broad market index (Nasdaq Stock Market  U.S.) and an
industry index (Nasdaq Computer Manufacturer Index). The Company paid no
dividends during the periods shown; the performance of the indexes is shown on
a total return (dividend reinvestment) basis. The graph lines merely connect
the prices on the dates indicated and do not reflect fluctuations between those
dates. The following Company Stock Price Performance graph shall not be deemed to
be incorporated by reference in any previous or future documents filed by the
Company with the Securities and Exchange Commission under the Securities Act of
1933 or the Securities Exchange Act of 1934, except to the extent that the
Company specifically incorporates the following Company Stock Price Performance
graph by reference in any such document. 39




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(PERFORMANCE GRAPH) 
 Item 12.Security Ownership Of Certain Beneficial Owners And Management And
Related Stockholders Matters Securities Authorized For Issuance Under Equity Compensation Plans The following table sets forth information about stock of the Company that
may be issued upon exercise of options under all of the Companys equity
compensation plans as of April 3, 2004 40




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##### Table of Contents



Number of securitiesremaining available forNumber of securities
    
    
    
    
    
    future issuance underto be issued upon
    
    Weighted-average
    
    equity compensationexercise of
    
    exercise price per share
    
    plans (excludingoutstanding options,
    
    of outstanding options,
    
    securities reflected inwarrants and rights
    
    warrants and rights
    
    column (a))Plan category
    
    (a)
    
    (b)
    
    (c)Equity compensation
plans approved by
security holders
    
    
    11,047,024
    
    
    $
    4.8065
    
    
    
    2,032,114Equity compensation
plans not approved
by security holders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    11,047,024
    
    
    $
    4.8065
    
    
    
    2,032,114
   (1)
    
    Includes 891,046 shares of Common Stock available for future issuance
under the 2001 Employee Stock Purchase Plan. VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF The following table sets forth certain information regarding the
beneficial ownership of Common Stock as of July 9, 2004, by (i) each person
known by the Company to own more than 5% of such shares, (ii) each of the
Companys directors, (iii) the Companys Chief Executive Officer and each of
its named executive officers at April 3, 2004, and (iv) all directors and
executive officers as a group. As of July 9, 2004, there were 34,621,664
issued and outstanding shares of Common Stock of the Company, not including
treasury shares or shares issuable upon exercise of options or warrants.
Ownership information has been supplied by the persons concerned. SHARESOWNED(2)
    
    BENEFICIALLYNAME AND ADDRESS OF BENEFICIAL OWNER(1)
    
    NUMBER
    
    PERCENTThe Canopy Group,Inc.(3)
333 South 520 West, Suite 300
Lindon, Utah 84042
    
    
    14,463,285
    
    
    
    41.78
    %Advent International Corporation(4)
75 State Street, 29th Floor
Boston, MA 02109
    
    
    5,347,671
    
    
    
    13.38
    %Thomas P. Raimondi, Jr.(5)
    
    
    1,269,111
    
    
    
    3.54
    %Franz L. Cristiani(6)
    
    
    85,001
    
    
    
    *Val Kreidel(7)
    
    
    140,001
    
    
    
    *Darcy G. Mott(8)
    
    
    14,504,953
    
    
    
    41.85
    %John Repp(9)
    
    
    80,001
    
    
    
    *Kent D.
Smith(10)
    
    
    75,001
    
    
    
    *Ralph J.
Yarro, III(11)
    
    
    14,758,286
    
    
    
    42.28
    %Michael
Pehl(12)
    

    
    5,347,671
    
    
    
    13.38
    %Keith
Clark(13)
    
    
    645,274
    
    
    
    1.83
    %Todd
Schaeffer(14)
    
    
    211,391
    
    
    
    *Richard L.
Ruskin(15)
    
    
    95,667
    
    
    
    *Bill
Decker(16)
    
    
    758,750
    
    
    
    2.17
    %Nick
Boland(17)
    
    
    448,047
    
    
    
    1.28
    %All
directors and officers as a group (13 persons)(18)
    
    
    23,955,869
    
    
    
    60.80
    %
   *Less than 1%(1)
    
    Unless otherwise indicated, the address for each beneficial owner is
14661 Franklin Avenue, Tustin, CA 92780.(2)
    
    Except as indicated in the footnotes to this table and pursuant to
applicable community property laws, the Company believes that the persons
named in this table have sole voting and investment power with respect to
all shares.(3)
    
    Based on the Schedule 13D filed with the SEC on February 24, 2004.(4)
    
    Based on the Schedule 13G filed with the SEC on June 29, 2004. Includes
1,191,159 shares issuable upon exercise of warrants. The warrants are
exercisable after December 20, 2004. Please see discussion above under
the section Voting at the Annual Meeting regarding the June 2004 private
placement and the proxy agreement among Canopy and the Series A investors.(5)
    
    Includes 1,190,111 shares issuable upon exercise of options exercisable
within 60 days of July 9, 2004.(6)
    
    Represents 85,001 shares issuable upon exercise of options exercisable
within 60 days of July 9, 2004.(7)
    
    Represents 140,001 shares issuable upon exercise of options exercisable
within 60 days of July 9, 2004. 41




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(8)
    
    Represents shares owned by Canopy, plus 41,668 shares issuable upon
exercise of options exercisable within 60 days of July 9, 2004. Mr. Mott
is Vice President, Treasurer and Chief Financial Officer of Canopy.
Except to the extent of his pecuniary interest therein, Mr. Mott disclaims
beneficial ownership of all shares held by Canopy.(9)
    
    Represents 80,001 shares issuable upon exercise of options exercisable
within 60 days of July 9, 2004.(10)
    
    Represents 75,001 shares issuable upon exercise of options exercisable
within 60 days of July 9, 2004.(11)
    
    Represents shares owned by Canopy, 10,000 shares owned by Mr. Yarro, plus
285,001 shares issuable upon exercise of options and warrants exercisable
within 60 days of July 9, 2004. Mr. Yarro is President, Chief Executive
Officer and a member of the Board of Directors of Canopy. Except to the
extent of his pecuniary interest therein, Mr. Yarro disclaims beneficial
ownership of all shares held by Canopy.(12)
    
    Represents shares owned by Advent International Corporation. Mr. Pehl is
an Operating Partner of Advent. Except to the extent of his pecuniary
interest therein, Mr. Pehl disclaims beneficial ownership of all shares
held by Advent. Michael Pehl became a Director on July 17, 2004. Please
see discussion above under the section Voting at the Annual Meeting
regarding the June 2004 private placement and the proxy agreement among
Canopy and the Series A investors.(13)
    
    Includes 645,062 shares issuable upon exercise of options exercisable
within 60 days of July 9, 2004.(14)
    
    Represents 211,391 shares issuable upon exercise of options exercisable
within 60 days of July 9, 2004.(15)
    
    Includes 91,667 shares issuable upon exercise of options exercisable
within 60 days of July 9, 2004.(16)
    
    Includes 338,750 shares issuable upon exercise of options exercisable
within 60 days of July 9, 2004.(17)
    
    Includes 447,047 shares issuable upon exercise of options exercisable
within 60 days of July 9, 2004.(18)
    
    Represents shares held by entities affiliated with directors and
executive officers of the Company as described above, including an
aggregate of 4,821,860 shares issuable upon exercise of stock options and
warrants exercisable within 60 days of July 9, 2004. The warrants held by
Advent are exercisable after December 20, 2004. 
 Item 13. Certain Relationships And Related Transactions Certain Relationships And Related Transactions In November 2002, the company entered into an agreement with Comerica Bank
for a line of credit of $7,000,000 at an interest rate equal to the prime rate.
The line of credit is secured by a letter of credit that is guaranteed by
Canopy. Canopys guarantee was to mature on November 30, 2003, but on June 30,
2003, the company received an extension on the letter of credit for $7,000,000
until June 30, 2004. On June 18, 2004, the Company received an additional
extension of the letter of credit for $7,000,000 until June 30, 2005. Also on
June 18, 2004, the Company received an additional renewal on the Comerica line
of credit for $7,000,000 until May 31, 2005. Canopys obligations under the
guaranty are secured by a lien in favor of Canopy on all of the Companys
assets. During fiscal year 2004, the Companys total purchases of goods and
services from Directpointe (formerly known as Center 7, Inc.) were $140,000.
Canopy has an equity interest in Directpointe. During fiscal year 2004, the
Companys total sales of goods and services to companies affiliated with Canopy
were $85,000. These purchases and sales were made in the ordinary course of
business on the Companys standard terms and conditions. Thomas P. Raimondi, Jr., our President, Chief Executive Officer and
Chairman of the Board of Directors, is a member of the Board of Directors of
SCO. Mr. Yarro, a director of our Company, is President, Chief Executive
Officer and a member of the Board of Directors of Canopy and is Chairman of the
Board of Directors of SCO. Mr. Mott, a director of our Company, is Vice
President, Treasurer and Chief Financial Officer of Canopy. Canopy
beneficially owns 38.7% of the outstanding shares of common stock of SCO based
on the Definitive Proxy Statement filed with the SEC on February 27, 2004. The Companys certificate of incorporation authorizes the Company to enter
into indemnification agreements with each of its directors and officers. The
Company has entered into indemnification agreements with its directors and
officers, which provide for the indemnification of the Companys directors or
officers against any and all expenses, judgments, fines, penalties and amounts
paid in settlement, to the fullest extent permitted by law. 
 ITEM 14.Principal Accounting Fees And Services Audit, Audit-Related And Tax Fees The following tables present fees for professional services rendered by
KPMG LLP and Grant Thornton LLP for the audit of the Companys annual financial
statements in fiscal year 2003 and 2004, and fees billed for other services
rendered by KPMG LLP and Grant Thornton LLP. 42




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FEES PAID TO KPMG LLP Audit
    
    Audit-Related
    
    TaxFees($)
    
    Fees($)(1)
    
    Fees($)(2)2004
    
    
    35,340
    
    
    
    51,100
    
    
    
    78,1852003
    
    
    349,000
    
    
    
    4,200
    
    
    
    170,000
   (1)
    
    Audit related fees consisted principally of audits of financial
statements of certain employee benefit plans.(2)
    
    Other non-audit fees consisted principally of tax compliance and tax
consulting services. Financial Information Systems Design And Implementation Fees KPMG LLP performed no services and no fees were incurred or paid relating
to financial information systems design and implementation during fiscal years
2003 and 2004. All Other Fees No other services and no other fees were incurred or paid to KPMG LLP
during fiscal years 2003 and 2004. FEES PAID TO GRANT THORNTON LLP Audit
    
    Audit-Related
    
    TaxFees($)
    
    Fees($)(1)
    
    Fees($)(2)2004
    
    
    374,000
    
    
    
    15,000
    
    
    
    83,000
   (1)
    
    Audit related fees consisted principally of reviews of registration
statements, issuance of consents and audits of financial statements of
certain employee benefit plans.(2)
    
    Other non-audit fees consisted principally of tax compliance and tax
consulting services. Financial Information Systems Design And Implementation Fees Grant Thornton LLP performed no services and no fees were incurred or paid
relating to financial information systems design and implementation during
fiscal year 2004. All Other Fees No other services and no other fees were incurred or paid to Grant
Thornton LLP during fiscal year 2004. Policy On Audit Committee Pre-Approval Of Audit And Permissible Non-Audit
Services Of Independent Auditor Consistent with SEC policies regarding auditor independence, the Audit
Committee has responsibility for appointing, setting compensation and
overseeing the work of the independent auditor. In recognition of this
responsibility, the Audit Committee has established a policy to pre-approve all
audit and permissible non-audit services provided by the independent auditor. Prior to engagement of the independent auditor for the next years audit,
the Companys management will submit an aggregate of services expected to be
rendered during that year for each of four categories of services to the Audit
Committee for approval.  1.
    
    Audit services include audit work performed in the preparation
of financial statements, as well as work that generally only the
independent auditor can reasonably be expected to provide, including
comfort letters, statutory audits, and attest services and
consultation regarding financial accounting and/or reporting
standards. 43




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2.
    
    Audit-related services are for assurance and related services
that are traditionally performed by the independent auditor,
including review of registration statements, issuances of consents,
due diligence related to mergers and acquisitions, employee benefit
plan audits, and special procedures required to meet certain
regulatory requirements.3.
    
    Tax services include all services performed by the independent
auditors tax personnel except those services specifically related to
the audit of the financial statements, and includes fees in the areas
of tax compliance, tax planning, and tax advice.4.
    
