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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended Commission File Number
September 30, 1996 0-19674
SYQUEST TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-2793941
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
47071 Bayside Parkway, Fremont, California 94538
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (510) 226-4000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par
value $.001 per share
(Title of Class)
Indicate by checkmark 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 checkmark 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 [X].
The aggregate market value of the voting stock held by nonaffiliates of the
registrant, based upon the closing price of Common Stock on November 30, 1996
as reported by NASDAQ, was approximately $78,663,000. Shares of Common Stock
held by each officer and director and by each person who owns 5% or more of the
outstanding Common Stock have been excluded in that such persons may be deemed
to be affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes. The number of outstanding shares
of the registrant's Common Stock on November 30, 1996 was 15,830,753.
DOCUMENTS INCORPORATED BY REFERENCE
Specifically identified portions of the Proxy Statement for Registrant's
1997 Annual Meeting of Stockholders (the "Proxy Statement") are incorporated by
reference into Part III of this Annual Report on Form 10-K.
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FORWARD LOOKING STATEMENTS
IN ADDITION TO HISTORICAL INFORMATION, THIS ANNUAL REPORT CONTAINS CERTAIN
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES, SUCH AS
STATEMENTS OF THE COMPANY'S PLANS, BELIEFS, EXPECTATIONS AND INTENTIONS. THE
COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THE RESULTS DISCUSSED IN
THE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH
DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THE SECTION
ENTITLED "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- FACTORS THAT MAY AFFECT FUTURE RESULTS." SYQUEST
UNDERTAKES NO OBLIGATION TO PUBLICLY REVISE THESE FORWARD-LOOKING STATEMENTS TO
REFLECT EVENTS OR CIRCUMSTANCES THAT ARISE AFTER THE DATE HEREOF. READERS SHOULD
CAREFULLY REVIEW THE RISK FACTORS DESCRIBED IN OTHER DOCUMENTS THE COMPANY FILES
FROM TIME TO TIME WITH THE SECURITIES EXCHANGE COMMISSION, INCLUDING THE
QUARTERLY REPORTS ON FORM 10-Q TO BE FILED BY THE COMPANY IN 1997 AND ANY
CURRENT REPORTS ON FORM 8-K FILED BY THE COMPANY.
ITEM 1. BUSINESS
General
SyQuest Technology, Inc. ("SyQuest"/1/ or the "Company") designs, develops,
manufactures, and markets removable hard disk cartridges, associated disk drives
and free-standing storage systems. The Company's products combine the advantages
of fixed hard disk drives with the benefits of removability, which include
unlimited incremental expansion of data storage capacity, transfer and sharing
of data and software among personal computers, and backup, archival storage and
physical security of data. The Company's principal products have been 5.25 inch
and 3.5 inch cartridges, drives and storage systems used with personal computers
and work stations manufactured and sold by manufacturers of such products. These
products are typically purchased by distributors, mail order firms, national
retail chains, value added resellers, original equipment manufacturers ("OEMs")
for integration into their equipment, government contractors and others for
resale to the end users.
Industry Background
All computer systems use one or more types of memory. Internal
semiconductor or main memory is extremely fast but also expensive and is
therefore used in limited quantities. As a result, auxiliary memory devices,
such as disk drives, have long been used to provide additional memory capacity
for operating systems, application programs and user data.
Today's personal computers and workstations typically use fixed disk drives
as their primary auxiliary storage device. Other auxiliary memory devices
include SyQuest's removable disk cartridges and disk drives, removable drives
(where the entire drive unit is removable rather than only the disk), standard
and high capacity floppy diskettes and drives, tapes and tape drives, magneto
optical media and drives, phase change optical media and drives, WORM (Write
Once Read Many) optical media and drives, CD-ROM (Compact Disk - Read Only
Memory) optical media and drives, CD-R (Compact Disk Rewritable) optical media
and drives, and flash memory devices.
/1/ "SyQuest," "SQ555," "SQ400," "SQ5110C," "SQ800," "SQ5200," "SQ2000,"
"SQ3105," "SQ310," "SQ3270," "SQ327," "EZ135," and "SQ3135," "SQ135,"
"SQ1100" and "SQ110" are trademarks of the Company. This Annual Report
also includes trademarks of companies other than SyQuest Technology, Inc.
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The Company believes that its removable disk cartridges and disk drives are
the most appropriate auxiliary memory device for various business applications
due to their combination of interchangeability, performance and cost.
Technology
The Company believes that it has developed and continues to refine a
sophisticated and proprietary removability technology relating to its product
designs and manufacturing processes. Features of this technology include:
. specialized air flow design to provide a sufficiently clean
---------------------------
environment inside the cartridge for reliable operation;
. ramp loading mechanics and microcode to load the heads reliably over
------------------------------------
the spinning disk when the cartridge is inserted and to enable the
heads to retract from the disk before the cartridge is removed;
. cartridge loading mechanisms to position the disk consistently over
----------------------------
the drive hub with centering accuracies that are measured in micro
inches;
. closed loop servo electronics and microcode to enable the cartridge to
-------------------------------------------
achieve high track densities in spite of the variations in centering
inherent in removable disk cartridges;
. multiple zone recording to decrease bits per track and data transfer
-----------------------
rates in the inner tracks of the disk so that variations in centering
of the disk do not impair reading and writing accuracy;
. adaptive microcode to perform system control functions, such as track
------------------
buffer control, actuator control and spin motor control, so as to
compensate intelligently for variations in disks to ensure
interchangeability and permit the use of wider tolerance mechanical
components;
. servo track writing techniques to permit interchangeability of
------------------------------
cartridges without compromising data retrievability; and
. advanced tribology (the science of design, friction, wear and
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lubrication of interacting surfaces) to achieve head flying heights
------------------------------------
over removable cartridge disks comparable to those of fixed Winchester
disk drives.
Products
The Company's principle products are 5.25 inch and 3.5 inch removable
Winchester disk drives, associated cartridges and system products.
5.25 Inch Products
The Company's 5.25 inch drive and cartridge products are designed and
developed by the Company's engineering staff in Fremont, California. The 5.25
inch product line (including SyQuest branded systems products) accounted for
44% of the Company's net revenues in fiscal 1996 compared to 60% in fiscal 1995
and 72% in fiscal 1994. The 5.25 inch product line includes:
SQ555 & SQ400. The 44 megabyte SQ555 drive and associated SQ400 cartridge,
-------------
first introduced in 1988, operate at a typical seek time of 20 milliseconds and
support a burst asynchronous data transfer rate of 1.25 megabytes per second.
The SQ555 was discontinued and phased out of production during the second
quarter of fiscal 1995. The Company continues to manufacture and sell SQ400
cartridges.
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SQ5110C & SQ800. The 88 megabyte SQ5110C drive and SQ800 cartridge, first
---------------
introduced in 1991, operate at a typical seek time of 20 milliseconds and
support a burst synchronous data transfer rate of 4 megabytes per second. The
SQ5110C can both read and write SQ400 and SQ800 cartridges. This drive was
phased out of production in the second quarter of 1996, but cartridges remain in
production and are expected to remain in production into 1997.
SQ5200 & SQ2000. The 200 megabyte SQ5200 drive and SQ2000 cartridge,
---------------
introduced in 1994, operate at a typical seek time of 16 milliseconds and
support a burst synchronous data transfer rate of 5 megabytes per second. The
SQ5200 can read and write both SQ400 and SQ800 as well as SQ2000 cartridges. The
SQ5200 and SQ2000 products are still in production and are expected to remain in
production throughout 1997.
