| MTI TECHNOLOGY CORP ITEM 1A RISK FACTORS FORWARD-LOOKING STATEMENTS This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) |
| Such statements include statements regarding our expectations, hopes or intentions regarding the future, including but not limited to, statements regarding our relationship with EMC, storage solution trends, strategy, backlog, competition, demand seasonality, acquisition of Collective Technologies, LLC, financing, revenue, margins, operations, capital 6 _________________________________________________________________ [58]Table of Contents expenditures, service offerings, personnel, dividends, litigation and compliance with applicable laws |
| In particular, this Annual Report on Form 10-K contains forward-looking statements regarding: • our belief that we receive favorable pricing, rebates and access to training from EMC; • our belief that complexity is the key weakness in the IT storage environment; • our beliefs regarding trends toward fully integrated storage solutions and insufficient access to those solutions in the mid-enterprise market; • our belief that the quality, reliability, and continuing support of our products and the expertise of our professional services staff will be of greater importance to our customer base; • our market strategy to become the preferred provider for sales, professional services and maintenance to the mid-enterprise market for information infrastructure solutions; • our belief that EMC products are a world-class product brand; • our total solutions approach and the ability of the EMC product brand to meet our customers’ needs and to track their buying decisions; • our belief that order backlog as of any particular date is not meaningful as it is not necessarily indicative of future sales levels; • our beliefs regarding the principal elements of competition; • our anticipation of greater demand for our products and services in our third fiscal quarter; • the factors upon which our future depends, which, in addition to our cost-reduction initiatives, include improving revenues and margins, continuing our relationship with EMC, expanding our service offerings, receiving market acceptance of new products and services, recruiting, hiring, training and retaining significant numbers of qualified personnel, forecasting revenues and expenses, controlling expenses, and managing assets; • our belief that our current cash and receivable balances will be sufficient to meet our operating and capital expenditure requirements for at least the next 12 months; • our belief regarding the timing and risk of undetected software or hardware errors; • our belief that our success is dependent to a significant extent on our personnel, including our executive officers; • our focus on increasing EMC product sales; • our belief that we are currently in compliance with Nasdaq Capital Market continued listing requirements; • our expectation to retain earnings and not to declare or pay any cash dividends in the near future; • our expectation that the loss of hardware maintenance revenue will be mitigated by an increase in professional service revenue and software maintenance revenue; and • our business outlook, including all statements in the section titled “Outlook” in Item 7 |
| Forward-looking statements involve certain risks and uncertainties, and actual results may differ materially from those discussed in any such statement |
| Factors that could cause actual results to differ materially from such forward-looking statements include the risks described in greater detail under the heading “Risk Factors” in Item 1A of this report |
| All forward-looking statements in this document are made as of the date hereof, based on information available to us as of the date hereof, and, except as otherwise 7 _________________________________________________________________ [59]Table of Contents required by law, we assume no obligation to update or revise any forward-looking statement to reflect new information, events or circumstances after the date hereof |
| 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 |
| In March 2003, we entered into a Reseller Agreement with EMC whereby 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 its 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 its channel strategy, it may cease supplying us with its 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 or of acceptable quality |
| 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 |
| In the first quarter of fiscal 2005 we became an EMC Premier Velocity Partner, which has allowed us to earn certain performance based and service rebates |
| There is no guarantee that we will earn these rebates in the future or that EMC will continue to offer such rebate program |
| Our failure to receive these performance rebates could have an adverse impact on our results of operations |
| 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 are able to influence corporate decisions |
| As a result of this concentration, these few stockholders are able to influence actions of the Company that require stockholder approval, in particular with regard to significant corporate transactions |
| Among other things, this concentration 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 |
| As of April 1, 2006, The Canopy Group, Inc |
| (“Canopy”) beneficially owned 22prca of the Company’s common stock assuming conversion of the Series A and Series B and related warrants outstanding, but excluding outstanding options |
| William Mustard serves on our Board of Directors and was President and CEO of Canopy until December 23, 2005 when he resigned from Canopy |
| In addition, the holders of our Series A and Series B, as a result of their acquisition of securities issued in our June 2004 and November 2005 private placements, currently beneficially own approximately 46prca of the Company’s outstanding common stock, assuming conversion and exercise of all shares of preferred stock and warrants which they presently hold |