    Other fees are those associated with services not captured in
the other categories. The Company generally doesnt request such
services from the independent auditor. Prior to engagement, the Audit Committee pre-approves these services by
category of service. The fees are budgeted and the Audit Committee requires
the independent auditor and management to report actual fees versus the budget
periodically throughout the year by category of service. During the year,
circumstances may arise when it may become necessary to engage the independent
auditor for additional services not contemplated in the original pre-approval.
In those instances, the Audit Committee requires specific pre-approval before
engaging the independent auditor. The Audit Committee may delegate pre-approval authority to one or more of
its members. The member to whom such authority is delegated must report, for
informational purposes only, any pre-approval decisions to the Audit Committee
at its next scheduled meeting. 
 PART IV 
 Item 15.Exhibits, Financial Statement Schedules, and Reports on Form 8-K The following Consolidated Financial Statements of MTI and the Reports of
Independent Registered Public Accounting Firms are attached hereto beginning on
pages 37 and 34, respectively. (a)(1) Consolidated Financial Statements: Report of Independent Registered Public Accounting Firm  Grant Thornton
LLP Independent Auditors Report  BDO Simpson Xavier Report of Independent Registered Public Accounting Firm  KPMG LLP Consolidated Balance Sheets as of April 3, 2004 and April 5, 2003 Consolidated Statements of Operations for the fiscal years ended 2004,
2003 and 2002 Consolidated Statements of Stockholders Equity for the fiscal years ended
2004, 2003 and 2002 Consolidated Statements of Cash Flows for the fiscal years ended 2004,
2003 and 2002 Notes to Consolidated Financial Statements (2) The following financial statement schedule for fiscal years 2004, 2003
and 2002 is submitted herewith: Schedule II  Valuation and Qualifying Accounts (See page 77) All other schedules are omitted because they are not applicable or
the required information is shown in the Consolidated Financial
Statements or notes thereto. 44




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(3) Exhibits An exhibit index has been filed as part of this report and is
incorporated herein by this reference. (b) Reports on Form 8-K A Current Report on Form 8-K, dated February 17, 2004, was filed during
the fourth quarter of 2004 pursuant to Item 12 containing the press release
relating to the Companys financial results for the quarterly period ended
January 3, 2004. (The information in the foregoing report on Form 8-K,
including all exhibits thereto, was furnished pursuant to Item 9 or 12 of Form
8-K and shall not be deemed filed for the purposes of Section 18 of the
Securities Exchange Act of 1934, as amended, or otherwise subject to the
liability of that section, nor shall it be deemed incorporated by reference
herein.) 45




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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
22nd day of
December, 2004. MTI TECHNOLOGY CORPORATIONBy:
    
    /s/ THOMAS P. RAIMONDI, JR.Thomas P. Raimondi, Jr.Chairman, President and Chief Executive Officer
 Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and on
the dates indicated. Signature
    
    Title
    
    Date/s/ Thomas P. Raimondi, Jr.
    
    Chairman, President and Chief Executive Officer
(Principal Executive Officer)
    
    December 22, 2004/s/ Scott Poteracki
    
    Chief Financial Officer and Secretary (Principal
Financial & Accounting Officer)
    
    December 22, 2004Franz L. Cristiani*
    
    Director
    
    December 22, 2004Val Kreidel*
    
    Director
    
    December 22, 2004Darcy G. Mott*
    
    Director
    
    December 22, 2004Michael Pehl*
    
    Director
    
    December 22, 2004John Repp*
    
    Director
    
    December 22, 2004Kent D. Smith*
    
    Director
    
    December 22, 2004Ralph J. Yarro, III*
    
    Director
    
    December 22, 2004* Executed pursuant to a power ofattorney previously filed./s/ Thomas P. Raimondi, Jr.
 46




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INDEX TO FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm  Grant Thornton LLP
    
    
    48Independent Auditors Report  BDO Simpson Xavier
    
    
    49Report of Independent Registered Public Accounting Firm  KPMG LLP
    
    
    50Consolidated Balance Sheets as of April 3, 2004 and April 5, 2003
    
    
    51Consolidated Statements of Operations for the fiscal years ended April 3, 2004, April 5, 2003 and April 6, 2002
    
    
    52Consolidated Statements of Stockholders Equity for the fiscal years ended April 3, 2004, April 5, 2003 and April 6, 2002
    
    
    53Consolidated Statements of Cash Flows for the fiscal years ended April 3, 2004, April 5, 2003 and April 6, 2002
    
    
    54Notes to Consolidated Financial Statements
    
    
    55FINANCIAL STATEMENT SCHEDULESchedule II  Valuation and Qualifying Accounts
    
    
    77
 47




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Shareholders MTI Technology Corporation We have audited the accompanying consolidated balance sheet of MTI
Technology Corporation and subsidiaries as of April 3, 2004, and the related
consolidated statements of operations, stockholders equity, and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Companys management. Our responsibility is to express
an opinion on these financial statements based on our audit. We did not audit
the financial statements of MTI France SA, a consolidated subsidiary, which
statements reflect total assets and revenue constituting 18% and 16%,

respectively, in 2004 of the related consolidated totals. Those statements
were audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to the amounts included for MTI France SA, is
based solely on the report of the other auditors. We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). 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
audit provides a reasonable basis for our opinion. In our opinion, based on our audit and the report of the other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of MTI Technology
Corporation and subsidiaries as of April 3, 2004, and the results of their
consolidated operations and their consolidated cash flows for the year then
ended, in conformity with accounting principles generally accepted in the
United States of America. We have also audited Schedule II of MTI Technology Corporation for the
year ended April 3, 2004. In our opinion, this 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. /s/ GRANT THORNTON LLP Irvine, California
June 7, 2004 (except for note 16,
as to which the date is June 18, 2004) 48




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INDEPENDENT AUDITORS REPORT To the Board of Directors and Shareholders MTI France SA: We have audited the balance sheet of MTI France SA as of April 3, 2004,
and the related statements of operations, stockholders equity and cash flows
for year ended April 3, 2004. These financial statements are the
responsibility of the Companys management. Our responsibility is to express
an opinion on these financial statements based on our audit. We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board. 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 audit provides a
reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of April 3, 2004, and the
results of its operations and cash flows for the year ended April 3, 2004, in

conformity with accounting principles generally accepted in the United States
of America. /s/ BDO SIMPSON XAVIER Dublin, Ireland
June 4, 2004 49




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors MTI Technology Corporation: We have audited the accompanying consolidated balance sheet of MTI
Technology Corporation and subsidiaries as of April 5, 2003, and the related
consolidated statements of operations, stockholders equity and cash flows for
each of the years in the two-year period ended April 5, 2003. In connection
with our audits of the consolidated financial statements, we also have audited
the accompanying financial statement schedule of Valuation and Qualifying
Accounts for the years ended April 5, 2003 and April 6, 2002. 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 the standards of the Public
Company Accounting Oversight Board (United States). 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, 2003, and the results of
their operations and their cash flows for each of the years in the two-year
period ended April 5, 2003, in conformity with U.S. 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. As discussed in note 1 to the consolidated financial statements, effective
April 8, 2001, the Company adopted Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets. /s/ KPMG LLP Costa Mesa, California
May 23, 2003, except as to the second
paragraph of note 7, which is as
of June 30, 2003 50




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MTI TECHNOLOGY CORPORATION CONSOLIDATED BALANCE SHEETS April 3,
    
    April 5,2004
    
    2003(In thousands except pershare amounts)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    3,017
    
    
    $
    9,833Accounts receivable, less allowance for doubtful accounts and sales
returns
of $437 in 2004 and $476 in 2003
    
    
    22,352
    
    
    
    13,913Inventories
    
    
    6,186
    
    
    
    8,297Income tax refund and interest receivable
    
    
    2,464
    
    
    
    Prepaid expenses and other receivables
    
    
    5,792
    
    
    
    4,330Total current assets
    
    
    39,811
    
    
    
    36,373Property, plant and equipment, net
    
    
    1,401
    
    
    
    2,833Goodwill, net
    
    
    5,184
    
    
    
    5,184Other
    
    
    216
    
    
    
    166$
    46,612
    
    
    $
    44,556LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Line of credit
    
    $
    3,933
    
    
    $
    1,740Current portion of capital lease obligations
    
    
    176
    
    
    
    161Accounts payable
    
    
    13,650
    
    
    
    8,562Accrued liabilities
    
    
    6,097
    
    
    
    7,321Accrued restructuring charges
    
    
    1,830
    
    
    
    2,931Deferred revenue
    
    
    11,382
    
    
    
    13,587Total current liabilities
    
    
    37,068
    
    
    
    34,302Capital lease obligations, less current portion
    
    
    95
    
    
    
    286Deferred revenue
    
    
    2,308
    
    
    
    994Total liabilities
    
    
    39,471
    
    
    
    35,582Commitments and contingencies
    
    
    
    
    
    
    Stockholders equity:Preferred stock, $.001 par value; authorized 5,000 shares; issued and
outstanding, none
    
    
    
    
    
    
    Common stock, $.001 par value; authorized 80,000 shares; issued and
outstanding 34,473 and 32,969 shares in 2004 and 2003, respectively
    
    
    34
    
    
    
    33Additional paid-in capital
    
    
    136,316
    
    
    
    134,931Accumulated deficit
    
    
    (126,149
    )
    
    
    (122,282
    )Accumulated other comprehensive loss
    
    
    (3,060
    )
    
    
    (3,708
    )Total stockholders equity
    
    
    7,141
    
    
    
    8,974$
    46,612
    
    
    $
    44,556
 See accompanying notes to consolidated financial statements. 51




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MTI TECHNOLOGY CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS Fiscal Years Ended April 3, 2004, April 5, 2003 and April 6, 2002 2004
    
    2003
    
    2002(In thousands, except per share data)Net product revenue
    
    $
    46,442
    
    
    $
    40,101
    
    
    $
    69,519Service revenue
    
    
    36,723
    
    
    
    42,285
    
    
    
    48,399Total revenue, including $85, $104 and $836 from related
parties in 2004, 2003 and 2002, respectively
    
    
    83,165
    
    
    
    82,386
    
    
    
    117,918Product cost of revenue
    
    
    37,499
    
    
    
    32,948
    
    
    
    56,466Service cost of revenue
    
    
    26,390
    

    
    
    27,640
    
    
    
    29,751Total cost of revenue
    
    
    63,889
    
    
    
    60,588
    
    
    
    86,217Gross profit
    
    
    19,276
    
    
    
    21,798
    
    
    
    31,701Operating expenses:Selling, general and administrative
    
    
    26,405
    
    
    
    27,754
    
    
    
    43,211Research and development
    
    
    776
    
    
    
    5,238
    
    
    
    12,742Restructuring charges
    
    
    (211
    )
    
    
    1,467
    
    
    
    4,911Total operating expenses
    
    
    26,970
    
    
    
    34,459
    
    
    
    60,864Operating loss
    
    
    (7,694
    )
    
    
    (12,661
    )
    
    
    (29,163
    )Other income (expense):Interest expense
    
    
    (242
    )
    
    
    (299
    )
    
    
    (236
    )Interest income
    
    
    865
    
    
    
    76
    
    
    
    514Gain (loss) on foreign currency transactions
    
    
    29
    
    
    
    639
    
    
    
    (542
    )Other income, net
    
    
    8
    
    
    
    1,231
    
    
    
    3,904Equity in net loss and write-down of net investment of
affiliate
    
    
    
    
    
    
    
    
    
    
    (9,504
    )Loss before income taxes
    
    
    (7,034
    )
    
    
    (11,014
    )
    
    
    (35,027
    )Income tax expense (benefit)
    
    
    (3,168
    )
    
    
    205
    
    
    
    24,598Net loss
    
    $
    (3,866
    )
    
    $
    (11,219
    )
    
    $
    (59,625
    )Net loss per share:Basic and diluted
    
    $
    (0.12
    )
    
    $
    (0.34
    )
    
    $
    (1.83
    )Weighted average shares used in per share computations:Basic and diluted
    
    
    33,482
    
    
    
    32,852
    
    
    
    32,548
 See accompanying notes to consolidated financial statements. 52




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MTI TECHNOLOGY CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY Fiscal Years Ended April 3, 2004, April 5, 2003 and April 6, 2002 AccumulatedCommon Stock
    
    Additional
    
    
    
    
    