3.5 Inch Products
The Company's 3.5 inch drive and cartridge products are designed and
developed at SyQuest development centers in Boulder, Colorado and in Campbell,
California. The 3.5 inch product line (including SyQuest branded systems)
accounted for 56.0% of the Company's net revenues in fiscal 1996 compared to 40%
in fiscal 1995 and 27% in fiscal 1994. The product line includes:
SQ3270 and SQ327. The 270 megabyte SQ3270 drive and associated SQ327
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cartridge, first introduced in 1993, operate at a typical seek time of 13.5
milliseconds and support a burst data transfer rate of 4 megabytes per second.
The SQ3270 can read and write the SQ310 cartridge (a 105 megabyte cartridge
developed for the SQ3105 drive which was discontinued at the beginning of the
fiscal year) as well as the SQ327 cartridge. The SQ3270 family of drives was
discontinued in the fourth quarter of fiscal 1996 as the new generation of
SyQuest drives began to come on line, but the SQ327 cartridges will continue in
production.
EZ3135 and SQ135. The 135 megabyte SQ3135 drive and SQ135 cartridge, first
----------------
introduced in the fourth quarter of 1995, operate at a typical seek time of 13.5
milliseconds and support a burst data transfer rate of 5 megabytes per second.
Marketed primarily as a bridge product to the new generation EZFlyer 230 drives
and cartridges, production of this drive was discontinued in the fourth quarter
of fiscal 1996, but the SQ135 cartridges will continue in production.
EZFlyer 230 and SQ230. The 230 megabyte EZFlyer 230 and associated SQ230
---------------------
cartridge, first shipped in volume in the fourth quarter of fiscal 1996, operate
at a typical seek time of 13.5 milliseconds and support a sustained data
transfer rate of 2.4 megabytes per second. The EZFlyer is able to read and write
SQ135 cartridges as well as SQ230 cartridges.
SyJet 1.5GB and SQ15000. The SyJet 1.5GB drive and associated SQ15000
-----------------------
cartridge represent a new generation of removable storage devices for SyQuest.
The SyJet operates at a typical seek time of 12 milliseconds and delivers burst
data transfer rates of 10 megabytes per second. The Company commenced beta test
shipments of the SyJet in September 1996, and commenced limited production
shipments in December 1996.
Systems Products
SyQuest also designs, develops, manufactures and markets storage systems
which incorporate the Company's 5.25 inch and 3.5 inch drives and cartridges. A
system generally consists of a drive, a cartridge and additional components
necessary for a user to attach and operate the system to his computer. These
products, which include the EZFlyer 230, EZ3135 and 200SS subsystems, are
marketed under the SyQuest brand name to national retail chains, commercial
distributors, computer mail order houses and others.
Markets and Customers
The Company markets and sells its products through manufacturer
representatives and SyQuest's direct sales force to VADs (Value Added
Distributors), commercial and industrial distributors, systems integrators,
retail sales channels (computer specialty retailers, computer superstores,
computer mail order outlets, etc.) and OEMs. As
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the market for the Company's products has become increasingly segmented, diverse
sales channels have developed. While the market for the majority of the
Company's products has been focused on distributors, VADs and systems
integrators, the Company's sales to retailers and superstores have increased
from nearly zero in 1994 to over 11% of the total net revenue in fiscal 1996.
The Company believes this trend will continue into the near future.
The Company believes that continuing advancements and increased end user
accessibility to applications with heavy storage demands such as multimedia,
digital audio and music, digital video, the Internet, computer graphics, digital
photography and large programs such as Windows 95, will benefit the Company's
market by continuing to create a need for more storage. This basic need is
addressed by the "endless" storage design offered by cartridge-based peripheral
devices like SyQuest's and competitive products.
The Company plans to aggressively develop marketing strategies (channel
marketing programs, national and consumer advertising campaigns, aggressive
merchandising, etc.) and commit financial resources for these market strategies
in an attempt to capture additional market share and presence. With the new
generation of products being introduced in 1997, the Company will also make an
effort to increase its level of business in the OEM market. There can be no
assurance, however, that these efforts will result in increases to the Company's
sales.
The majority of SyQuest's business is done through commercial distributors
throughout the world. The largest single distributor of SyQuest products is
Ingram Micro, which accounted for approximately 10% of the Company's total
revenue in fiscal 1996.
Recently, the Company and Legend Group ("Legend"), the largest computer
systems manufacturer and distributor in the People's Republic of China, executed
a distribution agreement whereby Legend has become the exclusive distributor of
the Company's products in the developing Chinese market.
A growing segment of the Company's business is the retail/superstore
channel, which now accounts for over 11% of the Company's worldwide revenues.
The largest superstore reseller of SyQuest products in fiscal 1996 was CompUSA,
which accounted for 2.6% of the Company's total net revenue. In the mail order
retail channel, MAC/Micro Warehouse continued to be the largest reseller as it
represented nearly 8% of SyQuest's net revenue for fiscal 1996.
At the end of September, 1996, the Company had 7 direct sales personnel
located in 5 offices in the United States, 4 direct sales representatives in
Asia, Australia and the Far East located in 4 offices, and 3 direct sales
representatives in Europe located in 3 offices. North American sales represented
57% of the Company's total net revenue in fiscal 1996.
Manufacturing
The Company manufactures high volume, mature products in Malaysia. In
addition, the Company assembles system products and manufactures initial
production quantities of new products in Fremont, California.
The Company currently has manufacturing relationships with Nomai, S.A.
("Nomai") for cartridges and others for manufacture and subassembly of
components. The Company has filed lawsuits against Nomai and Maxell in France
alleging copyright and patent infringement and in the United States regarding
various related claims, including royalty payments owed by Nomai under a
previous arrangement. In November 1996, the Company and two individuals owning a
controlling interest in Nomai announced the execution of a letter of intent
proposing a transaction in which the Company would acquire a controlling
interest in Nomai from those individuals in exchange for shares of the Company's
Common Stock, and would commence a tender offer to acquire up to 100% of the
publicly held shares of Nomai. On November 25, 1996, however, the Company
announced that plans to acquire Nomai have been terminated, adding that it
intends to pursue vigorously all available causes of action against Nomai. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Factors That May Affect Future Results--Reliance on Manufacturing
Relationships; Nomai Lawsuits" and "Legal Proceedings."
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The Company and Legend Group ("Legend"), the largest computer systems
manufacturer and distributor in the People's Republic of China, have announced
the intention to form a joint venture company for the manufacture and
distribution of the Company's removable cartridge hard drives and products in
China. The Company would provide the proposed joint venture company with
training and manufacturing know-how to insure that the joint venture had the
requisite skills to manufacture the Company's removable cartridge hard drives
and products. The Company and Legend have begun the process of negotiating
definitive agreements. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Factors That May Affect Future Results--
Reliance on Manufacturing Relationships; Nomai Lawsuits."
The Company's drive manufacturing operations consist of incoming quality
inspection of components, assembly and test of subassemblies, final assembly of
drives, pretest, burn-in of drives and customer simulation tests. The cartridge
production lines involve extensive media parametric and tribology testing,
assembly of the disk onto a hub, balancing of the cartridge, mapping of media
defects, servowriting and formatting of each cartridge.