| Other than with respect to the election of directors, the holders of Series A and Series B generally have the right to vote on any matter with the holders of common stock, and each share of Series A is entitled to 8dtta5369 votes and each share of Series B is entitled to 8dtta7792 votes |
| The approval of the holders of a majority of the Series A and Series B, each voting as a separate class, will be required to approve certain corporate actions, including: • any amendment of the Company’s charter or bylaws that adversely affects the holders of Series A, or Series B, as applicable; • any authorization of a class of capital stock ranking senior to, or on parity with, the Series A, or Series B, as applicable; • any increase in the size of the Company’s Board of Directors to greater than eight members or any change in the classification of the Board of Directors; 8 _________________________________________________________________ [60]Table of Contents • certain redemptions or repurchases of capital stock; • acquisitions of capital stock or assets from other entities; • effecting, or entering into any agreement to effect, any merger, consolidation, recapitalization, reorganization, liquidation, dissolution, winding up or similar transaction (a “Liquidation Event”) involving the Company or any of its subsidiaries; • any sale of assets of the Company or a subsidiary which is outside the ordinary course of business; • any purchase of assets of or an equity interest in another entity for more than dlra5dtta0 million; and • any incurrence of additional debt for borrowed money in excess of dlra1dtta0 million |
| The holders of Series A and Series B are each entitled to elect one member of the Company’s Board of Directors |
| In connection with the Series A financing, the Series A investors, the Company and The Canopy Group, Inc |
| entered into a Voting Agreement, pursuant to which, when any matter involving a significant corporation transaction (such as a merger, consolidation, liquidation, significant issuance of voting securities by the Company, sale of significant Company assets, or acquisition of significant assets or equity interest of another entity) is submitted to a vote of the Company’s stockholders, Canopy has agreed that either (a) the common stock of the Company that Canopy holds will be voted in proportion to the Series A investors’ votes on the matter, or (b) if Canopy wishes that any of its common stock be voted differently than in proportion to the Series A investors’ votes, Canopy will, if so required by a Series A investor, purchase from the Series A investor(s) with which the Canopy votes are not aligned all or any portion (as required by the Series A investor) of such investor’s Series A Convertible Preferred Stock |
| The per share price in any such purchase is to equal two times the sum of (x) the stated value of a share of Series A Convertible Preferred Stock plus (y) any accrued but unpaid dividends thereon |
| At any stockholder meeting at which members of the Board are to be elected and the Series A investors do not then have either a Series A Director on the Board or the power at such election to elect a Series A Director to the Board, Canopy has agreed to vote in favor of one nominee of the Advent Funds and the Series A investors have agreed to vote in favor of a Canopy nominee |
| Currently, Canopy beneficially owns approximately 22prca of the Company’s outstanding common stock (calculated assuming conversion of all outstanding Series A Preferred and Series B Preferred and the warrants held by the holders of our preferred stock, but excluding outstanding options) |
| Our pending acquisition of the operating assets of Collective Technologies, LLC is expected to benefit us, but we may not realize any anticipated benefits due to challenges associated with integrating our companies and costs we incur from the acquisition |
| The closing of our pending acquisition of the operating assets of Collective is subject to customary closing conditions and other uncertainties, and the transaction may not ultimately be consummated |
| Furthermore, the success of our pending acquisition of Collective, if consummated, will depend in large part on the success of our management in integrating the operations, technologies, service capabilities and personnel of Collective into our company following the acquisition |
| Our failure to meet the challenges involved in integrating successfully the operations of Collective or otherwise to realize any of the anticipated benefits of the acquisition could adversely impact our combined results of operations |
| In addition, the overall integration of Collective may result in unanticipated operational problems, expenses, liabilities and diversion of management’s attention |
| The challenges involved in this integration include the following: • successfully integrating our operations, technologies, products and services with those of Collective; • retaining and expanding customer and supplier relationships; • coordinating and integrating the service capabilities of Collective into our company; • preserving service and other important relationships that we and Collective have, and resolving potential conflicts that may arise; 9 _________________________________________________________________ [61]Table of Contents • assimilating the personnel of Collective and integrating the business cultures of both companies; • maintaining employee morale and motivation; and • reducing administrative costs associated with the operations of Collective |
| We may not be able to successfully integrate the operations of Collective in a timely manner, or at all, and we may not realize the anticipated benefits or synergies of the acquisition to the extent or in the time frame anticipated |