    Other
    
    Total
    
    TotalPaid-in
    
    Accumulated
    
    Comprehensive
    
    Stockholders
    
    ComprehensiveShares
    
    Amount
    
    Capital
    
    Deficit
    
    Loss
    
    Equity
    
    Income (Loss)(In thousands)Balance at April 7, 2001
    
    
    32,357
    
    
    $
    33
    
    
    $
    133,784
    
    
    $
    (51,050
    )
    
    $
    (4,017
    )
    
    $
    78,750Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (59,625
    )
    
    
    
    
    
    
    (59,625
    )
    
    $
    (59,625
    )Foreign currency translation
adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    338
    
    
    
    338
    
    
    
    338Comprehensive loss for the
year ended April 6, 2002
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (59,287
    )Exercise of stock options
    
    
    131
    
    
    
    
    
    
    
    202
    
    
    
    
    
    
    
    
    
    
    
    202Treasury shares issued under
Employee Stock Purchase
Plan
    
    
    81
    
    
    
    
    
    
    
    135
    
    
    
    
    
    
    
    
    
    
    
    135Treasury shares issued for
employee compensation
    
    
    106
    
    
    
    
    
    
    
    201
    
    
    
    (27
    )
    
    
    
    
    
    
    174Issuance of warrant
    
    
    
    
    
    
    
    
    
    
    139
    
    
    
    
    
    
    
    
    
    
    
    139Balance at April 6, 2002
    
    
    32,675
    
    
    $
    33
    
    
    $
    134,461
    
    
    $
    (110,702
    )
    
    $
    (3,679
    )
    
    $
    20,113Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,219
    )
    
    
    
    
    
    
    (11,219
    )
    
    $
    (11,219
    )Foreign currency translation
adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (29
    )
    
    
    (29
    )
    
    
    (29
    )Comprehensive loss for the
year ended April 5, 2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (11,248
    )Shares issued under
Employee Stock Purchase
Plan
    
    
    142
    
    
    
    
    
    
    
    429
    
    
    
    (361
    )
    
    
    
    
    
    
    68Shares issued for employee
compensation
    
    
    152
    
    
    
    
    
    
    
    41
    
    
    
    
    
    
    
    
    
    
    
    41Balance at April 5, 2003
    
    
    32,969
    
    
    $
    33
    
    
    $
    134,931
    
    
    $
    (122,282
    )
    
    $
    (3,708
    )
    
    $
    8,974Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,866
    )
    
    
    
    
    
    
    (3,866
    )
    
    $
    (3,866
    )Foreign currency translation
adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    648
    
    
    
    648
    
    
    
    648Comprehensive loss for the
year ended April 5, 2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (3,218
    )Shares issued under
Employee Stock Purchase
Plan
    
    
    133
    
    
    
    
    
    
    
    76
    
    
    
    
    
    
    
    
    
    
    
    76Exercise of stock options
    
    
    1,331
    
    
    
    1
    
    
    
    1,269
    
    
    
    
    
    
    
    
    
    
    
    1,270Deferred compensation
    
    
    
    
    
    
    
    
    
    
    40
    
    
    
    
    
    
    
    
    
    
    
    40Warrants conversion
    
    
    40
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance at April 3, 2004
    
    
    34,473
    
    
    $
    34
    
    
    $
    136,316
    
    
    $
    (126,148
    )
    
    $
    (3,060
    )
    
    $
    7,142
 See accompanying notes to consolidated financial statements. 53




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MTI TECHNOLOGY CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS Fiscal Years Ended April 3, 2004, April 5, 2003 and April 6, 2002 2004
    
    2003
    
    2002(In thousands)Cash flows from operating activities:Net loss
    
    $
    (3,866
    )
    
    $
    (11,219
    )
    
    $
    (59,625
    )Adjustments to reconcile net loss to net cash provided by (used
in) operating activities:Depreciation and amortization
    
    
    1,419
    
    
    
    3,460
    
    
    
    6,798Provision for (recovery of) sales returns and losses on
accounts
receivable, net
    
    
    25
    
    
    
    (602
    )
    
    
    1,884Provision for inventory obsolescence
    
    
    1,469
    
    
    
    1,950
    
    
    
    8,850Loss on disposal of fixed assets
    
    
    210
    
    
    
    1,186
    
    
    
    1,101Deferred income tax expense
    
    
    
    
    
    
    
    
    
    
    24,300Deferred revenue
    
    
    (887
    )
    
    
    (1,315
    )
    
    
    (7,841
    )Net loss in equity of affiliate
    
    
    
    
    
    
    
    
    
    
    9,504Restructuring charges
    
    
    (211
    )
    
    
    1,467
    
    
    
    4,473Non-cash compensation from issuance of restricted stock,
options and warrants
    
    
    40
    
    
    
    41
    
    
    
    154Gain on sale of investment
    
    
    
    
    
    
    (1,070
    )
    
    
    Changes in assets and liabilities, net of effect of acquisitions:Accounts receivable
    
    
    (8,540
    )
    
    
    4,680
    
    
    
    1,743Inventories
    
    
    625
    
    
    
    4,799
    
    
    
    10,541Prepaid expenses, other receivables and other assets
    
    
    (4,087
    )
    
    
    2,678
    
    
    
    (1,658
    )Accounts payable
    
    
    5,052
    
    
    
    (940
    )
    
    
    (1,517
    )Accrued and other liabilities
    
    
    (2,202
    )
    
    
    (4,710
    )
    
    
    (5,089
    )Net cash provided by (used in) operating activities
    
    
    (10,953
    )
    
    
    405
    
    
    
    (6,382
    )Cash flows from investing activities:Capital expenditures for property, plant and equipment
    
    
    (157
    )
    
    
    (378
    )
    
    
    (3,311
    )Proceeds from the sale of investment
    
    
    
    
    
    
    1,070
    
    
    
    Proceeds from the sale of property, plant and equipment
    
    
    50
    
    
    
    7
    
    
    
    Net cash provided by (used in) investing activities
    
    
    (107
    )
    
    
    699
    
    
    
    (3,311
    )Cash flows from financing activities:Borrowings under line of credit
    
    
    5,393
    
    
    
    4,490
    
    
    
    Borrowings under note payable
    
    
    
    
    
    
    
    
    
    
    1,900Proceeds from issuance of common stock, treasury shares and
exercise of options and warrants
    
    
    1,346
    
    
    
    68
    
    
    
    496Payment of capital lease obligations
    
    
    (176
    )
    
    
    (149
    )
    
    
    (152
    )Repayments of notes payable
    
    
    
    
    
    
    (1,900
    )
    
    
    Repayments of line of credit
    
    
    (3,200
    )
    
    
    (2,750
    )
    
    
    Net cash provided by (used in) financing activities
    
    
    3,363
    
    
    
    (241
    )
    
    
    2,244Effect of exchange rate changes on cash
    
    
    881
    
    
    
    550
    
    
    
    (451
    )Net increase (decrease) in cash and cash equivalents
    
    
    (6,816
    )
    
    
    1,413
    
    
    
    (7,900
    )Cash at beginning of year
    
    
    9,833
    
    
    
    8,420
    
    
    
    16,320Cash at end of year
    
    $
    3,017
    
    
    $
    9,833
    
    
    $
    8,420Supplemental disclosures of cash flow information:Cash paid during the period for:Interest
    
    $
    241
    
    
    $
    443
    
    
    $
    98Income taxes
    
    
    166
    
    
    
    105
    
    
    
    
 See accompanying notes to consolidated financial statements. 54




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MTI TECHNOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share data) (1) Summary of Significant Accounting Policies Company The Company is a system integrator providing storage solutions for the
mid-range enterprise market. Historically, the Company partnered with
independent storage technology companies to develop, integrate and maintain
high-performance, high-availability storage solutions for the mid-range and
Global 2000 companies worldwide. The Company continues to service select third
party hardware and software, and its professional services organization
provides planning, consulting and implementation support for storage products
from other leading vendors. The Company believes that there is as much value
in creating, integrating, implementing and providing umbrella services around
these various technologies as there is in developing the raw technology. On
March 31, 2003, the Company entered into a reseller agreement with EMC
Corporation, a world leader in information storage systems, software, networks
and services, and has become a reseller and service provider of EMC Automated
Networked Storage TM systems and software. Although the Company intends to
focus primarily on EMC products, it will continue to support and service
customers that continue to use MTI-branded RAID controller technology and
partnered independent storage technology. The Company believes that it can
differentiate itself through its ability to offer umbrella services on a wide
range of storage products covering online storage, replicated site environments
and data protection from leading technology companies. Basis of Financial Statement Presentation and Principles of Consolidation The accompanying consolidated financial statements include the accounts of
MTI Technology Corporation and subsidiaries (the Company or MTI). All
significant inter-company accounts and transactions have been eliminated in
consolidation. Fiscal Year The Companys year-end is the first Saturday following March 31. Fiscal
years 2004, 2003 and 2002 ended on April 3, April 5 and April 6, respectively,
and consisted of 52 weeks. Revenue Recognition The Company derives revenue from sales of products and services. The
following summarizes the major terms of the contractual relationships with
customers and the manner in which the Company accounts for sales transactions. Product Revenue Product revenue consists of the sale of disk and tape based hardware and
software. The Company recognizes revenue pursuant to Emerging Issues Task
Force No. 00-21, Revenue Arrangements with Multiple Deliverables (EITF 00-21)
and Staff Accounting Bulletin No. 104, Revenue Recognition in Financial
Statements (SAB 104). In accordance with these revenue recognition guidelines,
if the arrangement between the Company and the customer does not require
significant production, modification, or customization of hardware or software,
revenue is recognized when all of the following criteria are met:  o
    
    persuasive evidence of an arrangement existso
    
    delivery has occurredo
    
    fee is fixed or determinableo
    
    collectibility is probable 55




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MTI TECHNOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) Generally, product sales are not contingent upon customer testing,
approval and/or acceptance. However, if sales require customer acceptance or
include significant post-delivery obligations, revenue is recognized upon
customer acceptance or fulfillment of any post delivery obligations. Product sales with post-delivery
obligations generally relate to professional services, including installation
services or other projects. Professional services revenue is not recognized
until the services have been completed. In transactions where the Company sells directly to an end user,
generally there are no acceptance clauses. However, the Company also sells to
leasing companies who in turn lease the product to their lessee, the end user.
For this type of sale, generally there are lessee acceptance criteria in the
purchase order or contract. For these transactions, the Company defers the
revenue until written acceptance is received from the lessee.
Generally, credit terms with customers range from net 30 to net 60. Product returns are estimated in accordance with Statement of Financial
Accounting Standards No. 48, Revenue Recognition When Right of Return Exists
(Statement 48). Customers have a limited right of return which allows them to
return non-conforming products. Accordingly, reserves for estimated future
returns are provided in the period of sale based on contractual terms and
historical data and are recorded as a reduction of revenue. In bundled sales transactions that include software combined with hardware
and services, the software is considered incidental to the overall product
solution, and therefore the Company applies EITF 00-21 to account for these
multiple element transactions  see disclosure below. Sales of software
products on a standalone basis are not frequent. These sales are generally
add-on sales to customers that have previously purchased hardware. For sales
transactions that include software products on a stand-alone basis, coupled
with software maintenance contracts, the Company applies Statement of Position
97-2, Software Revenue Recognition (SOP 97-2) as amended by Statement of
Position 98-9 Modification of SOP 97-2 with Respect to Certain Transactions
(SOP 98-9). The total arrangement revenue is allocated between the software
and the services using the residual method, whereby revenue is first allocated
to the undelivered element, the services, using VSOE. VSOE for software
service contracts is established based on stand-alone renewal rates. Revenue
is recognized from software licenses, provided all the revenue recognition
criteria noted above have been met, at the time the license is delivered to the
customer. The Company recognizes revenue from software maintenance agreements
ratably over the term of the related agreement. Service revenue Service revenue is generated from the sale of professional services,
maintenance contracts and time and materials billings. The following describes
how the Company accounts for service transactions, provided all the other
revenue recognition criteria noted above have been met. Generally,
professional services revenue, which includes installation, training,
consulting and engineering services, is recognized upon completion of the
services. If the professional
service project includes independent milestones, revenue is recognized as
milestones are met and upon acceptance from the customer. Maintenance revenue is generated from the sale of hardware and software
maintenance contracts. These contracts generally range from one to three
years. Maintenance revenue is recorded as deferred revenue and is recognized
as revenue ratably over the term of the related agreement. Multiple element arrangements The Company considers sales contracts that include a combination of
systems, software or services to be multiple element arrangements. Revenue
recognition with multiple elements whereby software is incidental to the
overall product solution is recorded in accordance with EITF 00-21. An item is
considered a separate element if it involves a separate earnings process. If an
arrangement includes undelivered elements that are not essential to the
functionality of the delivered elements, the Company uses the residual method,
whereby it defers the fair value of the undelivered elements with the residual
revenue allocated to the delivered elements. Discounts are allocated only to
the delivered elements. Fair value is determined by examining renewed service
contracts and based upon the price charged when the element is sold separately
or prices provided by vendors if sufficient standalone sales information is not
available. Undelivered elements typically include installation, training,
warranty, maintenance and professional services. 56