The manufacture of removable cartridge disk drives and disk cartridges is
complicated and difficult. In the past, the Company experienced manufacturing
difficulties, including quality problems, resulting in low yields impacting the
Company's ability to meet sales demand. While the Company is not currently
experiencing any quality problems of a material nature in the manufacturing
process, there can be no assurance that the Company will not experience
manufacturing problems in the future. Any disruption of the Company's
manufacturing could adversely affect the Company's business and results of
operations. Foreign manufacturing is subject to various risks, including changes
of governmental policies, transportation delays and interruptions, and the
imposition of tariffs and import/export controls.
The Company obtains almost all subassemblies and components from outside
sources located principally in the United States and Asia. Several of these
components are available through limited or single sources. In the past, the
failure to obtain sufficient quantities of certain key components or to obtain
components of satisfactory quality has caused production delays. Prolonged
disruptions in the supply of any key components used in the Company's
manufacturing processes could adversely affect the Company's operating results
and damage customer relationships. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Factors That May Affect Future
Results -- Shortages of Critical Components; Absence of Supply Contracts;
Suppier Workouts" and " -- Reliance on Manufacturing Relationships; Nomai
Lawsuits."
Research and Development
SyQuest's strategy is to focus its research and development efforts on
advancing its proprietary removability technology. At the same time, the Company
takes advantage of developments in the fixed Winchester disk drive industry by
purchasing standard components from vendors that sell to manufacturers of fixed
Winchester disk drives. SyQuest's removability technology includes both product
designs and manufacturing processes and is built upon expertise in mechanical,
electrical and firmware engineering as well as in tribology.
The Company's current product development efforts are directed toward both
high performance drives and cartridges and a value line of products. SyQuest
makes extensive use of computer-aided design tools in mechanical, electrical,
firmware and circuit board design areas.
In fiscal 1996, 1995 and 1994, the Company's research and development
expenses were $25.9 million, $23.9 million and $18.0 million, respectively.
The data storage industry is subject to rapid technological change and
short product life cycles. Data storage manufacturers continually strive for
larger data storage capacities, higher performance and lower costs. Meeting
these demands is more difficult and complicated for manufacturers of removable
cartridge drives such as SyQuest than for fixed drive manufacturers. In order to
remain competitive, the Company must continue to design,
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develop, manufacture, market and sell new products in a timely manner. The
Company may also identify and pursue opportunities for affiliation and/or
acquisition to complement its existing technology base. To this end, the Company
has incurred and expects to continue to incur significant product research and
development expenditures. However, there can be no assurance that SyQuest will
be able to introduce cost effective and competitive new products in a timely
manner. If the Company is unable to do so, its future operating results will be
adversely affected. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Factors That May Affect Future Results --
Technological Change and New Products."
Competition
The removable data storage industry is intensely competitive and is
characterized by rapid technological change which can cause substantial shifts
in pricing and product capabilities. The principle competitive factors in the
industry include price, performance, storage capacity, ease of use, customer
consumption, state of the personal computer market, customer service and time-
to-volume production. In addition, smaller form factors, aesthetic appeal,
ruggedness, compatibility and interfaces are important factors. Many of the
Company's competitors have greater financial, marketing and technological
resources than the Company, and there can be no assurance that the Company will
be able to compete effectively. In particular, several of the Company's
competitors have significantly greater cash reserves than the Company which may
enable them to better withstand intense price competition and/or develop
technology over the long term.
The Company believes that its products compete most directly with other
removable media data storage devices, such as disk drives offered by Iomega
Corporation and magneto optical disk drives. While the Company pioneered the
technology used in the Winchester removable cartridge hard disk drive and for
many years enjoyed a unique position in the industry having little direct
competition, the competitive scene changed due to the activities of two
companies. The Company's most direct competition comes from Nomai, which
manufactures Winchester cartridges compatible with many SyQuest systems, and
Iomega, whose Winchester-based Jaz drive competes directly with the Company's
3.5-inch products and is considered by the Company as similar in price and
performance to the Company's SyJet drive. Today, only Iomega and Nomai
manufacture Winchester-based removable cartridge disk drive products. Also noted
as competition is Iomega's Zip product, based on a high-density floppy-disk
technology, which has gained a large following in the Company's core markets and
effectively enlarged the removable storage market at the retail level, and which
competes with the EZ Flyer 230.
Although the Company believes that its products offer performance and
certain other advantages over most other removable media storage devices
available today, the Company believes that the price/performance levels of
existing removable media products will improve and that other companies will
introduce new removable media storage devices. Accordingly, the Company believes
that its products will face intense competition from makers of removable storage
products based on other technologies. These technologies and some of their
respective developers include: (optical) Panasonic, Pinnacle Micro, Maxoptics,
Fujitsu; (rewritable CD) Toshiba, Sony, Phillips, Panasonic, MKE; and (LS-120)
MKE, OR Technology, Compaq and Swan Instruments. In addition, the Company may
face increased competition in the future from alternative data storage and
retrieval technologies such as high-capacity floppy disk drives, rewritable CD
drives and DVD devices. In particular, a consortium comprising Compaq Computer,
3M, Insite and Matsushita-Kotobuki Electronics Industries Ltd. has announced and
is selling the LS120, a high-capacity floptical drive that is compatible with
conventional floppy disks. Each of Mitsubishi Electric Corp. and Mitsumi has
also announced that it plans to manufacture a high capacity, floppy drive that
is downward compatible with existing floppy diskettes. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Factors That May Affect Future Results -- Competition."
Backlog
The Company's sales are primarily for delivery of standard products
according to standard purchase orders, which may be subject to change or
cancellation by the customer without significant penalties. The quantity
actually purchased, as well as the shipment schedules, therefore, are frequently
revised to reflect changes in the customer's needs. At times when price
competition is intense and price moves are frequent, the Company
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believes that most customers may place purchase orders below their projected
needs in order to obtain the most favorable pricing. Conversely, at times when
the industry's participants are on allocation, the Company believes that certain
customers may place purchase orders beyond their projected needs in order to
obtain a greater portion of such allocation. In light of these factors, backlog
as of any particular date may not be indicative of the Company's actual revenues
for any succeeding period, and, therefore, is not material to an evaluation of
the Company's future revenue.
Patents and Licenses
Since its inception, the Company has been issued more than 60 U.S. and
foreign patents relating to certain features or components of its disk drive and
cartridge products. Many of these patents, however, do not pertain to the
Company's recent product generation. The Company has approximately 100 pending
U.S. and foreign patent applications, although there can be no assurances that
such applications will mature into patents. No assurance can be given that any
patents issued to the Company will not be challenged, invalidated or
circumvented. In addition to potential patent protection, the Company relies on
the laws of unfair competition, copyright, trademark and trade secrets to
protect its proprietary rights. The Company also utilizes nondisclosure
agreements and internal secrecy procedures. No assurance can be given that the
protective measures taken by the Company will be sufficient to preclude
competitors from developing competing or similar technologies or products.
The Company has been and may in the future be notified that it may be
infringing patent or other proprietary rights. None of these notifications has
resulted in any litigation against the Company, but there can be no assurance
that litigation will not be commenced in the future. If infringement is
established, the Company could be required to pay damages and be enjoined from
selling the infringing products or practicing the infringing processes.
Moreover, if the Company were unable to alter its products or processes to avoid
the infringement claim, it might be required to obtain licenses and there can be
no assurance that necessary licenses could be obtained on satisfactory terms, if
at all. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Factors That May Affect Future Results -- Dependence on
Proprietary Technology."