| Our stockholders may be diluted by the conversion of outstanding Series A and Series B and the exercise of warrants to purchase common stock issued in our June 2004 and November 2005 private placements, and by our pending acquisition of Collective, if consummated |
| There are currently 566cmam797 shares of our Series A Convertible Preferred Stock outstanding, which are convertible at any time at the direction of their holders |
| Each share of Series A Convertible Preferred Stock is convertible into a number of shares of common stock equaling its stated value plus accumulated and unpaid dividends, divided by its conversion price then in effect |
| Each share of Series A is presently convertible into approximately 12dtta8 shares of common stock, but is subject to adjustment upon certain dilutive issuances of securities by the Company |
| The outstanding shares of Series A Convertible Preferred Stock are currently convertible into an aggregate of approximately 7dtta3 million shares of common stock |
| Dividends accrue on the Series A Convertible Preferred Stock at an annual rate of 8prca, 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 |
| Accrued and unpaid Series A dividends totaled dlra2cmam225 at April 1, 2006 |
| The holders of Series A are also entitled to anti-dilution 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 have preemptive rights to purchase a pro rata portion of certain future issuances of equity securities by the Company |
| There are also currently 1cmam582cmam023 shares of our Series B outstanding, which are convertible at any time at the direction of their holders |
| Each share of Series B is convertible into a number of shares of common stock equaling its stated value plus accumulated and unpaid dividends, divided by its conversion price then in effect |
| Each share of Series B is presently convertible into 10 shares of common stock, but is subject to adjustment upon certain dilutive issuances of securities by the Company |
| The outstanding shares of Series B are currently convertible into an aggregate of approximately 15dtta8 million shares of common stock |
| Dividends accrue on the Series B at an annual rate of 8prca, and the holders of Series B may convert the accrued dividends into shares of common stock to the extent the Company has not previously paid such dividends in cash |
| Accrued and unpaid Series B dividends totaled dlra667 at April 1, 2006 |
| The holders of Series B are also entitled to anti-dilution 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 their conversion price then in effect |
| In addition, the holders of Series B 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 1cmam624cmam308 shares of our common stock, which are held by the Series A investors |
| The exercise price for such warrants is dlra3dtta10 per share |
| The warrants are currently exercisable and expire in December 2014 |
| There are currently warrants outstanding to purchase up to 5cmam932cmam587 shares of our common stock, which are held by the Series B investors |
| The exercise price for such warrants is dlra1dtta26 per share |
| The warrants are currently exercisable and expire in November 2015 |
| Furthermore, if we have an indemnity obligation under the Securities Purchase Agreement we entered into in connection with the Series B financing, then we may, if we and the Series B investors agree, settle up to dlra2dtta0 million of that indemnity obligation by issuing up to an additional dlra2dtta0 million (158cmam203 shares) of Series B and warrants to purchase 37dtta5prca of the number of shares of common stock into which such additional shares of Series B are convertible when issued |
| If any such indemnity obligation is not satisfied by issuing shares of Series B and warrants, then it will be satisfied through a cash payment |
| 10 _________________________________________________________________ [62]Table of Contents If the holders of our Series A or Series B convert their shares or exercise the warrants they now hold, or that they may in the future be issued as a result of any indemnity obligations that we may have in connection with the Series B financing, 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 |
| Additionally, we have also agreed to issue 2cmam272cmam272 shares of common stock, a warrant to purchase 1 million shares of common stock, options to purchase up to 1cmam608cmam481 shares of common stock and up to 306cmam303 shares of restricted stock in connection with our pending acquisition of Collective (unless, under certain circumstances, the purchase price is increased in lieu thereof), all of which could cause further dilution to existing stockholders |
| A significant portion of our revenues occurs in the last month of a given quarter |
| Consequently, our results of operations for any particular quarter are 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 2006, 59prca, 65prca, 61prca and 60prca, respectively, of our total revenue was recorded in the last month of each successive quarter |
| 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 |
| We have a history of operating losses, and our future operating results may depend on the success of our cost reduction initiatives and on other factors |
| We have a history of recurring losses and net cash used in operations |
| In fiscal 2006 and 2005, we incurred net losses of dlra8dtta1 million and dlra15dtta8 million, respectively |
| Our cash used in operations was dlra11dtta2 million and dlra4dtta4 million and for fiscal year 2006 and 2005, respectively |
| We had dlra13dtta5 million in working capital as of April 1, 2006 |
| In fiscal year 2005, we implemented additional restructuring activities related to the closure of our Dublin, Ireland facility |