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MTI TECHNOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) Other The Company considers sales transactions that are initiated by EMC and
jointly negotiated and closed by EMC and MTIs sales-force as Partner Assisted
Transactions (PATs). The Company recognizes revenue from PATs on a gross basis,
in accordance with EITF 99-19, because it bears the risk of returns and
collectability of the full accounts receivable. Product revenue of the
delivered items is recorded at residual value upon pickup by a common carrier
for Free Carrier (FCA) origin shipments. For FCA destination shipments, product
revenue is recorded upon delivery to the customer. If the Company subcontracts
the undelivered items such as maintenance and professional services to EMC or
other third parties, it records the costs of those items as deferred costs and
amortizes the costs using the straight-line method over the life of the
contract. The Company defers the revenue for the undelivered items at fair
value based upon list prices with EMC according to EITF 00-21. At times, MTIs
customers prefer to enter into service agreements directly with EMC. In such
instances, the Company may assign the obligation to perform services to EMC, or
other third parties, and therefore, it does not record revenue nor defer any
costs related to the services. Finally, upon assignment of maintenance and
professional services to EMC, EMC may elect to subcontract the professional
services to MTI. In this case, the Company defers the revenue for the
professional services at fair value according to EITF 00-21. For certain sales transactions, an escrow account is utilized to
facilitate payment obligations between all parties involved in the transaction.
In these transactions, generally the end-user or lessor will fund payment into
the escrow account and the bank will distribute the payment to each party in
the transaction pursuant to mutually agreed upon escrow instructions. The
Company only receives cash which represents the net margin on the sales
transaction. For these transactions, the Company recognizes revenue on a net
basis as the Company does not bear credit risk in the transaction. The Company may allow customers that purchase new equipment to trade-in
used equipment to reduce the purchase price under the sales contract. These
trade-in credits are considered discounts and are allocated to the delivered
elements in accordance with EITF 00-21. Thus, product revenue from trade-in
transactions is recognized net of trade-in value. Shipping Products are generally drop-shipped directly from suppliers to MTIs
customers. Upon the suppliers delivery to a carrier, title and risk of loss
pass to the Company. Revenue is recognized at the time of shipment when
shipping terms are Free Carrier (FCA) shipping point as legal title and risk of
loss to the product pass to the customer. For FCA destination shipments,
revenue is recorded upon delivery to the customer. For legacy sales, product
is shipped from the Companys facility in Ireland. The Company retains title
and risk of loss until the product clears U.S. customs and therefore revenue is
not recognized until the product clears customs for FCA origin shipments and
upon delivery to the customer for FCA destination shipments. 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. There were
no cash equivalents at April 3, 2004 and April 5, 2003. Inventories Inventories are valued at the lower of cost (first-in, first-out) or
market, net of an allowance for obsolete, slow-moving, and unsalable inventory.
The allowance is based upon managements review of inventories on-hand,
historical product sales, and future sales forecasts. Historically, the
Company used rolling forecasts based upon anticipated product orders to
determine its component and product inventory requirements. As a reseller, the
Company procures inventory primarily upon receipt of purchase orders from
customers; as such, management believes the risk of EMC production inventory
obsolescence is low. The Companys logistics inventory reserve is based on a
combined analysis of historical usage, current and anticipated maintenance
contract renewals and future product sales. 57




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MTI TECHNOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) 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
the assets. Plant equipment, office furniture and fixtures are amortized over
a period of two to five years. Computer equipment is amortized over five
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. Long-lived
assets are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying value of an asset may not be recoverable. If the
fair value is less that the carrying value, a loss is recognized for the
difference. Allowance for Doubtful Accounts and Sales Returns The Company maintains an allowance for doubtful accounts for estimated
sales returns and losses resulting from the inability of our customers to make
payments for products sold or services rendered. The Company analyzes accounts
receivable, customer credit-worthiness, current economic trends and changes in
customer payment terms when evaluating the adequacy of the allowance for
doubtful accounts and sales returns. All new customers are reviewed for
credit-worthiness upon initiation of the sales process. Accounting for Stock-Based Compensation The Company accounts for its stock-based awards to employees in accordance
with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued
to Employees (APB 25) and related interpretations, rather than the alternative
fair value accounting allowed by Statement of Financial Accounting Standards
No. (Statement) 123, Accounting for Stock Based Compensation. APB 25 provides
that compensation expense relative to the Companys employee stock options is
measured based on the intrinsic value of stock options granted and the Company
recognizes compensation expense in its statement of operations using the
straight-line method over the vesting period for fixed awards. Under Statement
123, the fair value of stock options at the date of grant is recognized in
earnings over the vesting period of the options. In December 2002, the
Financial Accounting Standards Board (FASB) issued Statement 148, Accounting
for Stock-Based Compensation  Transition and Disclosure. Statement 148 amends
Statement 123 to provide alternative methods of transition for a voluntary
change to the fair value method of accounting for stock-based employee
compensation. In addition, Statement 148 amends the disclosure requirements of
Statement 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method on reported results. The Company
adopted the disclosure provisions of Statement 148 as of April 5, 2003, and
continues to follow APB 25 for stock-based employee compensation. The following table shows pro forma net loss as if the fair value method
of Statement 123 had been used to account for stock-based compensation expense: 2004
    
    2003
    
    2002Net loss, as reported
    
    $
    (3,866
    )
    
    $
    (11,219
    )
    
    $
    (59,625
    )Add: Stock-based employee compensation expense
included in reported net loss, net of related tax effects
    
    
    
    
    
    
    41
    
    
    
    174Deduct: Stock-based employee compensation expense
determined under the fair value based method for all
awards, net of related tax effects
    
    
    (5,531
    )
    
    
    (9,413
    )
    
    
    (16,440
    )Pro forma net loss
    
    $
    (9,397
    )
    
    $
    (20,591
    )
    
    $
    (75,891
    )Net loss per share:Basic and diluted, as reported
    
    $
    (0.12
    )
    
    $
    (0.34
    )
    
    $
    (1.83
    )Basic and diluted, pro forma
    
    $
    (0.28
    )
    
    $
    (0.63
    )
    
    $
    (2.33
    )
 58




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MTI TECHNOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) The fair value of the options granted has been estimated at the date of
grant using the Black-Scholes option-pricing model. The following represents
the weighted-average fair value of options granted and the assumptions used for
the calculations: 2004
    
    2003
    
    2002Weighted-average fair value of options granted
    
    $
    1.49
    
    
    $
    0.49
    
    
    $
    1.48Expected volatility
    
    
    0.9
    
    
    
    1.5
    
    
    
    1.2Risk-free interest rate
    
    
    3.15
    %
    
    
    2.78
    %
    
    
    4.62
    %Expected life (years)
    
    
    5.0
    
    
    
    5.0
    
    
    
    5.0Dividend yield
    
    
    
    
    
    
    
    
    
    
    
 The Black-Scholes option valuation model was developed for use in
estimating the value of traded options that have no vesting restrictions and
are fully transferable. In addition, option valuation models require the input
of highly subjective assumptions, including expected stock price volatility. Income Taxes Under the asset and liability method of Statement 109, Accounting for
Income Taxes, 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 and operating loss and tax credit
carryforwards 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. Intangible Assets and Goodwill In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement 141, Business Combinations, and Statement 142, Goodwill and Other
Intangible Assets. The Company chose to early adopt the provisions of
Statement 142 effective April 8, 2001. The Company adopted Statement 141
immediately upon its release. Statement 141 requires that the purchase method
of accounting be used for all business combinations initiated after June 30,
2001. Statement 141 also specifies criteria intangible assets acquired in a
purchase method business combination must meet to be recognized and reported
apart from goodwill. Statement 142 requires that goodwill and intangible
assets with indefinite useful lives no longer be amortized, but instead tested
for impairment annually or whenever events or changes in circumstances indicate
that the carrying value may not be recoverable. Factors the Company considers
important which could trigger an impairment review include significant
underperformance relative to expected historical or projected future operating
results, significant changes in the manner of use of acquired assets or the
strategy for the overall business, and significant negative industry or
economic trends. Upon the adoption of Statement 142, the carrying value of the
Companys goodwill and other intangible assets was determined to not be
impaired. The Company completed its annual assessment for goodwill impairment
in the fourth quarter of fiscal year 2004. Based upon factors such as the
market valuation approach, comparison between the reporting units estimated
fair value using discounted cash flow projections over the next three years,
and carrying value, the Company concluded that there was no impairment of
goodwill. The provisions of Statement 142 were in effect for all periods
presented. Foreign Currency Translation The Company follows the principles of Statement 52, Foreign Currency
Translation, using the local currencies as the functional currencies of its
foreign subsidiaries. Accordingly, all assets and liabilities outside the U.S.
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 other accumulated comprehensive loss in stockholders
equity. A net foreign currency transaction exchange gain (loss) of $29, $639
and $(542) was realized in fiscal years 2004, 2003 and 2002, respectively. 59




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MTI TECHNOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) Concentration of Credit Risk and Dependence upon Suppliers Credit is extended to all customers based on financial condition and,
generally, collateral is not required. Concentrations of credit risk with
respect to trade receivables are limited because of the large number of
customers comprising the Companys customer base and dispersion across many
different industries and geographies. As of April 3, 2004, one customer
represented approximately 11% of accounts receivable. Effective March 31,
2003, the Company became a reseller of EMC disk-based storage products.
Therefore, the Company depends on EMC to manufacture and supply the Company
with their storage products. If the supply of EMC disk-based storage products
becomes disrupted for any reason, the Companys operations and financial
condition could be adversely impacted. Loss Per Share Basic loss per share is computed by dividing loss available to common
shareholders by the weighted-average number of common shares outstanding during
the period. Diluted loss per share is computed by dividing loss available to
common shareholders by the weighted-average number of common shares outstanding
during the period increased to include the number of additional common shares
that would have been outstanding if the dilutive potential common shares had
been issued. The dilutive effect of outstanding options and warrants is
reflected in diluted loss per share by application of the treasury-stock
method. Such shares are not included when there is a loss from continuing
operations as the effect would be anti-dilutive. Fair Value of Financial Instruments Statement 107, Disclosure about Fair Value of Financial Instruments,
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 3,
2004, the fair value of all financial instruments, including cash and cash
equivalents, accounts receivable, accounts payable, accrued liabilities,
capital lease obligation and line of credit approximate carrying value due to
their short-term nature and variable market interest rates. Reclassifications Certain reclassifications have been made to the fiscal year 2003 and 2002
financial statements to conform with the fiscal year 2004 presentation. Use of Estimates The financial statements have been prepared in conformity with accounting
principles generally accepted in the United States of America, and as such,
include amounts based upon informed estimates and judgments of management.
Actual results could differ from these estimates. Recently Adopted Accounting Standards The FASB issued Statement 143, Accounting for Asset Retirement
Obligations, addressing financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. Statement 143 requires an enterprise to record the
fair value of an asset retirement obligation as a liability in the period in
which it incurs a legal obligation associated with the retirement of a tangible
long-lived asset. Statement 143 also requires the enterprise to record the
contra to the initial obligation as an increase to the carrying amount of the
related long-lived asset and to depreciate that cost over the remaining useful
life of the asset. The liability is changed at the end of each period to
reflect the passage of time and changes in the estimated future cash flows
underlying the initial fair value measurement. Statement 143 is effective for
fiscal years beginning after June 15, 2002. The Company adopted Statement 143
in the first quarter of fiscal year 2004. The adoption did not have a material
impact on the results of its operations or financial position. 60




