MCDATA CORP - 10-Q Quarterly Report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended October 31, 2004

¨	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

Commission File Number 000-31257

McDATA CORPORATION

(Exact name of registrant as specified in its charter)

Delaware

84-1421844

(State or other jurisdiction of

incorporation of organization)

(I.R.S. Employer

Identification No.)

380 Interlocken Crescent, Broomfield, Colorado 80021

(Address of principal executive offices)(zip code)

(720) 558-8000

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨

At November 30, 2004, 81,000,000 shares of the registrant’s Class A Common Stock were outstanding and 38,042,765 shares of the registrant’s Class B Common Stock were outstanding.

McDATA CORPORATION

FORM 10-Q

QUARTER ENDED OCTOBER 31, 2004

TABLE OF CONTENTS


Item
	PART I – FINANCIAL INFORMATION	4

1.	Financial Statements

	Condensed Consolidated Balance Sheets	4

	Condensed Consolidated Income Statements	5

	Condensed Consolidated Statements of Cash Flows	6

	Notes to Condensed Consolidated Financial Statements	7

2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15

3.	Quantitative and Qualitative Disclosures About Market Risks	34

4.	Controls and Procedures	35

	PART II – OTHER INFORMATION

1.	Legal Proceedings	35

4.	Submission of Matters to a Vote of Security Holders	36

6.	Exhibits	36

Special Note Regarding Forward-Looking Statements

Some of the information presented in this Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Reform Act”). Although McDATA Corporation (“McDATA” or the “Company,” which may also be referred to as “we,” “us” or “our”) believes that its expectations are based on reasonable assumptions within the bounds of its knowledge of its businesses and operations; there can be no assurance that actual results will not differ materially from our expectations. Factors that could cause actual results to differ materially from expectations include:

•

changes in our relationship with EMC Corporation, or EMC, International Business Machines Corporation, or IBM, Hitachi Data Systems, or HDS, and our other distribution partners and the level of their orders;

•

our ability to successfully increase sales of McDATA’s network switches and management software, including SANavigator^®;

•

competition in the multi-protocol (Fibre Channel and IP) network market, including competitive pricing pressures and product give-aways, by our competitors such as Brocade Communication Systems, Inc., or Brocade, QLogic Corp., or QLogic, Computer Network Technology Corporation, or CNT, Cisco Systems, Inc., or Cisco, and other IP and multi-protocol switch and software suppliers;

•

our ability to expand our product offerings including our ability to successfully qualify and ramp sales of new products (including higher port density, multi-protocol and intelligent network products);

•

unexpected engineering costs or delays, additional manufacturing and component costs or production delays that we may experience in connection with new product development;

•

a loss of any of our key customers (and our OEMs’ key customers), distributors, resellers, suppliers or our manufacturers;

•

any change in business conditions, our business and sales strategy or product development plans, and our ability to attract and retain highly skilled individuals;

•

any industry or technology changes that cause obsolescence of our products or components of those products;

•

one-time events and other important risks and factors disclosed previously and from time to time in our filings with the U.S. Securities and Exchange Commission, or SEC, including the risk factors discussed in this Quarterly Report; and

•

the impact of any acquisitions by us of businesses, products, or technologies, including difficulties in integrating any acquisitions.

You should not construe these cautionary statements as an exhaustive list or as any admission by us regarding the adequacy of the disclosures made by us. We cannot always predict or determine after the fact what factors would cause actual results to differ materially from those indicated by our forward-looking statements or other statements. In addition, you are urged to consider statements that include the terms “believes,” “belief,” “expects,” “plans,” “objectives,” “anticipates,” “intends,” or the like to be uncertain and forward-looking. All cautionary statements should be read as being applicable to all forward-looking statements wherever they appear. We do not undertake any obligation to publicly update or revise any forward-looking statements.

PART I – FINANCIAL INFORMATION

McDATA CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)


	October 31, 2004			January 31, 2004
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	47,690		$	50,301
Securities lending collateral		141,361			126,681
Short-term investments		152,307			157,740
Accounts receivable, net of allowance for bad debts of $811 and $926, respectively		64,406			62,670
Inventories, net		16,386			11,364
Prepaid expenses and other current assets		6,764			6,055

Total current assets		428,914			414,811

Property and equipment, net		98,096			99,225
Long-term investments		98,385			103,483
Restricted cash		5,029			5,130
Intangible assets, net		93,146			111,313
Goodwill		78,693			78,787
Interest rate swap		281			—
Other assets, net		27,497			18,219

Total assets	$	830,041		$	830,968

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	28,297		$	16,532
Accrued liabilities		40,759			53,330
Securities lending collateral payable		141,361			126,681
Current portion of deferred revenue		20,791			19,775
Current portion of obligations under notes payable and capital leases		1,013			2,785