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Employees
As of November 30, 1996, the Company had a total of 1,904 full time
employees of which 209 were in research and development, 1,413 were in
manufacturing, 103 were in quality assurance, 74 were in marketing, sales and
support, and 105 were in finance and administration. Of the total number of
employees, the Company has 273 employees located in North America, 29 employees
located in Europe, 9 employees located in Singapore, 1,586 employees in
Malaysia, 2 employees in Australia and 5 employees in Japan. The Company makes
use of temporary employees, primarily in manufacturing, who are hired on an as-
needed basis. None of the Company's employees is represented by a labor union.
The Company has experienced no material work stoppages and believes that its
employee relations are good.
Foreign and Domestic Operations and Export Sales
See Note 2 to the Company's Consolidated Financial Statements set forth in
Item 8 of this Annual Report on Form 10-K for financial information concerning
SyQuest's foreign and domestic operations and export sales, which information is
incorporated herein by reference.
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ITEM 2. PROPERTIES
The Company's corporate offices, including research and development,
domestic manufacturing, quality assurance, marketing, sales and support, and
finance and administration are located in Fremont, California. The Company owns
its manufacturing facility in Penang, Malaysia; the building is 100,000 square
feet and the total land area leased by the Company at such site is 193,432
square feet. The lease on the Penang land area expires in 2050. SyQuest or one
of its subsidiaries leases the facilities described in the following table:
<TABLE>
<CAPTION>
Size Expiration of
Location (Sq. Ft.) Lease Principal Use
-------- --------- ------------- -------------
<S> <C> <C> <C>
Fremont, California.......... 139,311/1/ April 1999 Administration,
Manufacturing and
Research and
Development
Singapore.................... 9,225 February 1997 Administration
Boulder, Colorado............ 13,896 November 1999 Research
and Development
Campbell, California......... 11,461 June 1997 Research and
Development
Amsterdam, the Netherlands... 7,700/2/ March 2000 Unoccupied
Ismaning, Germany........... 56,000 September 1999 Administration
-------
Total........................ 237,593
=======
</TABLE>
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/1/ Consists of two adjacent buildings
/2/ The Company is in the process of assigning its Amsterdam office space and
anticipates that such assignment will be completed no later than the second
quarter of fiscal 1997.
The Company also leases or rents office space for sales in the greater
metropolitan areas of Washington, D.C.; Wylie, Texas; Pembroke and Boca Raton,
Florida; Raleigh, North Carolina; Los Angeles and Fremont, California;
Singapore; Paris, France; London and Edinburgh, United Kingdom; Stuttgart and
Weingarten/Ravensburg, Germany; Milan, Italy; Tokyo, Japan; and Sydney,
Australia.
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ITEM 3. LEGAL PROCEEDINGS
The Company has been named as a defendant in four putative class action
lawsuits. Two of the actions, Ravens, et al. v. Iftikar, et al. (filed April
---------------------------------
2, 1996) and Bellezza, et al. v. Iftikar, et al. (filed May 24, 1996) have been
-----------------------------------
brought in the United State District Court for the Northern District of
California and have been assigned to the Honorable Vaughn Walker (collectively,
the "Federal Lawsuit"). Certain current and former officers and directors also
have been named as defendants in the Federal Lawsuit. Plaintiffs have petitioned
the Court to consolidate the foregoing complaints into one consolidated action.
That request, as well as other procedural matters which arose during a July 18,
1996, case management conference, is under consideration. The plaintiffs in the
Federal Lawsuit purport to represent a class of all persons who purchased the
Company's Common Stock between October 21, 1994 and February 1, 1996. The
Federal Lawsuit alleges that the defendants violated the federal securities laws
through material misrepresentations and omissions. The third suit, a purported
class action entitled Gary S. Kaufman v. SyQuest Technology, Inc., et al., was
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filed on March 25, 1996, in the Superior Court of the State of California for
the County of Alameda (the "Kaufman Lawsuit"). Certain current and former
executive officers and directors of the Company are also named as defendants in
the Kaufman Lawsuit. The plaintiffs in the Kaufman Lawsuit purport to represent
a class of all persons who purchased the Company's Common Stock between May 2,
1995, and February 2, 1996. The Kaufman Lawsuit alleges that defendants violated
various California laws through material misrepresentations and omissions.
Unspecified damages are sought. The fourth purported class action entitled
Ravens, et al. v. Iftikar, et al., was filed on October 11, 1996 in the Superior
- ---------------------------------
Court of the State of California for the County of Alameda (the "Ravens
Lawsuit"). The Ravens Lawsuit alleges that the Company and certain of its former
officers and directors violated various California laws through material
representations and omissions between October 21, 1994 and February 2, 1996, and
is purportedly brought on behalf of persons who purchased stock during that
period. Unspecified damages are sought. The Ravens Lawsuit has been consolidated
with the Kaufman Lawsuit. Plaintiffs are preparing a consolidated complaint. The
Company intends to defend the cases vigorously.
On May 14, 1996, the Company was served with a shareholder's derivative
action filed in Alameda County, California, Superior Court entitled John Nitti,
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et al. v. Syed Iftikar, et al. On July 22, 1996, plaintiffs filed an amended
- ------------------------------
complaint. The action seeks to recover unspecified and punitive damages on
behalf of the Company from current and former officers and directors of the
Company for alleged breach of fiduciary duty, unjust enrichment and waste of
corporate assets. The Company is a nominal defendant in the action. The
complaint alleges that the officers and directors issued false and misleading
information and sold shares of the Company's stock at artificially inflated
prices. The allegations are essentially the same as those in the putative class
actions. The Company intends to defend this case vigorously.
A third party has notified the Company that it believes the Company
infringes on six U.S. patents. It is the Company's belief that the claims are
without merit or that the infringement claims related to component parts
purchased from vendors. The Company also believes that in the event the third
party prevails on its claims, the Company will be indemnified by its vendor for
any liability arising from the alleged infringements and that this matter will
not have a material adverse effect upon its financial condition or results of
operations.
The Company has filed suit against Nomai, S.A. (Nomai) and Maxell in France
for copyright and patent infringement, and though it did not obtain the
temporary injunction sought against Nomai prohibiting the sale and distribution
of Nomai's 200 megabyte cartridges, the underlying suit continues. The Company
has also initiated an arbitration proceeding against Nomai seeking payment of
outstanding royalties of approximately $1 million. The arbitration process began
in May 1995, in San Jose, California.
From time to time, the Company is involved in litigation that it considers
to be in the normal course of its business. Other than set forth above, the
Company is not engaged in any legal proceedings as of the date hereof which the
Company expects individually or in the aggregate to have a material adverse
effect on the Company's financial condition or results of operations.