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MTI TECHNOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) The Emerging Issues Task Force EITF reached a consensus on its
conclusions for EITF 00-21, Revenue Arrangements with Multiple Deliverables.
EITF 00-21 provides accounting guidance for customer solutions where delivery
or performance of products, services and/or performance may occur at different
points in time or over different periods of time. Companies are required to
adopt this consensus for fiscal periods beginning after June 15, 2003, with
early application permitted. The Company adopted EITF 00-21 in the first
quarter of fiscal year 2004. The adoption did not have a material impact on
the results of its operations or financial position. In April 2003, the FASB issued Statement 149, an amendment of FASB
Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities, which requires prospective application for contracts entered into
or modified after June 30, 2003, except for contracts which exist in fiscal
quarters that began prior to June 15, 2003, and for hedging relationships
designated after June 30, 2003. For existing contracts for fiscal quarters
that began prior to June 15, 2003, the provisions of this Statement that relate
to Statement 133 Implementation Issues should continue to be applied in
accordance with their respective effective dates. Statement 149 requires that
contracts with comparable characteristics be accounted for similarly. The
Company adopted Statement 149 in the second quarter of fiscal year 2004.
Because the Company discontinued its hedging activities in fiscal 2003, the
adoption did not have a material impact on the results of its operations or
financial position. In May 2003, the FASB issued Statement 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity.
Statement 150 establishes standards for classifying and measuring certain
financial instruments with characteristics of both liabilities and equity.
Statement 150 requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances) because
that financial instrument embodies an obligation of the issuer. Statement 150
is effective for financial instruments entered into or modified after May 31,
2003, and otherwise is effective for the first interim period beginning after
June 15, 2003, except for mandatorily redeemable financial instruments of a
nonpublic entity for which this statement is effective for fiscal periods
beginning December 15, 2003. The Company adopted Statement 150 in the second
quarter of fiscal year 2004. The adoption did not have a material impact on
the results of its operations or financial position. In January 2003, the FASB issued Interpretation 46, Consolidation of
Variable Interest Entities. In December 2003, the FASB issued Interpretation
46 (Revised) (FIN 46-R) to address certain Interpretation 46 implementation
issues. FIN 46-R requires that the assets, liabilities and results of
activities of a Variable Interest Entity (VIE) be consolidated into the
financial statements of the enterprise that has a controlling interest in the
VIE. FIN 46-R also requires additional disclosures by primary beneficiaries
and other significant variable interest holders. For entities acquired or
created before February 1, 2003, this interpretation is effective no later than
the end of the first interim or reporting period ending after March 15, 2004,
except for those VIEs that are considered to be special purpose entities, for
which the effective date is no later than the end of the first interim or
annual reporting period ending after December 15, 2003. For all entities
acquired subsequent to January 31, 2003, this interpretation is effective as of
the first interim or annual period ending after December 31, 2003. The
adoption of the provisions of the interpretation did not have a material impact
on the Companys results of operations or financial position. In December 2003, The Securities and Exchange Commission issued Staff
Accounting Bulletin No. 104 (SAB No. 104), which supercedes SAB No. 101
Revenue Recognition in Financial Statements. The primary purpose of SAB No.
104 is to rescind accounting guidance contained in SAB No. 101 related to
multiple element revenue arrangements that was superceded as a result of the
issuance of EITF 00-21. While the wording of SAB No. 104 has changed to
reflect the issuance of EITF 00-21, the revenue recognition principles of SAB
No. 101 remain largely unchanged by the issuance of SAB No. 104. The adoption
of SAB No. 104 did not have a material impact on the Companys financial
position, results of operations or liquidity. (2) Restructuring and Other Reductions in Staff Due to a reduction in volume as well as a shift in focus from developing
technology to becoming a product integrator, the Company initiated an approved
restructuring plan in the fourth quarter of fiscal year 2002. It was
determined that certain underutilized facilities would be exited and a
significant number of positions, primarily in sales, marketing, research and
development and manufacturing would be terminated. It was also determined that
the Companys manufacturing and integration facility would be consolidated in
Dublin, Ireland. The majority of the 61




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MTI TECHNOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) restructuring actions were completed by the first quarter of fiscal year
2003. The Company remains liable on the leases of its abandoned facilities
through fiscal year 2006. Further detail regarding the restructuring charge is
below. During the fourth quarter of fiscal year 2002, the Company recorded a
restructuring charge of $4,911 which consisted of $4,266, $277 and $368 charges
related to the abandonment of either underutilized or historically unprofitable
facilities, a headcount reduction of 56 employees, and the disposal of certain
fixed assets, respectively. The cash outflow of the restructuring charge was
$277, related to severance, of which $70 was paid in fiscal year 2002. The
remaining $207 was paid in the first quarter of fiscal year 2003. During the first quarter of fiscal year 2003, the Company recorded a
restructuring charge of $1,046 which consisted of charges of $545 related to a
headcount reduction of 39 employees, or 15% of the Companys workforce, and
$501 related to the disposal or abandonment of fixed assets. Of the 39
employees terminated, 14, 3, 6, 1, 14, and 1 were from the Sales, Marketing,
General and Administrative, Customer Service, Research and Development, and
Manufacturing departments, respectively. The cash outflow of the restructuring
charge was $545 related to severance, which was paid during fiscal year 2003. In the third quarter of fiscal year 2003, the Company recorded a $221
additional restructuring charge due to lower than anticipated lease payments
from sub-lessees in its Sunnyvale, California and Raleigh, North Carolina
facilities. In the fourth quarter of fiscal year 2003, the Company recorded a $200
restructuring charge due to lower than anticipated lease payments from
sub-lessees in its European facilities. The Company also completed consolidating its manufacturing facility to
Dublin, Ireland, in July 2002, and reduced the amount of space leased for its
corporate headquarters by moving from Anaheim, California to Tustin, California
in January 2003. In the first quarter of fiscal year 2004, the Company recorded an
additional $40 restructuring charge due to lower than anticipated lease
payments from sub-lessees in its Sunnyvale, California facility. Also in the
first quarter of fiscal year 2004, the Company eliminated 18 full-time
positions, 1, 16 and 1 from the domestic general and administrative, global
customer solutions and manufacturing departments, respectively. In the second quarter of fiscal year 2004, the Company reversed $251 of
the restructuring charge due to higher than anticipated lease payments from
sub-lessees and usage of space in its Westmont, Illinois facility. In the third quarter of fiscal year 2004, the Company eliminated 21 full
time positions, 8 from its field service department, 7 from its manufacturing
department, 2 from its general and administrative department and 4 from its
sales department. The cash outflow from this reduction in staff was $228
related to severance, which was paid in the third quarter of fiscal year 2004.
This charge was not reflected as a restructuring charge as it was not part of
the Companys formal restructuring plan. The changes to the restructuring reserve established in the fourth quarter
of fiscal year 2002 are as follows: 62




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MTI TECHNOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) Abandoned facilities:Balance as of April 6, 2002
    
    $
    4,266Add: fiscal year 2003 restructuring charges
    
    
    421Less: fiscal year 2003 utilization
    
    
    (1,756
    )Balance as of April 5, 2003
    
    
    2,931Less: Current year restructuring charges, net of reversal
    
    
    (211
    )Less: Current year utilization
    
    
    (890
    )Balance as of April 3, 2004
    
    
    1,830Workforce reduction:Balance as of April 6, 2002
    
    
    207Add: Current year severance charges
    
    
    545Less: Current year severance payments
    
    
    (752
    )Balance as of April 5, 2003 and April 3, 2004
    
    
    Total accrued restructuring, as of April 3, 2004
    
    $
    1,830
 (3) Inventories Inventories consist of the following: April 3, 2004
    
    April 5, 2003Service spares and components
    
    $
    3,147
    
    
    $
    4,942Work-in-process
    
    
    2
    
    
    
    296Finished goods
    
    
    3,037
    
    
    
    3,059$
    6,186
    
    
    $
    8,297
 The above amounts are shown net of an inventory reserve for slow moving
and obsolete items of $5,387 and $6,754 as of April 3, 2004 and April 5, 2003,
respectively, of which $4,219 and $4,100 related to service spares and
component inventory. For the year ended April 3, 2004, the Company recorded an
additional inventory provision of $1,469 and reduced the reserve by $2,836
related to inventory disposals. The total inventory write-down in fiscal year
2004 was comprised of $1,200 related to logistics (spare parts) inventory and
$269 related to production inventory. The logistics inventory was written down
due to the continued decline in our legacy product installed base. As
maintenance contracts expire and are not renewed, the amount of logistics
inventory needed to support the legacy installed base decreases. The Company
performs a logistic inventory reserve analysis quarterly based on review of
historical usage, current and anticipated maintenance contract renewals and
future product sales. The $0.2 million write-down of production inventory was
due to technological obsolescence of certain legacy products. The inventory write-down in fiscal year 2003 was $1.9 million. This
write-down was comprised of $0.9 million related to logistics inventory and
$1.0 million related to production inventory. The logistics inventory
write-down was due to the declining installed base as noted above. The
production inventory write-down was related to technological obsolescence of
legacy products, specifically for the Vivant, Vcache and S-200 product lines. The inventory write-down in fiscal year 2002 was $8.8 million. This
write-down all related to production inventory. This write-down was the result
of two factors: 1) due to declining revenue it was determined that there was
excess inventory on hand to meet future demand and 2) In 2002, MTI introduced a
new generation product line called the V400. This product utilized a Mylex
RAID controller card. MTI shifted focus to selling this product and as such,
much of the inventory that used the MTI proprietary controller card was
written-down. The majority of the inventory that was written-down was either scrapped
or sold to scrap dealers. 63




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MTI TECHNOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) (4) Composition of Certain Financial Statement Captions Prepaid expenses and other receivables are summarized as follows: April 3, 2004
    
    April 5, 2003Prepaid maintenance contracts
    
    $
    4,455
    
    
    $
    3,011Other
    
    
    1,337
    
    
    
    1,319$
    5,792
    
    
    $
    4,330
 Property, plant and equipment, at cost, are summarized as follows: April 3, 2004
    
    April 5, 2003Plant equipment, office furniture and fixtures
    
    $
    9,178
    
    
    $
    15,605Computer equipment
    
    
    12,307
    
    
    
    12,376Leasehold improvements
    
    
    2,452
    
    
    
    2,23223,937
    
    
    
    30,213Less accumulated depreciation and amortization
    
    
    22,536
    
    
    
    27,380$
    1,401
    
    
    $
    2,833
 Property under capitalized leases in the amount of $846 at April 3, 2004
and April 5, 2003, is included in plant equipment, office furniture and
fixtures. Accumulated amortization of this property under capital leases
amounted to $575 and $399 at April 3, 2004 and April 5, 2003, respectively. (5) Investment in Affiliate In August 1999, the Company purchased 5,333,333 shares of SCO (formerly
Caldera International, Inc.), representing approximately 25% of the outstanding
capital stock of SCO upon completion of the purchase. SCO develops and markets
software based on the Linux operating system and provides related services.
Canopy (a related party) owned all the issued and outstanding shares of SCO
before this transaction. Also, in August 1999, after the Companys initial investment in SCO, the
Companys percentage ownership was diluted to approximately 20% as a result of
Canopy exercising a convertible note payable from SCO. Additionally, on March
21, 2000, SCO completed its initial public offering, further diluting the
Companys percentage ownership to approximately 14%. The Company accounted for
its investment in SCO under the equity method because the Company had
significant influence, but not control, of the operations of SCO. This
significant influence was the result of two factors: 1) Mr. Ray Noorda was
Chairman of the Board of Directors for both MTI and Canopy. Canopy was the
majority shareholder of SCOs common stock; 2) Mr. Thomas Raimondi, Jr., MTIs
CEO and Mr. Dale Boyd, MTIs CFO were also on the Board of Directors of SCO,
effectively giving MTI three out of the seven SCO board seats. These
relationships allowed MTI to exercise significant influence over the activities
of SCO. The original investment in SCO was $7,598 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 $1,598, including the issuance of a
warrant to purchase 150,000 shares of the Companys common stock. On March 21,
2000, SCO completed its initial public offering. The Company recorded its
share of the change in the affiliates equity resulting from the public
offering as an increase to additional paid-in-capital of $6,194, net of the tax
impact of $3,336. The excess of the Companys investment in SCO over the
related underlying equity in net assets of $6,931 was being amortized on a
straight-line basis over seven years. However, the Company adopted Statement
142 as of April 8, 2001, the beginning of fiscal year 2002, and therefore,
ceased to amortize the remaining balance of goodwill related to the investment
in SCO of 64