| These measures included reductions in our workforce and the partial or complete closure of certain under-utilized facilities, including offices |
| 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 at all, or that the workforce reductions will not impair our ability to achieve our current or future business objectives |
| Our future is dependent upon many other factors in addition to our cost reduction initiatives, including but not limited to, improving revenues and margins, continuing our relationship with EMC, expanding our service offerings, completing and successfully integrating our recently announced acquisition of Collective, receiving market acceptance of new products and services, recruiting, hiring, training and retaining significant numbers of qualified personnel, forecasting revenues and expenses, controlling expenses and managing assets |
| If we are not successful in these areas, our future results of operations could be adversely affected |
| We are subject to financial and operating risks associated with international sales and services |
| International sales and services represented approximately 40prca and 42prca of our total sales and service revenue for fiscal year 2006 and 2005, respectively |
| As a result, our results of operations are subject to the financial and operating risks of conducting business internationally, including: • fluctuating exchange rates, tariffs and other barriers; 11 _________________________________________________________________ [63]Table of Contents • difficulties in staffing and managing foreign subsidiary operations; • changes in a country’s economic or political conditions; • greater difficulties in accounts receivable collection and longer payment cycles; • unexpected changes in, or impositions of, legislative or regulatory requirements; • import or export restrictions; • potentially adverse tax consequences; • potential hostilities and changes in diplomatic and trade relationships; 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 |
| 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 |
| 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 |
| 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 Certain of our sales transactions are generated through sales leads received from EMC Although EMC’s primary sales focus is currently on large-enterprise customers, should EMC change its strategy and begin to 12 _________________________________________________________________ [64]Table of Contents sell directly to the small-to-mid-enterprise customers, or work more closely with other resellers, it could have an adverse impact on our results of operations |
| 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 have historically used 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 |
| Additionally, there is often a time gap between when we are required to pay for a product received from EMC (which is due net 45 days from shipment) and the time when we receive payment for the product from our customer (which often occurs after payment is due to EMC) |
| Due to our sales growth since fiscal year 2004, a significant and increasingly larger portion of our working capital resources must be used to cover amounts owed to EMC during the gap periods |
| If we are not able to maintain sufficient working capital resources to fund payments due to EMC during these gap periods, we could default on or be late in our payments to EMC, which could harm our relationship with EMC, cause EMC to stop or delay shipments to our customers or otherwise reduce the level of business it does with us, harm our ability to serve our customers and otherwise adversely affect our financial performance and operations |
| We believe that our current cash and receivable balances will be sufficient to meet our operating and capital expenditure requirements for at least the next 12 months |
| Projections for our capital requirements are subject to numerous uncertainties, including the cost savings expected to be realized from the restructuring, the actual costs of the integration of Collective, the amount of service and product revenue generated in fiscal 2007 and general economic conditions |
| If we do not realize substantial cost savings from our restructuring, improve revenues and margins, successfully integrate Collective and achieve profitability, we expect to 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 |
| Any such activity requires the approval of the Series A and Series B investors |
| No assurance can be given that our Series A and Series B investors will consent to such new financing, 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 would adversely affect our ability to: • grow the business; • maintain or enhance our product or service 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: • 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 |
| 13 _________________________________________________________________ [65]Table of Contents 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 |
| For example, we no longer utilize our facilities in Sunnyvale, California and various facilities in Europe |
| As a result, we are obligated to continue making lease payments related to our unutilized facilities |
| In the aggregate, in fiscal year 2007 and 2008, we are obligated to pay gross lease payments of approximately dlra0dtta6 million each fiscal year, for facility space which we no longer utilize, and we cannot assure you that we will be able to continue to sublease the unutilized facilities on terms that will significantly offset these obligations |
| 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 size, timing and terms of customer orders; • the introduction of new products by our competitors and competitive pricing pressures; • 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; • decreases in our gross profit as a percentage of revenues for mature products; and • changes in foreign currency exchange rates |