11
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held a Special Meeting of its stockholders on September 26,
1996. All of the proposals submitted to the stockholders at the meeting were
approved, and the vote on such proposals is described below:
1. A proposal to amend the Company's Certificate of Incorporation to
increase the number of authorized shares of Common Stock from
20,000,000 to 60,000,000 was approved by the following vote:
<TABLE>
<S> <C> <C>
For : 9,240,216
Against : 1,237,995
Abstain : 87,414
Broker Non-Vote : 0
</TABLE>
2. A proposal to allow the issuance by the Company of additional shares
of Common Stock to the holders of the Company's 7% Cumulative Convertible
Preferred Stock, Series 1, upon conversion was approved by the following
vote:
<TABLE>
<S> <C> <C>
For : 4,100,593
Against : 832,417
Abstain : 113,801
Broker Non-Vote : 5,518,814
</TABLE>
3. A proposal to increase the number of shares issuable under the
Company's 1991 Stock Option Plan from 4,428,524 shares to 6,000,000
shares was approved by the following vote:
<TABLE>
<S> <C> <C>
For : 2,854,778
Against : 2,123,841
Abstain : 121,442
Broker Non-Vote : 5,465,564
</TABLE>
4. A proposal to increase the number of shares issuable under the
Company's 1992 Non-Employee Director Stock Option Plan from 250,000 shares
to 500,000 shares was approved by the following vote:
<TABLE>
<S> <C> <C>
For : 3,007,448
Against : 2,216,623
Abstain : 138,942
Broker Non-Vote : 5,202,572
</TABLE>
A proposal to amend the Company's 1992 Non-Employee Director Stock Option
Plan to increase the annual grants of options to the non-employee directors
and to provide for a one-time option grant to purchase 30,000 shares to new
non-employee directors (which one-time grant was also made to each non-
employee director as of the date of stockholder approval of the amendments)
was approved by the following vote:
<TABLE>
<S> <C> <C>
For : 7,788,555
Against : 2,236,833
Abstain : 132,952
Broker Non Vote : 407,285
</TABLE>
12
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
SyQuest's Common Stock, $.001 par value, was first offered to
the public on December 18, 1991 and since that time has been traded in
the over-the-counter market as a Nasdaq National Market security under
the symbol SYQT. The following table sets forth, during the periods
indicated, high and low closing sales prices in the Nasdaq National
Market system for the last two fiscal years:
<TABLE>
<CAPTION>
Fiscal Year Ended
September 30, 1995 High Low
---------------------- --------- -------
<S> <C> <C>
First Quarter......... $18 3/4 $10
Second Quarter........ $18 1/2 $10 5/8
Third Quarter......... $15 3/4 $10 5/8
Fourth Quarter........ $19 1/8 $12 1/2
Fiscal Year Ended
September 30, 1996 High Low
---------------------- -------- -------
First Quarter......... $13 1/2 $ 8 7/8
Second Quarter........ $11 1/4 $ 4 7/8
Third Quarter......... $18 7/8 $ 4 3/8
Fourth Quarter........ $ 8 5/8 $ 5
</TABLE>
The Company's policy is to retain its earnings to finance future
growth and it has paid no dividends in the last two fiscal years. The
Company does not anticipate declaring cash dividends on its Common
Stock in the forseeable future. In addition, the payment of cash
dividends is restricted by certain of the Company's borrowing
arrangements. See Note 4 of Notes to Consolidated Financial
Statements. As of November 30, 1996, there were approximately 427
stockholders of record. Because many of such shares are held by
brokers and other institutions on behalf of stockholders, the Company
is unable to estimate the total number of stockholders represented by
these record holders.
13
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data is derived from the
audited consolidated financial statements of SyQuest. The data should be read in
conjunction with the consolidated financial statements, related notes and
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in Items 7 and 8 of this Annual Report.
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-------------------------------------------------------
1996 1995 1994 1993 1992
--------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
(in thousands, except per share data)
CONSOLIDATED STATEMENTS OF
INCOME DATA:
Net revenues $ 200,407 $299,544 $221,001 $206,362 $174,852
Gross profit (loss) (48,286) 51,047 60,659 75,281 59,142
Income(loss) from operations (130,676) (17,101) 5,120 19,278 17,592
Net income(loss)/(1)(2)/ $(136,651) $(11,786) $ 5,405 $ 15,212 $ 13,583
INCOME(LOSS) PER SHARE/(3)/:
Income(loss) before cumulative
effect of change in method of
accounting for income taxes $ (12.38) $ (1.07) $ 0.43 $ 1.23 $ 1.14
Net income (loss) $ (12.38) $ (1.07) $ 0.46 $ 1.23 $ 1.17
<CAPTION>
SEPTEMBER 30,
-------------------------------------------------------
1996 1995 1994 1993 1992
--------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital $ (37,351) $ 62,340 $ 72,652 $ 69,638 $ 56,183
Total assets 75,181 164,684 139,501 120,503 105,109
Total stockholders' equity (deficit) (30,353) 83,188 90,845 89,544 76,900
</TABLE>
_____________________
(1) In 1994, the Company changed its method of accounting for income taxes from
the deferred method to the liability method. The effect of the accounting
change was to increase 1994 net income and income per share by $346,000 and
$0.03, respectively.
(2) Net income includes a credit to income of $346,000 for the cumulative
effect of the change in method of accounting for income taxes for the year
ended September 30, 1994 and extraordinary credits of $300,000, resulting
from the utilization of net operating loss carryforwards for the year ended
September 30, 1992.
(3) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the method used to determine the number of shares used to compute per
share amounts.
14
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the consolidated
financial statements and notes thereto.
Revenue, gross profit and net income declined substantially in fiscal 1996.
Revenue for fiscal 1996 was $200.4 million, a decline of $99.1 million from
fiscal 1995; the gross loss in fiscal 1996 was $48.3 million, as compared to a
gross profit of $51.0 million in fiscal 1995; net losses in fiscal 1996 were
$136.7 million as compared to a loss of $11.8 million in fiscal 1995. The
decrease in revenue can be primarily attributed to a substantial decline in
average selling prices (ASPs) of the EZ Flyer 135 and SQ3270 products
(EZ135/SQ3270). In addition to EZ135/SQ3270 pricing, the Company's revenue was
affected by an ongoing trend of declining selling prices and unit volumes for
the Company's mature 5.25 inch products, partially offset by the successful
introduction of the EZ Flyer 230 in the fourth quarter of the fiscal year. The
Company was not able to reduce its manufacturing costs as rapidly as ASPs
declined, especially with respect to the EZ135/SQ3270 products. These products
generated negative gross profits for most of fiscal 1996 and, along with
declining ASPs and unit sales of the 5.25 inch products, were the primary cause
for the large losses incurred by the Company. Inventory reserves, excess non-
cancellable purchase commitments, and restructuring charges accounted for
approximately $28.6 million of the fiscal 1996 net loss. As of September 30,
1996, the Company had a negative working capital of $37.4 million and a negative
net worth of $30.4 million. With the consumption of available working capital,
the Company was unable to meet a significant portion of its financial
obligations to key suppliers and the supply of certain materials was disrupted.
In the second half of the fiscal year, management changes were made and the
Company initiated significant changes in financing, manufacturing operations,
business processes, and product focus, including discontinuing the EZ135/SQ3270
products.
FISCAL 1996 COMPARED TO FISCAL 1995
Net Revenues
Fiscal 1996 revenues declined by 33% to $200.4 million from $299.5 million
in fiscal 1995. The revenue reduction can be attributed to sharply reduced
prices for the Company's EZ135 and SQ3270 3.5 inch products, and reduced unit
sales and lower ASPs for all 5.25 inch platform drives and cartridges (down 50%
from fiscal year 1995), which were partially offset by the successful
introduction of the EZ Flyer 230 in the fourth quarter of fiscal 1996. From
fiscal 1995 to fiscal 1996, ASPs for 5.25 inch drives and subsystems declined
9%, 3.5 inch drive and subsystem ASPs declined 37% and cartridge ASPs declined
29%. Cartridge revenue as a percentage of total revenue was 49% in both fiscal
years. Cartridge unit sales volume declined 3% from fiscal 1995 to fiscal 1996
while unit drive volume decreased 4% for the same period. The Company's mature
5.25 inch products comprised 44% of revenue in fiscal 1996 after representing
60% of revenue in fiscal 1995. While a substantial portion of the Company's
revenue in fiscal 1996 was derived from the current family of 5.25 inch drives
and cartridges, the Company expects that this line of products will continue to
decline as a portion of future revenue.