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MTI TECHNOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) $4,209, which was written off during the third quarter of fiscal year 2002
as an other than temporary decline in value and to record its proportional
share of SCOs net loss. Such loss has been included in Equity in net loss
and write-down of net investment of affiliate in the Companys fiscal year
2002 Consolidated Statement of Operations. As of August 1999, the Company owned 5,333,333 shares of SCOs stock. SCO
shareholders approved a one-for-four reverse stock split on March 14, 2002,
which converted the Companys ownership to 1,333,334 shares. The Company sold
1,800 shares and 142,500 shares on April 1, 2002 and April 8, 2002,
respectively. On July 23, 2002, the Company sold its remaining shares of SCO
common stock to SCO for approximately $1,070 in net proceeds, which it used to
pay down the Companys credit line with Canopy. The Company recognized a gain
of $1,070 from the sale of SCO shares, which is recorded in other income, net
in the 2003 Consolidated Statement of Operations. (6) Accrued Liabilities Accrued liabilities consist of the following: April 3, 2004
    
    April 5, 2003Salaries and benefits
    
    $
    2,546
    
    
    $
    2,593Commissions
    
    
    478
    
    
    
    234Sales tax
    
    
    2,038
    
    
    
    2,814Warranty costs
    
    
    603
    
    
    
    876Other
    
    
    432
    
    
    
    804$
    6,097
    
    
    $
    7,321
 Product warranties For proprietary hardware products, the Company provides its customers with
a warranty against defects for one year domestically and for two years
internationally. Currently, the Company is selling most EMC hardware products
with up to 3-year 24x7x365 warranties and EMC software products with 90-day
warranties. The Company accrues warranty expense at the time revenue is
recognized and maintains a warranty accrual for the estimated future warranty
obligation based upon the relationship between historical and anticipated costs
and sales volumes. Upon expiration of the warranty, the Company may sell
extended maintenance contracts to its customers. The Company records revenue
from equipment maintenance contracts as deferred revenue when billed and it
recognizes this revenue as earned over the period in which the services are
provided, primarily straight-line over the term of the contract. The changes in the Companys warranty obligation for fiscal 2004 and 2003
are as follows (in thousands): April 3, 2004
    
    April 5, 2003Balance at the beginning of the period
    
    $
    876
    
    
    $
    896Current year warranty charges
    
    
    513
    
    
    
    275Utilization
    
    
    (786
    )
    
    
    (295
    )Balance at the end of the period
    
    $
    603
    
    
    $
    876
 (7) Debt Credit Agreement and Lines of Credit On December 5, 2002, the Company paid off the outstanding $1,685 loan with
the Canopy Group, Inc. This loan agreement remains in effect, but with a zero
balance and the Company may not re-borrow any funds thereunder. However,
pursuant to the loan agreement, as amended in June 2004, Canopy has guaranteed
a letter of credit in support of the Companys obligations to Comerica Bank
discussed below and the Companys obligations to Canopy are secured by a
security interest in substantially all of the Companys assets. Ralph J.
Yarro, III, one of the 65




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MTI TECHNOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) Companys Directors, is also a Director, President and Chief Executive
Officer of Canopy. Darcy G. Mott, one of the Companys Directors, is also a
Vice President, Treasurer and Chief Financial Officer of Canopy. Canopy
beneficially owns approximately 44% of the Companys outstanding common stock. In November 2002, the Company entered into an agreement (the Comerica
Loan Agreement) with Comerica Bank (Comerica) for a line of credit of $7.0
million at an interest rate equal to the prime rate. As discussed above, the
line of credit is secured by a letter of credit that is guaranteed by Canopy.
Canopys guarantee was to mature on November 30, 2003, but on June 30, 2003,
the Company received an extension on the letter of credit for $7.0 million
until June 30, 2004. The Comerica Loan Agreement was to mature on October 31,
2003, but on June 30, 2003, the Company received a renewal on the line of
credit for $7.0 million until May 31, 2004. On June 18, 2004 the Company
received an additional extension on the letter of credit for $7.0 million until
June 30, 2005. Also on June 18, 2004, the Company received an additional
renewal on the Comerica line of credit for $7.0 million until May 31, 2005 (see
note 16). The Comerica Loan Agreement contains negative covenants placing
restrictions on the Companys ability to engage in any business other than the
businesses currently engaged in, suffer or permit a change in control, and
merge with or acquire another entity. Although we are currently in compliance
with all of the terms of the Comerica Loan Agreement, and believe that we will
remain in compliance, there can be no assurance that we will be able to
continue to borrow under the Comerica Loan Agreement through the expiration
date. Upon an event of default, Comerica may terminate the Comerica Loan
Agreement and declare all amounts outstanding immediately due and payable. As
of April 3, 2004, there was $3,933 million outstanding under the Comerica line
of credit. (8) Income Taxes The components of loss before income taxes are as follows: Fiscal Year EndedApril 3, 2004
    
    April 5, 2003
    
    April 6, 2002U.S.
    
    $
    (5,554
    )
    
    $
    (11,062
    )
    
    $
    (33,986
    )Foreign
    
    
    (1,480
    )
    
    
    48
    
    
    
    (1,041
    )$
    (7,034
    )
    
    $
    (11,014
    )
    
    $
    (35,027
    )
 66




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##### Table of Contents



MTI TECHNOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) Income tax expense (benefit) consists of the following: Current
    
    Deferred
    
    Total2004:Federal
    
    $
    (3,127
    )
    
    $
    
    
    
    $
    (3,127
    )State
    
    
    6
    
    
    
    
    
    
    
    6Foreign
    
    
    (47
    )
    
    
    
    
    
    
    (47
    )$
    (3,168
    )
    
    $
    
    
    
    $
    (3,168
    )2003:Federal
    
    $
    
    
    
    $
    
    
    
    $
    State
    
    
    68
    
    
    
    
    
    
    
    68Foreign
    
    
    137
    
    
    
    
    
    
    
    137$
    205
    
    
    $
    
    
    
    $
    2052002:Federal
    
    $
    
    
    
    $
    24,300
    
    
    $
    24,300State
    
    
    126
    
    
    
    
    
    
    
    126Foreign
    
    
    172
    
    
    
    
    
    
    
    172$
    298
    
    
    $
    24,300
    
    
    $
    24,598
 Reconciliations of the federal statutory tax rate to the effective tax
rate are as follows: Fiscal Year EndedApril 3, 2004
    
    April 5, 2003
    
    April 6, 2002Federal statutory rate
    
    
    (35.0
    )%
    
    
    (35.0
    )%
    
    
    (35.0
    )%Effect of foreign operations
    
    
    (0.6
    )
    
    
    1.2
    
    
    
    1.2State taxes, net of federal benefit
    
    
    (5.8
    )
    
    
    (5.8
    )
    
    
    (5.8
    )Change in valuation allowance
    
    
    37.9
    
    
    
    37.0
    
    
    
    113.8Elimination of reserve for tax audit
    
    
    (20.8
    )
    
    
    
    
    
    
    Tax benefit from NOL carryback
    
    
    (23.7
    )
    
    
    
    
    
    
    Non-deductible expenses
    
    
    2.9
    
    
    
    0.1
    
    
    
    0.3Other
    
    
    0.1
    
    
    
    4.3
    
    
    
    (5.1
    )(45.0
    )%
    
    
    1.8
    %
    
    
    69.4
    %
 67




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##### Table of Contents



MTI TECHNOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) 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
liabilities are as follows: 2004
    
    2003
    
    2002Tax operating loss carryforwards
    
    $
    43,588
    
    
    $
    48,348
    
    
    $
    40,056Tax basis of intangible assets greater than book basis
    
    
    2,707
    
    
    
    3,109
    
    
    
    3,726Accrued expenses not deductible for tax purposes
    
    
    2,174
    
    
    
    3,674
    
    
    
    2,714Inventory reserves
    
    
    1,398
    
    
    
    2,185
    
    
    
    3,544Book depreciation greater than tax depreciation
    
    
    1,306
    
    
    
    2,791
    
    
    
    4,195Recognition of income reported on different methods for
tax purposes than for financial reporting
    
    
    403
    
    
    
    361
    
    
    
    430Tax credit carryforwards
    
    
    783
    
    
    
    
    
    
    
    Capital loss carryforwards
    
    
    2,646
    
    
    
    
    
    
    
    Other
    
    
    37
    
    
    
    253
    
    
    
    2,04355,042
    
    
    
    60,721
    
    
    
    56,708Less valuation allowance
    
    
    55,042
    
    
    
    60,721
    
    
    
    56,708$
    
    
    
    $
    
    
    
    $
    
 At April 3, 2004, the Company had federal net operating loss (NOL)
carryforwards, available to offset future taxable income of $112,645. These
carryforwards begin to expire in fiscal year 2005. The utilization of these
carryforwards may be limited. In the first quarter of fiscal year 2002, the Company recorded $24,300 of
tax expense related to establishing a valuation allowance for deferred-tax
assets. The change in the valuation allowance from fiscal year 2003 to fiscal
year 2004 was $(5,684) and the change in the valuation allowance from fiscal
year 2002 to fiscal year 2003 was $4,013. Because of the continued softness in
the American and European markets for the Companys products, management
believes that it is more likely than not that the Company will not realize the
benefits of the net deferred tax asset existing on April 3, 2004. On August 13, 2002, the Company received a notice of deficiency in its
federal income tax due for fiscal year 1992 in the amount of $1,119. The
notice of deficiency also advised the Company of related examination changes to
its taxable income as reported for fiscal years 1993 through fiscal year 1995.
The Company filed a timely petition in the United States Tax Court asking for a
review of the IRS determinations. During the fourth quarter of fiscal year
2004, the Company received a decision from the United States Tax Court which
obligates the Company to pay an additional $193 in income tax due for fiscal
year 1992. The Company had accrued income taxes of $1,655 related to the IRS
audits for fiscal years 1992 through fiscal year 1996. During the third
quarter of fiscal year 2004, the Company reduced this accrual to $193 and
recognized an income tax benefit of $1,462. Additionally, the Company will
receive income tax refunds for fiscal years 1982 through 1990 totaling $1,665.
The income tax refunds allowed by the IRS are based upon the carryback of the
net operating losses which were confirmed by the IRS for fiscal years 1993,
1994 and 1995. During the third quarter of fiscal year 2004, the Company
accrued the income tax refunds of $1,668 and recorded an income tax benefit in
the same amount. In the fourth quarter of fiscal year 2004, the Company
received the interest calculation from the IRS and accrued the interest
receivable of $741 related to the income tax refunds and recognized interest
income in the same amount. Subsequent to year-end, the Company received all
outstanding receivables from the IRS. The IRS is conducting an examination of the Companys fiscal years 1996
and 1997 federal income tax returns. During May 2004, the Company received
notice from the IRS of proposed adjustments for fiscal 1996. The Company,
after consultation with tax counsel, continues to believe in the propriety of
its positions as set forth in its tax return and will file a protest with the
IRS regarding these proposed adjustments. The Company believes the ultimate
resolution of the examination will not result in a material impact on the
Companys consolidated financial position, results of operations or liquidity. 68




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MTI TECHNOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) In the third quarter of fiscal year 2004, the Company received notice of
re-assessment from the French Treasury. The French tax authorities have argued
that the Companys France subsidiary should have paid VAT on the waiver of
intercompany debts granted by its U.S. parent company and by its Irish
subsidiary. The amount of re-assessment is $79 and $605 related to fiscal
years 2002 and 2001, respectively, plus penalties and interest. Through
discussions with its tax advisors, the Company believes that intercompany debt
waivers are not subject to VAT and therefore believes that this re-assessment
is without merit and it is not probable that it will be required to pay the
re-assessed amounts. Therefore, the Company has not recorded a liability for
such amounts at April 3, 2004. The Company has appealed this re-assessment. (9) Stockholders Equity Net Loss Per Share The following table sets forth the computation of basic and diluted loss
per share (in thousands, except per share amounts): 2004
    
    2003
    
    2002Numerator:Net loss, basic and diluted
    
    $
    (3,866
    )
    
    $
    (11,219
    )
    
    $
    (59,625
    )Denominator:Denominator for net loss per share,
basic and diluted 
weighted-average shares outstanding
    
    
    33,482
    
    
    
    32,852
    
    
    
    32,548Net loss per share, basic and diluted
    
    $
    (0.12
    )
    
    $
    (0.34
    )
    