| 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 following table quantifies the fluctuations in our period-to-period results for fiscal year 2006 (amounts in thousands) |
| Net Loss Operating Attributable Total Gross Income to Common Revenue Profit (Loss) Shareholders 2006 Fourth quarter $ 43cmam915 $ 8cmam589 $ (117 ) $ (1cmam253 ) Third quarter 40cmam162 7cmam887 (1cmam557 ) (2cmam988 ) Second quarter 31cmam635 6cmam401 (3cmam463 ) (4cmam148 ) First quarter 39cmam331 8cmam078 (2cmam090 ) (3cmam622 ) Total $ 155cmam043 $ 30cmam955 $ (7cmam227 ) $ (12cmam011 ) 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 14 _________________________________________________________________ [66]Table of Contents 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 |
| 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 MTI and its US employees have the right to terminate their 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 may have difficulty managing any future growth effectively |
| 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 strategy 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 we 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 employees’ or 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 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 |
| 15 _________________________________________________________________ [67]Table of Contents If we and 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 United States 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 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 a number of factors upon the market price of our common stock, including the following: • failure of our results from operations to meet the expectations of public market analysts and investors; • the timing and announcement of new or enhanced products or services by us, our partners or by our competitors; • 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 Capital 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 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 not have registered, or we may not have had an exemption from registering, certain options under the California securities laws and may incur liability to repurchase the options or face potential claims under the California securities laws |
| At various times from March 2005 through March 2006, we issued options to purchase shares of our common stock under our 2001 Stock Incentive Plan, as amended, to our directors, employees and consultants, with exercise prices ranging from a minimum of dlra1dtta44 per share to a maximum of dlra2dtta45 per share, for the purpose of providing incentive compensation to those directors, employees and consultants |
| The aggregate exercise price of the issued options is dlra1dtta2 million |
| The recipients of the issued options did not pay the Company for the options, and none of the options has been exercised as of the date hereof |
| In order to comply with the securities laws of California, where we have our headquarters, we have applied for approval of the terms of a repurchase offer |
| Under the terms submitted to the California Department of Corporations, we would offer to repurchase any outstanding options issued during such period for a cash price equal to 20prca of the aggregate exercise price of the option, plus interest at an annual rate of 7prca |
| There is no assurance that the terms of the repurchase offer will be approved, and we could be required to offer a higher repurchase price or to extend the offer to a greater number of persons |
| 16 _________________________________________________________________ [68]Table of Contents Failure to achieve and maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our business and stock price |
| We are in the process of documenting and testing our internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act, which requires annual management assessments of the effectiveness of our internal controls over financial reporting and a report by our independent auditors regarding our assessments |
| During the course of our testing we may identify deficiencies which we may not be able to remediate in time to meet the deadline imposed by the Sarbanes-Oxley Act for compliance with the requirements of Section 404 |
| Upon completion of the Collective acquisition, we will need to integrate Collective it into our internal control procedures, and as a result, may identify deficiencies |
| In addition, if we fail to maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act |
| Failure to achieve and maintain an effective internal control environment could have a material adverse effect on our stock price |
| Based on our current market capitalization and the current legislation as written, we do not expect to be required to comply with Section 404 of the Sarbanes-Oxley Act until our fiscal year 2008 |
| However, changes in our market capitalization or changes to the legislation may require us to comply earlier |
| We may fail to comply with Nasdaq Marketplace Rules |
| Our securities have traded on the Nasdaq Capital Market since August 16, 2002 |
| We believe we are currently in compliance with Nasdaq Capital Market continued listing requirements |
| However, we failed to comply with Nasdaq Marketplace Rules, specifically with the minimum bid price requirement, in fiscal year 2002, and may in the future fail to comply with the minimum bid price requirement, or other continued listing requirements |
| If that happens and we do not regain compliance by the end of any applicable grace period, our stock would be delisted and we would likely seek to list 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 our Series A Preferred Stock, Series B and any other 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 |