The Company reached volume production with the EZ Flyer 135 (EZ135) in the
first quarter of fiscal 1996; however, during that quarter the Company
experienced certain vendor related component supply and quality problems which
limited its ability to fill its open customer backlog. Over the balance of
fiscal 1996, a competitor marketed a product with a lower cost structure than
the EZ135, causing the Company to lower its price in order to maintain market
share. In the second quarter of fiscal 1996, the Company decided to cease
production of the EZ135 drive as soon as economically possible, and sales of
EZ135 drives ended in the fourth
15
<PAGE>
quarter of fiscal 1996. However, cartridge production and sales traditionally
continue beyond the final production of the associated drive in the removable
cartridge disk drive industry. EZ135 cartridges are expected to contribute a
significant portion of the Company's revenue in fiscal 1997.
The Company's EZ Flyer 230, a new 3.5 inch product that began shipping in
the fourth quarter of fiscal 1996, contributed approximately 6% of total revenue
for the year. Management believes the EZ Flyer 230 and future products
utilizing the EZ Flyer platform will contribute a significant portion of the
Company's revenue for fiscal 1997.
The data storage industry is subject to rapid technological change and
short product life cycles. Data storage manufacturers continually strive for
larger data storage capacities, higher performance and lower costs. Meeting
these demands is more difficult and complicated for manufacturers of removable
cartridge drives such as SyQuest than for fixed drive manufacturers. In order
to remain competitive, the Company must continue to design, develop,
manufacture, market and sell new products in a timely manner. To this end, in
the fourth fiscal quarter of 1996 the Company announced a 1.5 gigabyte, 3.5 inch
product (SyJet) but has not yet commenced volume production. The Company
believes the SyJet will contribute a significant portion of its fiscal 1997
revenue. However, there can be no assurance that SyQuest will be able to
introduce this or other cost effective and competitive new products in a timely
manner. If the Company is unable to do so, its future operating results will be
adversely affected.
Gross Profit (Loss)
The gross loss for the year ended September 30, 1996 was $48.3 million
compared to a gross profit of $51.0 million in the previous fiscal year. The
negative gross margin as a percentage of net revenue was 24% in fiscal 1996
compared to a positive gross margin of 17% in fiscal 1995. The decline in gross
margin is primarily attributable to losses incurred on the sale of and reserves
established for the EZ135/SQ3270 systems, and ongoing reductions in ASP and unit
sales for the Company's current line of 5.25 inch products.
The Company made a strategic decision in fiscal 1995 to enter the growing
SOHO (Small Office/Home Office) marketplace and acquire market share with the
EZ135 rather than wait until it could introduce a low cost, low-end product. Due
to competitive pressures, the Company reduced selling prices in order to
maintain market share, but was unable to make corresponding reductions in
manufacturing costs. As a result, the EZ135 and another subsystem product, the
SQ3270, were sold for most of fiscal 1996 at negative gross margins. This was a
significant factor in the Company's substantial operating loss in fiscal 1996.
In addition, the Company experienced a general decline in product prices
which reduced the gross profit margins of its 5.25 inch and 3.5 inch drives,
subsystems and cartridges. The decline in cartridge ASPs from fiscal 1995 to
fiscal 1996 was 29%. Average 5.25 inch drive and subsystem prices decreased
approximately 9% for the same period. From fiscal 1995 to fiscal 1996, EZ135
subsystem ASPs declined 30% and SQ3270 drives and subsystem ASPs declined 16%.
During fiscal 1996, EZ135 and SQ3270 drive and subsystem ASPs declined 45% and
58%, respectively. Rapid price declines are common in the disk drive industry
and there can be no assurance that the Company will be able to achieve
manufacturing cost reductions or introduce higher capacity products, which
generally have higher selling prices per unit, rapidly enough to offset the
pricing pressures on lower capacity products.
In the second half of fiscal 1996, management changes were made and the
Company initiated changes in product focus, financing, manufacturing operations,
and business processes. The EZ135/SQ3270 drive products were declared "end-of-
life" in the second fiscal quarter, with remaining inventory and purchase
commitments being managed to minimize cash requirements. The final sales of the
EZ135/SQ3270 drive products were completed in the fourth fiscal quarter of 1996.
The discontinuing of the EZ135/SQ3270 drives resulted in charges to cost of
goods sold of approximately $21.4 million in fiscal 1996, including $8.1 million
of obsolete and excess inventories and $13.3 million for non-cancellable
purchase commitments. The Company further granted customers an opportunity to
return EZ135 product for a refund. This resulted in significant product returns
in the third and fourth quarters of fiscal 1996. The Company incurred a charge
to earnings of approximately $2.5 million to write-off the portion of those
returns which could not be resold.
16
<PAGE>
Selling, General & Administrative Expenses
Selling, general and administrative expenses were $51.7 million for fiscal
1996 versus $44.3 million for fiscal 1995. The increase in expenses was
primarily attributable to an increase of $3.8 million in provisions for bad debt
and an increase in legal expenses from $1.2 million to $2.3 million primarily
attributable to various legal proceedings in which the Company is engaged. The
Company also incurred an increase of approximately $1.9 million in general and
administrative costs in fiscal 1996 over fiscal 1995, due to duplicate
administrative costs during the transition of manufacturing operations from
Singapore to Malaysia.
The Company continued to invest in its sales and marketing efforts despite
the decline in revenue from fiscal 1995 to fiscal 1996 as it endeavored to
increase the market presence of the Company's products.
Research and Development Expenses
Research and development expenses totalled $25.9 million in fiscal 1996, an
increase of $2.0 million from fiscal 1995. This represents 12.9% of revenue in
fiscal 1996, compared to 8.0% in fiscal 1995. The increase in spending is
primarily due to increased headcount and related costs. The increase as a
percentage of revenue is due to the increase in expense and the decline of
revenue from fiscal 1995 to fiscal 1996. The Company believes that it must
continue to make significant investments in R&D in order to effectively
implement its product strategy and continues to make these investments despite
the decline in revenue from 1995 to 1996.
Restructuring Expenses
Restructuring expenses were incurred during fiscal 1996 for the
transfer of manufacturing operations previously located in Singapore to
the Company's facility in Penang, Malaysia to lower costs and eliminate excess
capacity, and for the relocation of the Company's European headquarters from the
Netherlands to Germany. Restructuring charges from discontinued operations in
Singapore included $1.4 million for severance and other benefits affecting
approximately 1,500 employees, $0.6 million for site closure and related costs
and $1.6 million for write-off of capital assets. The shutdown was completed in
the third quarter of fiscal 1996. Restructuring charges related to the movement
of the Company's European headquarters to Germany totalled $1.1 million and
included severance costs and write-off of capital assets in the Netherlands, as
well as certain legal expenses.
