Oh, What a Tangled Web Ray Noorda's MTI and Canopy Weave!

A related-party transaction with the Canopy Group helps MTI make its quarter.
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How many times do we have to tell you? The reason you don't rely exclusively on a company's earnings announcement is because you never quite know

how

a company made its earnings until you read the 10-Q, which must be filed 45 days after the end of the quarter.

Case in point:

MTI Technology

(MTIC)

, which makes mega-computer storage systems and is 50% owned by Ray Noorda, former CEO of

Novell

(NOVL)

. The company met analyst forecasts on Oct. 28 when it announced fully taxed earnings of 10 cents per share. The announcement caused MTI's stock to immediately gain several points, on its way to almost doubling! It closed yesterday at 31 15/16.

But it wasn't until the 10-Q was filed late Tuesday that the company disclosed a "related party transaction" with the Noorda-controlled

Canopy Group

. According to that transaction, which was never previously disclosed, the company sold goods and services to Canopy last quarter to the tune of $2.9 million. It was MTI's first sale to Canopy.

Without that deal, it appears MTI's earnings would've come in around 2 cents light.

This is just the latest in a string of controversies surrounding MTI, which earlier this year hit the radar screen of accounting sleuth Howard Schilit of the independent

Center for Financial Research and Analysis

. Most recently Schilit noted that MTI amended its revenue-recognition policy to include what is known as "bill and hold." That means it can bill for products -- and recognize revenue --

before

the products are shipped. MTI also has days outstanding of receivables stretched to 104 days from 96 days (would've been 109 days if it hadn't been for the related-party transaction, says one short-seller). Either way, they're unusually high, suggesting the company is shipping more product than the distribution channel can handle. The company attributed the rise to a higher percentage of sales occurring in the last month of the quarter.

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What's more, inventories zoomed to 93 days from 61 days. (The company offered an explanation in its 10-Q, but unfortunately, I don't have a Ph.D. in gibberish. Go see the explanation for yourself.)

Then there's this whole tangled web. The company's relationship with Canopy is only part of it.

In addition to his 50% stake in MTI, Noorda owned more than 99% of

Caldera Systems

, a private provider of Linux operating systems that competes head-on with red-hot

Red Hat

(RHAT)

. He then sold 25% of Caldera to MTI for $3 million in cash, and $3 million in a note. The Caldera stake was subsequently diluted down to 20%. Analysts bullish on MTI are touting the Caldera stake as a potential bonus if Caldera goes public and gets the same treatment as Red Hat, which has a market value of $8.2 billion.

But wait, there's more. According to the latest 10-Q, back in August, when MTI's stock was 18 3/4, MTI issued a warrant for 150,000 shares of MTI stock to an unidentified person at Canopy for consulting services.

And just to show how tangled these webs can get -- MTI, you may recall, was on the receiving end of a new-generation switch from

Ancor Communications

(ANCR)

. An earlier generation of Ancor switches was shown to be inferior to switches from

Brocade Communications

(BRCD)

in a Brocade-sponsored test performed by

KeyLabs

, which is owned by Noorda and Canopy.

Got it?

MTI officials were out of the office yesterday and couldn't be reached.

Herb Greenberg writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, though he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback at

herb@thestreet.com. Greenberg also writes a monthly column for Fortune.

Mark Martinez assisted with the reporting of this column.