    $
    (1.83
    )
 Options and warrants to purchase 11,068,024 shares of common stock were
outstanding at April 3, 2004, but were not included in the computation of
diluted earnings per share for the year then ended because the effect would be
antidilutive. Options and warrants to purchase 10,233,404 shares of common stock were
outstanding at April 5, 2003, but were not included in the computation of
diluted earnings per share for the year then ended because the effect would be
antidilutive. Options and warrants to purchase 10,954,976 shares of common stock were
outstanding at April 6, 2002, but were not included in the computation of
diluted earnings per share for the year then ended because the effect would be
antidilutive. Stock Options The Company granted stock options under its 1987 Incentive Stock Option
Plan and Non-Qualified Stock Option Plan, its 1992 Stock Incentive Plan, its
1996 Stock Incentive Plan, and its 2001 Stock Inventive Plan, generally at
prices equal to the estimated fair market value of the Companys common stock
at date of grant. The Companys stockholders approved the 2001 Stock Incentive Plan (SIP),
the 2001 Non-Employee Director Option Program (Program) and the 2001 Employee
Stock Purchase Plan (the Stock Purchase Plan) on July 11, 2001. Upon
approval of these plans, all prior plans were terminated. Therefore, the
Company will no longer issue options under its prior plans and has granted
stock options under its SIP. Options currently outstanding under prior plans
as of April 3, 2004, shall remain in effect in accordance with the respective
terms of such plans. In the first quarter of fiscal year 2004, the Board
approved the amended Stock Incentive Plan (the Amended SIP) to increase the
number of shares issuable by 2,500,000 shares. Under the Amended SIP, the
maximum aggregate number of shares of Common Stock available for grant shall be
6,500,000 shares. A maximum of 1,200,000, 450,000 and 9,477,000 shares are
authorized for issuance under the Stock Purchase Plan, the Program and the SIP,
respectively. The Program functions as part of the SIP. 69




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##### Table of Contents



MTI TECHNOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) In the third and fourth quarter of fiscal year 2002, the Company granted
106,043 shares and 55,083 shares of common stock, respectively, to an employee
to compensate for services for fiscal year 2002. The shares were issued out of
treasury shares at a per share price of $1.20 and $0.57, respectively. The
Company recorded compensation expense of $234 in connection with the grants. In the third quarter of fiscal year 2003, the Company granted 96,724
shares of common stock to an employee to compensate him for his participation
in starting up its business in the Pacific Rim. The shares were issued at a
per share price of $0.58. The Company recorded compensation expense of $56 in
connection with the grants. Stock Purchase Warrants At April 3, 2004, a warrant to purchase 150,000 shares of the Companys
common stock at a price of $18.75 per share was outstanding. The warrant was
issued in August 1999 to an individual affiliated with Canopy in connection
with services provided to the Company and expires in August 2009. At April 3,
2004, the warrant was fully exercisable. At April 3, 2004, warrants to purchase 57,240 shares of the Companys
common stock at a price of $12.00 per share were outstanding. The original
warrants were issued in February 1998 to GB Storage in connection with a French
distribution agreement and expire in February 2008. On February 12, 2002, the
original warrants were replaced by warrants issued to Gerard Bantchik, Emmanuel
Moreau, Alain Mariotta and Florence Ferraz to purchase 32,398 shares, 15,913
shares, 6,411 shares and 2,518 shares of the Companys stock, respectively.
The exercise price and expiration date of the warrants remain unchanged. On
April 3, 2004, the warrants were fully exercisable. On January 16, 2004, Silicon Valley bank converted all its outstanding
warrants to purchase 190,678 shares of the Companys common stock into 40,176
shares of common stock through a cashless warrant exercise. Non-Employee Directors Option Program On July 11, 2001, the Companys shareholders approved the 2001
Non-Employee Directors Option Program (the Program) which functions as part
of the SIP described above. Upon approval of the Program, the 1994 Directors
Non-Qualified Stock Option Plan was terminated, although options currently
outstanding under the prior plan shall remain in effect in accordance with the
respective terms of such plan. Under the Program, each non-employee director
first elected to the Board of Directors following the effective date of the SIP
will automatically be granted an option to acquire 50,000 shares of Common
Stock at an exercise price per share equal to the fair market value of Common
Stock on the date of grant. These options will vest and become exercisable in
three equal installments on each anniversary of the grant date. Upon the date
of each annual stockholders meeting, each non-employee director who has been a
member of the Board of Directors for at least 11 months prior to the date of
the stockholders meeting will receive an automatic grant of options to acquire
25,000 shares of the Companys Common Stock at an exercise price equal to the
fair market value of the Companys Common Stock at the date of grant. These
options will vest and become exercisable in three equal installments on each
anniversary of the grant date. As of April 3, 2004, there were options to
purchase 375,000 shares outstanding under this program. Options granted typically vest over a period of three years from the date
of grant. At April 3, 2004 and April 5, 2003, the number of options
exercisable was 6,902,848 and 5,833,550 respectively, and the weighted-average
exercise price of those options was $6.05 and $7.08. As of April 3, 2004 there
were 2,156,076 shares available for grant. 70




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##### Table of Contents



MTI TECHNOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) A summary of all stock option transactions follows (in thousands, except
per share data): Weighted AverageShares
    
    Exercise PriceOptions outstanding at April 7, 2001
    
    
    9,355
    
    
    $
    9.39Granted
    
    
    4,241
    
    
    
    1.83Exercised
    
    
    (132
    )
    
    
    5.16Forfeited
    
    
    (2,906
    )
    
    
    8.26Options outstanding at April 6, 2002
    
    
    10,558
    
    
    $
    6.62Granted
    
    
    3,556
    
    
    
    0.53Exercised
    
    
    
    
    
    
    Forfeited
    
    
    (3,881
    )
    
    
    5.42Options outstanding at April 5, 2003
    
    
    10,233
    
    
    $
    4.97Granted
    
    
    3,385
    
    
    
    2.11Exercised
    
    
    (1,331
    )
    
    
    0.96Forfeited
    
    
    (1,468
    )
    
    
    4.97Options outstanding at April 3, 2004
    
    
    10,819
    
    
    $
    4.58
 The per share weighted average fair value of stock options granted during
fiscal years 2004, 2003 and 2002 was $1.49, $0.49 and $1.48, respectively, on
the date of grant. A summary of stock options outstanding at April 3, 2004 follows (in
thousands, except per share data): Exercisable(1)WeightedAverage
    
    WeightedNumber of
    
    Remaining
    
    Average
    
    
    
    
    
    WeightedOptions
    

    Contractual
    

    Exercise
    

    Number of
    

    Average ExerciseRange of Exercise Price
    
    Outstanding
    
    Life
    
    Price
    
    Options
    
    Price$
    0.2700 
    $0.3800
    
    
    251
    
    
    
    8.58
    
    
    $
    0.3251
    
    
    
    115
    
    
    $
    0.34010.5500 
    0.5500
    
    
    1,643
    
    
    
    8.25
    
    
    
    0.5500
    
    
    
    1,388
    
    
    
    0.55000.5700 
    1.3500
    
    
    1,187
    
    
    
    7.75
    
    
    
    1.1751
    
    
    
    943
    
    
    
    1.23091.5800 
    2.1250
    
    
    1,598
    
    
    
    7.78
    
    
    
    1.9494
    
    
    
    1,019
    
    
    
    2.00782.2000 
    2.2000
    
    
    2,450
    
    
    
    9.63
    
    
    
    2.2000
    
    
    
    
    
    
    
    2.2500 
    4.1250
    
    
    1,415
    
    
    
    6.48
    
    
    
    3.6631
    
    
    
    1,191
    
    
    
    3.76834.3125 
    8.3125
    
    
    1,211
    
    
    
    4.89
    
    
    
    6.3995
    
    
    
    1,193
    
    
    
    6.40668.3750 
    30.0625
    
    
    989
    
    
    
    5.51
    
    
    
    22.6437
    
    
    
    979
    
    
    
    22.780136.8750 
    36.8750
    
    
    15
    
    
    
    5.75
    
    
    
    36.8750
    
    
    
    15
    
    
    
    36.875045.8750 
    45.8750
    
    
    60
    
    
    
    5.94
    
    
    
    45.8750
    
    
    
    60
    
    
    
    45.875010,819
    
    
    
    7.57
    
    
    $
    4.5756
    
    
    
    6,903
    
    
    $
    6.0480
 Note:  (1)
    
    Options exercisable at April 3, 2004, April 5, 2003 and April 6, 2002,
were 6,903, 5,834 and 5,472, respectively. Employee Stock Purchase Plan On July 11, 2001, the Companys shareholders approved the Stock Purchase
Plan. A maximum of 1,200,000 shares of common stock is authorized for issuance
under the Stock Purchase Plan. The Company will no longer issue options under
the 1994 Employee Stock Purchase Plan. Under the Stock Purchase Plan, all
employees of the Company, and its designated parents or subsidiaries, whose
customary employment is more than five months 71




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##### Table of Contents



MTI TECHNOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) in any calendar year and more than 20 hours per week are eligible to
participate. The Stock Purchase Plan was implemented through overlapping offer
periods of 24 months duration commencing each January 1 and July 1, except that
the initial offer period commenced on July 11, 2001 and ends on June 30, 2003.
Purchase periods generally commence on the first day of each offer period and
terminate on the next following June 30 or December 31 respectively; provided,
however, that the first purchase period commenced on July 11, 2001 and ended on
December 31, 2001. The price per share at which shares of Common Stock are to
be purchased under the Stock Purchase Plan during any purchase period is
eighty-five percent (85%) of the fair market value of the Common Stock on the
first day of the offer period or eighty-five percent (85%) of the fair market
value of the Common Stock on the last day of the purchase period, whichever is
lower. During fiscal year 2004, 2003 and 2002, 132, 141 and 81 shares of
common stock, respectively, were issued pursuant to the Stock Purchase Plan. Issuance of Restricted Stock During the third quarter of fiscal year 2004, the Company granted 85
shares of restricted stock. Based on the fair market value at the date of
grant, the Company will record $187 in compensation expense ratably over the
vesting period of the restricted stock. The restricted stock vests 50% at the
end of the first year and the remaining 50% at the end of the second year. The
Company recorded $40 in compensation expense in fiscal year 2004. (10) Commitments and Contingencies Leases The Company leases facilities and certain equipment under non-cancelable
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 3, 2004 under all non-cancelable
operating leases for subsequent fiscal years are as follows: 2005
    
    $
    3,3722006
    
    
    2,6812007
    
    
    1,4792008
    
    
    1,0862009
    
    
    487Thereafter
    
    
    1,744$
    10,849
 Future minimum capital lease payments at April 3, 2004 for subsequent
fiscal years are as follows: 2005
    
    $
    2102006
    
    
    802007 and thereafter
    
    
    Total minimum lease payments
    
    
    290Less: Amount representing interest
    
    
    (19
    )Present value of minimum lease payments
    
    
    271Less: current portion
    
    
    (176
    )Capital lease obligations excluding current portion
    
    $
    95
 Rent expense totaled $2,372, $3,624 and $5,000, for fiscal years 2004,
2003 and 2002, respectively. 72




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##### Table of Contents



MTI TECHNOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) Litigation Between July and September 2000, several complaints were filed in the
United States District Court for the Central District of the California against
the Company and several current or former officers seeking unspecified damages
for its alleged violation of the Securities Exchange Act of 1934, as amended,
by failing to disclose certain adverse information primarily during fiscal year
2000. On or about December 5, 2000, the several complaints were consolidated
as In re MTI Technology Corp. Securities Litigation II. On October 17, 2002, the parties reached a tentative settlement in
principle of this action. On or about December 3, 2002, the parties executed
and submitted to the court for preliminary approval their agreement to settle
the litigation. On May 19, 2003, the District Court preliminarily approved the
settlement. On July 28, 2003, the District Court gave final approval of the

settlement, all but $125 of which was paid by the Companys insurers, in return
for a release of all claims against the Company and the other defendants, and
dismissed the litigation with prejudice. The settlement has now become final
under its terms, as the time to appeal from the dismissal has run. The Company is also, from time to time, subject to claims and suits
arising in the ordinary course of business. In its opinion, the ultimate
resolution of these matters is not expected to have a materially-adverse effect
on the Companys consolidated financial position, results of operations, or
liquidity. Employment Agreements The Company has entered into agreements with certain executive officers of
the Company that call for payment of compensation totaling 12 months base
salary and the acceleration of vesting of stock options under certain
circumstances related to a change in control of the Company. As of April 3,
2004, the estimated payout related to these agreements would be $1,700. (11) Business Segment and International Information The Company is a systems integrator providing storage solutions for the
mid-range enterprise market and has one reportable business segment.The
Company has two operating segments which are identified by geographic regions,
United States and Europe. These operating segments are aggregated into one
reporting segment as they have similar economic characteristics. 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 loss and identifiable assets shown for
each geographic area may not be the amounts 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 loss is revenue less cost of
revenues and direct operating expenses. 73