Other Income and Expenses
Other expenses in fiscal 1996 include $2.1 million in losses incurred on
the sale of excess and obsolete fixed assets and approximately $0.6 million in
foreign exchange losses. These expenses were partially offset by a $0.7 million
gain realized on the disposition of common stock of a third party used to reduce
certain debt owed to one of the Company's suppliers.
Interest Income and Expense
The Company incurred $1.2 million of interest expense on its borrowings and
earned $0.2 million of interest income on its investments in fiscal 1996. The
interest expense for fiscal 1996 was primarily the result of borrowings under
the Company's bank lines of credit. There were no borrowings and interest
income on investments was $1.1 million in fiscal 1995.
Income Taxes
The provision for income taxes was $3.0 million in fiscal 1996 as compared
to a net tax benefit of $3.7 million in fiscal 1995. The provision in 1996 was
primarily due to an increase in the deferred tax asset
17
<PAGE>
valuation allowance which exceeded the expected tax benefit computed by applying
the federal statutory rate to the fiscal 1996 loss. Realization of the net
deferred tax asset of $50 million as of September 30, 1996 is dependent on
future earnings, the timing and amount of which are uncertain. Accordingly, as
of September 30, 1996, a valuation allowance in an amount equal to the net
deferred tax asset has been recorded. In fiscal 1995, the Company recorded a
tax benefit of $3.7 million representing an effective tax rate of 24%. The
effective rate was less than the federal statutory rate primarily due to foreign
losses for which no current income tax benefit could be recognized and the
provision for income taxes on foreign earnings previously considered to be
permanently reinvested offshore.
The Company has been in negotiations with Malaysian authorities for a tax
holiday exempting at least part of the profits of its Penang, Malaysia operation
from taxes. While there can be no assurance that the Company will be successful
in negotiating or that it will be able to meet the conditions of the tax
holiday, Management believes it will be able to realize a tax holiday in
Malaysia in the future.
The Company's manufacturing operations in Singapore, prior to their
relocation to Penang, Malaysia, operated under a tax holiday that expired in
September 1996. The tax holiday had no impact on net income in fiscal 1996 or
1995.
FISCAL 1995 COMPARED TO FISCAL 1994
Net Revenues
Fiscal 1995 net revenues increased by 36% to $299.5 million from $221.0
million in fiscal 1994. The net revenue growth was attributed to several
factors; strong demand for the Company's higher capacity drive and cartridge
products which accounted for 62% of fiscal 1995 net revenues, continued demand
for the Company's lower capacity cartridges, and the fourth quarter introduction
and market acceptance of the EZ135 systems products targeted for the SOHO (small
office/home office) market. Unit shipments of the Company's drive products
increased by 47% resulting in a 71% increase in drive net revenues in fiscal
1995. Cartridge unit shipments increased 46%, yielding a 13% increase in fiscal
1995 cartridge net revenues. System net revenues, on the strength of the EZ135
product line, increased 163% in fiscal 1995.
Net revenues from 5.25 inch form factor products declined from 72% of net
revenues in fiscal 1994 to 60% of net revenues in fiscal 1995 while 3.5 inch
form factor net revenues increased to 40% of net revenues in fiscal 1995 from
27% in fiscal 1994.
The Company achieved volume shipments of its EZ135 drive and cartridge
products in the fourth quarter of fiscal 1995. During the quarter the Company
experienced certain vendor related component supply and quality problems which
limited its ability to fill its open customer backlog.
Selling prices of the Company's mature, lower capacity products continued
to decline in fiscal 1995. In order to stay competitive in the 5.25 inch
cartridge market the Company reduced the selling prices of its 44 megabyte and
88 megabyte cartridges by approximately 30% in the second quarter of fiscal
1995.
Cartridge sales as a percentage of net revenues decreased from 58% in
fiscal 1994 to 48% in fiscal 1995. The decline is attributable to pricing
actions taken on the 44 megabyte and 88 megabyte cartridges along with the shift
in sales to higher capacity products which require fewer cartridges to store the
same quantity of data.
Sales to customers outside of North America, which are primarily
denominated in U.S. dollars, increased from $85.7 million or 39% of net revenues
in fiscal 1994 to $117.4 million or 39% of net revenues in fiscal 1995. In
addition, the Company believes that a portion of its products sold to customers
in North America are resold by such customers outside of North America.
18
<PAGE>
Gross Profit
In fiscal 1995, gross profit totaled $51.0 million, a decline of $9.6
million or 16% from the $60.7 million reported in fiscal 1994. Gross margin in
fiscal 1995 was 17% compared to 27% in fiscal 1994. The decline in gross margin
is primarily attributable to losses incurred on the sale of and reserves
established for the EZ135 systems. The Company made a strategic decision to
enter the explosively growing SOHO marketplace and acquire market share rather
than wait until it could introduce a low cost, low-end product.
Selling, General and Administrative Expenses
Selling, general and administrative expenses in fiscal 1995 of $44.3
million were up 17.4% compared to fiscal 1994 expenses of $37.6 million, and as
a percentage of net revenues declined to 14.8% in fiscal 1995 from 17.0% in
fiscal 1994. Primary contributors to the increase were staffing additions of
$2.5 million in support of the revenue growth and a $3.1 million increase in
advertising and promotional activities. Bad debt expenses declined by $1.1
million as a result of unusually high funding requirements in fiscal 1994 while
legal expenses declined by $2.1 million resulting from the settlement in fiscal
1994 of certain litigation with Iomega and others.
Research and Development Expenses
In fiscal 1995, research and development expenses increased 33.0% to $23.9
million from $18.0 million in fiscal 1994. As a percentage of net revenues,
research and development expenses were 8.0% in fiscal 1995 compared to 8.1% in
fiscal 1994. During the year the Company devoted significant resources to its
research, development and advanced manufacturing engineering groups to enhance
existing products and develop higher capacity products on existing platforms.
In addition, the Company created a dedicated engineering group focusing strictly
on low cost derivatives of the low end EZ135 product line and continued its
engineering efforts on the 110 megabyte, 1.8 inch drive which commenced shipping
in the fourth quarter of fiscal 1995.
Interest Income
Interest income for fiscal 1995 was $1,134,000, relatively flat when
compared to $1,193,000 in fiscal 1994. In spite of lower average cash and short
term investment balances throughout the year, interest income remained flat due
to higher prevailing interest rates.
Provision for Income Taxes
The Company recorded a tax benefit of $3.7 million in fiscal 1995
representing an effective tax rate of 24%. The effective tax rate was less than
the federal statutory rate primarily due to foreign losses for which no current
income tax benefit could be recognized and the provision for taxes on foreign
earnings previously considered to be permanent reinvested offshore. In fiscal
1994, the Company recorded a $1.6 million provision for income taxes
representing an effective tax rate of 24%. The fiscal 1994 effective tax rate
was less than the federal statutory rate primarily due to the permanent
reinvestment offshore of a portion of the tax holiday earnings of the Company's
Far East operations and the utilization of federal tax credits.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1996, the Company's net worth was negative $30.4 million
compared to positive $83.2 million at September 30, 1995, and the Company's
working capital at September 30, 1996 was negative $37.4 million compared to
positive $62.3 million at September 30, 1995. The decrease in working capital
during fiscal 1996 was primarily attributable to continuing losses from
operations.