Total current liabilities		232,221			219,103

Obligations under notes payable and capital leases, less current portion		388			1,091
Deferred revenue, less current portion		25,049			20,632
Other long-term liabilities		2,020			—
Interest rate swap		—			349
Convertible subordinated debt		172,781			172,151

Total liabilities		432,459			413,326

Commitments and contingencies (Note 15)
Stockholders’ Equity:
Preferred stock, $0.01 par value, 25,000,000 shares authorized, no shares issued or outstanding		—			—
Common stock, Class A, $0.01 par value, 250,000,000 shares authorized, 81,000,000 shares issued and outstanding		810			810
Common stock, Class B, $0.01 par value, 200,000,000 shares authorized, 37,918,492 and 36,051,473 shares issued and outstanding at October 31, 2004 and January 31, 2004, respectively		379			361
Additional paid-in-capital		481,799			476,993
Treasury stock, at cost, 2,975,730 and 975,730 shares outstanding at October 31, 2004 and January 31, 2004, respectively		(18,853	)		(8,752	)
Deferred compensation		(3,620	)		(10,375	)
Accumulated other comprehensive income (loss)		(343	)		403
Accumulated deficit		(62,590	)		(41,798	)

Total stockholders’ equity		397,582			417,642

Total liabilities and stockholders’ equity	$	830,041		$	830,968

The accompanying notes are an integral part of these condensed consolidated financial statements.

McDATA CORPORATION

CONDENSED CONSOLIDATED INCOME STATEMENTS

(in thousands, except per share data)

(unaudited)


	Three Months Ended October 31,						Nine Months Ended October, 31
	2004			2003			2004			2003
Revenue	$	98,525		$	94,659		$	293,975		$	304,852
Cost of revenue		43,704			40,012			129,568			128,307

Gross profit		54,821			54,647			164,407			176,545
Operating expenses (recoveries):
Research and development (excludes amortization of deferred compensation included in Amortization of deferred compensation of $811, $1,943, $3,297 and $2,811, respectively)		22,789			23,571			69,993			60,546
Selling and marketing (excludes amortization of deferred compensation included in Amortization of deferred compensation of $98, $643, $548 and $1,033, respectively)		26,755			23,531			74,477			70,452
General and administrative (excludes amortization of deferred compensation included in Amortization of deferred compensation of $141, $3,133, $952 and $4,776, respectively)		5,760			8,144			19,471			21,764
Acquired in-process research and development and other acquisition related costs		—			11,410			—			11,410
Amortization of purchased intangible assets		5,645			2,516			17,218			3,566
Amortization of deferred compensation (excludes amortization of deferred compensation included in cost of revenue of $26, $285, $162 and $555, respectively)		1,050			5,719			4,797			8,620
Restructuring charges (recoveries)		(55	)		—			1,263			—

Total operating expenses		61,944			74,891			187,219			176,358
Income (loss) from operations		(7,123	)		(20,244	)		(22,812	)		187
Interest and other income		1,639			1,860			4,302			5,508
Interest expense		(395	)		(221	)		(862	)		(2,497	)

Income (loss) before income taxes and equity in net loss of affiliated company		(5,879	)		(18,605	)		(19,372	)		3,198
Income tax expense (benefit)		(618	)		30,852			40			38,210

Loss before equity in net loss of affiliated company		(5,261	)		(49,457	)		(19,412	)		(35,012	)
Equity in net loss of affiliated company		(262	)		(591	)		(1,380	)		(591	)

Net loss	$	(5,523	)	$	(50,048	)	$	(20,792	)	$	(35,603	)

Basic net loss per share	$	(0.05	)	$	(0.44	)	$	(0.18	)	$	(0.31	)

Shares used in computing basic net loss per share		115,624			114,955			115,377			114,627

Diluted net loss per share	$	(0.05	)	$	(0.44	)	$	(0.18	)	$	(0.31	)

Shares used in computing diluted net loss per share		115,624			114,955			115,377			114,627

The accompanying notes are an integral part of these condensed consolidated financial statements.

McDATA CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)


	Nine Months Ended October 31,
	2004			2003
Cash flows from operating activities:
Net loss	$	(20,792	)	$	(35,603	)
Adjustments to reconcile net loss to cash flows from operating activities;
Depreciation		21,127			19,538
Amortization		20,943			8,772
Equity in net loss of affiliate		1,380			591
Loss on trade-in/retirement of assets		179			482
Net realized loss (gain) on investments		652			(191	)
Inventory and inventory commitment provisions		4,319			2,077
Acquired in-process research and development		—			11,410
Impairment loss		50			—
Bad debt provision		25			81
Deferred income taxes		—			38,811

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