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##### Table of Contents



MTI TECHNOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) A summary of the Companys operations by geographic area is presented
below: 2004
    
    2003
    
    2002Revenue:United States
    
    $
    43,326
    
    
    $
    47,125
    
    
    $
    81,300Europe
    
    
    41,757
    
    
    
    38,861
    
    
    
    39,662Transfers between areas
    
    
    (1,918
    )
    
    
    (3,600
    )
    
    
    (3,044
    )Total revenue
    
    $
    83,165
    
    
    $
    82,386
    
    
    $
    117,918Operating loss:United States
    
    $
    (5,739
    )
    
    $
    (11,992
    )
    
    $
    (28,362
    )Europe
    
    
    (1,955
    )
    
    
    (669
    )
    
    
    (801
    )Total operating loss
    
    $
    (7,694
    )
    
    $
    (12,661
    )
    
    $
    (29,163
    )Identifiable assets:United States
    
    $
    21,802
    
    
    $
    22,953Europe
    
    
    19,626
    
    
    
    16,419Tangible assets
    
    
    41,428
    
    
    
    39,372Goodwill  United States
    
    
    3,059
    
    
    
    3,059Goodwill  Europe
    
    
    2,125
    
    
    
    2,125$
    46,612
    
    
    $
    44,556
 The Companys revenues by product type are summarized below: 2004

    
    2003
    
    2002Server
    
    $
    28,716
    
    
    $
    22,535
    
    
    $
    45,311Tape libraries
    
    
    12,024
    
    
    
    14,251
    
    
    
    17,904Software
    
    
    5,702
    
    
    
    3,315
    
    
    
    6,304Service
    
    
    36,723
    
    
    
    42,285
    
    
    
    48,399$
    83,165
    
    
    $
    82,386
    
    
    $
    117,918
 No single customer accounted for more than 10% of revenue in fiscal year
2004, 2003 and 2002. (12) Sale of Patents Effective February 9, 1996, the Company entered into an EMC asset purchase
agreement by which it sold to EMC substantially all of the Companys existing
patents, patent applications and related rights. Pursuant to the EMC asset
purchase agreement, the Company was entitled to receive $30,000 over the life
of this agreement, in six equal annual installments of $5,000 each. As of
January 2001, the Company had received all installments. The Company also
would receive royalty payments in the aggregate of up to a maximum of $30,000
over the term of the EMC asset purchase agreement. As part of the maximum
$30,000 of royalties, minimum royalties of $10,000 would be received in five
annual installments, beginning within thirty days of the first anniversary of
the effective date of the EMC asset purchase agreement, and within thirty days
of each subsequent anniversary thereof. As of March 2001, the Company had
received all installments. Also, as a result of a computer and technology
agreement between EMC and IBM announced in March 1999, the minimum royalties of
$10,000 were to be increased to $15,000. Payments were to be received under
the EMC asset purchase agreement in five equal annual installments. The
Company received the first three annual installments in March 2000, March 2001
and March 2002. On April 1, 2003, the Company entered into an amended asset purchase
agreement with EMC, under which EMC paid the Company $5,857, which satisfied
all obligations of EMC under the original agreement. Also, the Company granted
EMC immunity from suit for patent infringement with respect to its patents.
Included in net product revenue for fiscal years 2003 and 2002 are $2,733 and
$3,840, and other income of $0 and $3,600, respectively, related to this
agreement. In addition, pursuant to the terms of the EMC asset purchase
agreement, the Company also received an irrevocable, non-cancelable, perpetual
and royalty-free license to exploit, market, and 74




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MTI TECHNOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) sell the technology protected under the applicable patents. Pursuant to
the terms and conditions of the EMC asset purchase agreement, this license will
terminate in the event of a change in control of the Company involving certain
acquirers. Subsequent to fiscal year 2004, the Company assigned to EMC all of its
rights, title and interest in and to all of its remaining patents and patent
applications. (13) Relatedparty Transactions In the normal course of business, the Company sold and purchased goods and
services to and from subsidiaries of Canopy. Goods and services purchased from
the subsidiaries of Canopy in fiscal year 2004 was $140. There were no
purchases of goods and services from the subsidiaries of Canopy in fiscal years
2003 and 2002. Goods and services sold to the subsidiaries of Canopy in fiscal
year 2004, 2003 and 2002 were $85, $104 and $836, respectively. At April 3,
2004, there was no outstanding amount due to/from the subsidiaries of Canopy.
Ralph J. Yarro, III, one of the Companys Directors, is also a Director,
President and Chief Executive Officer of Canopy. Darcy G. Mott, one of the
Companys Directors, is also a Vice President, Treasurer and Chief Financial
Officer of Canopy. Canopy beneficially owns approximately 44% of the Companys
outstanding Common Stock. In November 2002, the Company entered into an agreement with Comerica Bank
for a line of credit of $7,000 at an interest rate equal to the prime rate.
The line of credit is secured by a letter of credit that is guaranteed by
Canopy. Canopys guarantee was to mature on November 30, 2003, but the Company
received an extension on the letter of credit for $7.0 million until June 30,
2005 (see Note 7). (14) 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 2003, 2002 and 2001, the Company did not
contribute to the plan. (15) Quarterly Financial Data (Unaudited) Selected quarterly financial data for continuing operations for fiscal
years 2004 and 2003 are as follows: Net Income(Loss)Net
    
    Per Share,Total
    
    Gross
    
    Income
    
    Basic andRevenue
    
    Profit
    
    (Loss)
    
    Diluted2004:Fourth quarter
    
    $
    23,651
    
    
    $
    5,482
    
    
    $
    (742
    )
    
    $
    (0.02
    )Third quarter
    
    
    21,210
    
    
    
    4,674
    
    
    
    1,458
    
    
    
    0.04Second quarter
    
    
    20,526
    
    
    
    4,428
    
    
    
    (1,725
    )
    
    
    (0.05
    )First quarter
    
    
    17,778
    
    
    
    4,692
    
    
    
    (2,857
    )
    
    
    (0.09
    )Total
    
    $
    83,165
    
    
    $
    19,276
    
    
    $
    (3,866
    )2003:Fourth quarter
    
    $
    22,383
    
    
    $
    7,778
    
    
    $
    602
    
    
    $
    0.02Third quarter
    
    
    19,644
    
    
    
    5,957
    
    
    
    (1,389
    )
    
    
    (0.04
    )Second quarter
    
    
    22,320
    
    
    
    7,025
    
    
    
    133
    
    
    
    First quarter
    
    
    18,039
    
    
    
    1,038
    
    
    
    (10,565
    )
    
    
    (0.32
    )Total
    
    $
    82,386
    
    
    $
    21,798
    
    
    $
    (11,219
    )
 The Company has experienced significant quarterly fluctuations in
operating results and anticipates that these fluctuations may continue into the
future. These fluctuations have been and may continue to be caused by a number
of factors, including: competitive pricing pressures, the timing of customer
orders (a large majority of which 75




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MTI TECHNOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) have historically been placed in the last month of each quarter), the
timing of the introduction of EMCs new products, shifts in product mix and the
timing of sales and marketing expenditures. Future operating results may
fluctuate as a result of these and other factors, including EMC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. During the third quarter of fiscal year 2004, the Company accrued income
tax refunds of $1,668 and recorded an income tax benefit in the same amount.
In the fourth quarter of fiscal year 2004, the Company received the interest
calculation from the IRS and accrued the interest receivable of $741 related to
the income tax refunds and recognized interest income in the same amount (see
Note 8). The Company had operated historically without a significant backlog of
orders and, as a result, net product revenue in any quarter was dependent upon
orders booked and products shipped during that quarter. However, as a result
of the new EMC relationship, the Company operates with a more significant
backlog since its order shipments depends on the availability of EMC products
and both the Company and EMC have concurrent quarter ends. Even though the
orders shipped determines the Companys revenue for any given quarter, its
order backlog may not be a reliable indicator of its future revenue since its
customers have the rights to cancel or delay shipment of their orders. A
significant portion of the Companys operating expenses are relatively fixed in
nature and planned expenditures are based primarily upon sales forecasts. If
revenue does not meet the Companys expectations in any given quarter, the
adverse effect on the Companys liquidity and operating results may be
magnified by the Companys inability to reduce expenditures quickly enough to
compensate for the revenue shortfall. Further, as is common in the computer
industry, the Company historically has experienced an increase in the number of
orders and shipments in the latter part of each quarter and it expects this
pattern to continue into the future. The Companys failure to receive
anticipated orders or to complete shipments in the latter part of a quarter
could have a materially adverse effect on the Companys results of operations
for that quarter. Because of all of the foregoing factors, the Company believes that
period-to-period comparisons of its operating results are not necessarily
meaningful and that such comparisons cannot be relied upon as indicators of
future performance. There can be no assurance that the Company will achieve
profitability on a quarter-to-quarter basis or that future revenues and
operating results will not be below the expectations of public market analysts
and investors, which could result in a materially adverse effect on the
Companys common stock. (16) Subsequent Events On June 17, 2004, the Company sold 566,797 shares of Series A Convertible
Preferred Stock in a private placement financing at $26.46 per share, which
raised $15 million in gross proceeds, before consideration of professional
fees. The sale included issuance to the investors of warrants to purchase
1,624,308 shares of the Companys common stock with an exercise price of $3.10
per share. The shares of common stock into which the warrants are exercisable
represent twenty-five percent (25%) of the aggregate number of shares of common
stock into which the Series A Convertible Preferred Stock are convertible plus
an additional 207,315 shares of common stock. Each share of Series A
Convertible Preferred Stock is convertible into common stock at an initial
conversion rate of ten shares of common stock for each share of Series A
Convertible Preferred Stock, subject to adjustments upon certain dilutive
issuances of securities by the Company at the initial stated price per share.
The Series A Convertible Preferred Stock contains a beneficial conversion
feature valued at $5.8 million. This will be reflected as a non-cash charge to
retained earnings in the first quarter of fiscal year 2005. The Series A
Convertible Preferred Stock carries a cumulative dividend of 8% per year
payable when and if declared by the Board of Directors. The warrants are
exercisable on or after December 20, 2004, and expire on June 17, 2015. As
part of the private placement, a representative of the investors has joined the
Companys Board of Directors. EMC was a participating investor in the private
placement, contributing $4 million of the $15 million raised. On June 18, 2004, the Company received an extension on the Canopy letter
of credit for $7.0 million until June 30, 2005. Also on June 18, 2004 the
Company received a renewal on the Comerica line of credit for $7.0 million
until May 31, 2005. (See Note 7). 76




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##### Table of Contents



SCHEDULE II MTI TECHNOLOGY CORPORATION VALUATION AND QUALIFYING ACCOUNTS For the Fiscal Years Ended April 3, 2004, April 5, 2003 and April 6, 2002 Allowance for Bad
    
    
    
    
    
    Balance atBalance at
    
    Debts Charged to
    
    Bad Debts
    
    End ofBeginning of Period
    
    SG&A
    
    Write-Offs
    
    PeriodYear ended April 3, 2004Allowance for doubtful accounts
    
    $
    276
    
    
    $
    25
    
    
    $
    (64
    )
    
    $
    237Year ended April 5, 2003Allowance for doubtful accounts
    
    $
    960
    
    
    $
    (602
    )
    
    $
    (82
    )
    
    $
    276Year ended April 6, 2002Allowance for doubtful accounts
    
    $
    1,531
    
    
    $
    1,884
    
    
    $
    (2,455
    )
    
    $
    960
 Allowance for SalesBalance at
    
    Returns Accounted
    
    
    
    
    
    Balance atBeginning
    
    for as a Reduction
    
    Sales
    
    End ofof Period
    
    in Revenue
    
    Return
    
    PeriodYear ended April 3, 2004Allowance for sales returns
    
    $
    200
    
    
    $
    
    
    
    $
    
    
    
    $
    200Year ended April 5, 2003Allowance for sales returns
    
    $
    489
    
    
    $
    
    
    
    $
    (289
    )
    
    $
    200Year ended April 6, 2002Allowance for sales returns
    
    $
    607
    
    
    $
    
    
    
    $
    (118
    )
    
    $
    489
 77




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EXHIBIT INDEX Exhibit Number
    
    Description23.1
    
    
    Consent of Independent Registered Public Accounting Firm  Grant Thornton LLP23.2
    
    
    Consent of Independent Registered Public Accounting Firm  KPMG LLP31.1
    
    
    Certification of Chief Executive Officer pursuant to Rule
13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    
    Certification of Chief Financial Officer pursuant to Rule
13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 78