19
<PAGE>
Due to the financial losses and associated decreases in working capital,
the Company experienced interruptions in the supply of key components in the
first half of fiscal 1996. As a result of negotiations held with key suppliers
to refinance outstanding liabilities, approximately $50.8 million of accounts
payable was converted to fixed payment notes and debentures, payable over six
months to three years. Subsequently, certain of the suppliers have exchanged the
notes for the Company's Common Stock, including $2.3 million converted as of
September 30, 1996. See "Factors That May Affect Future Results - Shortages of
Critical Components; Absence of Supply Contracts; Supplier Workouts." As a
result of the Company's completion of recent financing transactions and other
efforts by management to improve SyQuest's balance sheet, a number of the
Company's suppliers have begun to transition from doing business with the
Company on a C.O.D. basis and are selling to the Company under more standard
commercial terms. Many of SyQuest's key suppliers are continuing to do business
with SyQuest on a C.O.D. basis only, however, which places demands on the
Company's available cash resources that may limit its financial flexibility and
its ability to meet market demand for its products.
In addition to the operational impacts of limited cash resources, the
Company may experience other effects in the future such as higher interest
rates, inability to borrow without collateral and higher financing costs with
regard to capital. Limitations on cash resources also restricted the ability of
the Company to increase SyJet production in the first quarter of fiscal 1997 to
the levels desired by the Company.
The Company has financed its working capital needs through a combination of
existing cash resources, reduced inventories and accounts receivable, increased
asset-based borrowings, and a series of capital financing transactions completed
during calendar 1996. The Company's balance of cash and short-term investments
decreased by $26 million during fiscal 1996, leaving the Company with cash and
short-term investments of $3.7 million at September 30, 1996.
The accounts receivable balance was $30.3 million at September 30, 1996, a
decline of $25.3 million from the end of fiscal 1995. The decline in accounts
receivable was due to lower sales experienced in fiscal 1996 compared to fiscal
1995 and an increase in the level of reserve for doubtful accounts. Inventories,
net of reserves, decreased $23.7 million during fiscal 1996 and totaled $10.6
million at September 30, 1996. The decline in inventories is attributable to the
Company's second quarter decision to discontinue further production of the
SQ3270 and EZ135 products, reduced sales levels and improved inventory
management techniques introduced in the second half of fiscal 1996.
20
<PAGE>
Borrowings under the Company's bank lines of credit amounted to $19.3
million at September 30, 1996. There were no borrowings outstanding at September
30, 1995. As of September 30, 1996, the Company has a line of credit agreement
with a financial institution, expiring January 31, 1997. Borrowings under the
agreement bear interest at the highest "LIBOR" (London Interbank Offered Rate)
rate during the month plus 4.825% and are subject to the higher of a minimum
interest rate of 8% per annum or $10,000 per month, regardless of borrowings.
The interest rate as of September 30, 1996 was 10.25%. The total borrowings are
limited to the lesser of $30 million or 75 percent of the Company's eligible
accounts receivable. The Agreement also places limitations on additional
borrowings and payment of dividends. As of September 30, 1996, approximately
$14.7 million of borrowings were outstanding and approximately $5.3 million was
available for borrowing under the agreement. The Company is in discussions with
the financial institution for extension of the credit facility. Management
believes the Company's relations with the institution are good, but there can be
no assurances that it will be successful in negotiating an extension to the
credit agreement on terms acceptable to the Company.
In fiscal 1996, the Company entered into a credit agreement with a bank in
Penang, Malaysia. The agreement provides for a term loan equivalent to
approximately $4.2 million, an overdraft facility of approximately $.8 million
and a short-term line of credit for inventory financing. The term loan is
repayable in 120 monthly installments and bears interest at the rate of 1.0%
over the bank's base lending rate while the short-term borrowings bear interest
at varying rates and become due every 180 days. The credit available under this
agreement is secured by factory buildings owned by SyQuest Technology (M) SDN
BHD and is further secured by a corporate guarantee from SyQuest Technology,
Inc. At September 30, 1996 there was approximately $3.6 million outstanding
against the term loan, $.5 million outstanding against the overdraft facility
and approximately $4.0 million outstanding against the inventory line of credit.
The interest rates for the term loan and the short-term line of credit as of
September 30, 1996 were 9.15% and 8.275%, respectively.
In May 1996, the Company exchanged 4,155 common shares of a privately-held
French company for a reduction of $2.8 million of debt with one of the Company's
suppliers.
In June 1996, the Company sold 20,000 shares of 7% Cumulative Preferred
Stock for $20 million in gross proceeds. In October 1996, the Company sold 5,500
shares of Convertible Preferred Stock for $5.5 million in gross proceeds and
sold 24,500 shares of Series 2 Preferred Stock for $24.5 million in gross
proceeds. In November 1996, the Company sold 1,500,000 shares of its Common
Stock for approximately $8.5 million to an international investment firm and
granted that investor warrants to purchase up to 1,875,000 shares of Common
Stock, depending on, among other things, the number of shares of Common Stock
owned by such investor on July 12, 1997.
In July 1996, the Company issued a $7.7 million, 6% Convertible
Subordinated Debenture (the "Debenture") to one of its suppliers, of which a
portion is convertible into Common Stock of the Company. Subsequently, the
Company worked out repayment schedules with several of its other major suppliers
and converted approximately $43.1 million of accounts payable and other
obligations to notes payable reflecting extended repayment terms. From late
September 1996, through October 30, 1996, the Company exchanged with four of
these suppliers approximately $11.6 million of notes payable for an aggregate of
1,874,837 shares of the Company's Common Stock. Approximately $31 million of the
notes payable remained outstanding following the conversion of $11.6 million in
notes to equity.
The terms of these financings are described in three Current Reports on
Form 8-K dated, respectively, June 14, 1996, October 31, 1996 and November 11,
1996, the contents of which are hereby incorporated by reference.
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During fiscal 1996, the Company used $50.7 million in cash for operating
activities and an additional $17.8 million of cash for the purchase of equipment
and leasehold improvements. Based on current estimates, the Company expects to
spend less than $5 million for capital assets in fiscal 1997. There can
be no assurance, however, that the Company's actual spending will not exceed its
forecasts. The Company believes that, based on a number of events occurring, the
current sources of the financing available to the Company will be sufficient to
fund the Company's operations only into the second quarter of fiscal 1997, and
the Company will need additional funds for new products, to fund working capital
required to increase sales and to pay suppliers. Management's financial plans
for fiscal 1997 anticipate raising additional equity capital in order to
stimulate business and take advantage of market opportunities. As discussed in
Note 15, during the first quarter of fiscal 1997, the Company raised
approximately $38 million of additional equity from investors. Management is
currently pursuing other investment opportunities and expects to raise
additional financing during the second quarter of fiscal 1997. There can be no
assurance, however, that such financing would be available when needed, if at
all, or on favorable terms. If results of operations for fiscal 1997 do not meet
management's expectations, or additional capital is not available, management
has the ability and intent to reduce certain expenditures so as not to require
additional capital resources. The precise amount and timing of the Company's
funding needs cannot be determined accurately at this time, and will depend on a
number of factors, including the market demand for the Company's products, the
progress of the Company's product development efforts, the availability of
critical components, the Company's strategic alliances for the manufacture of
its products, and the Company's management of inventories and accounts
receivable, and whether key suppliers will grant payment terms for the purchase
of materials and services.
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FACTORS THAT MAY AFFECT FUTURE RESULTS
Business Re-Engineering
Management expects to continue the strategic and process changes mentioned
above into fiscal 1997 and to continue investing in the re-engineering of the
Company. In December, 1996, the Company shipped limited quantities of the SyJet
1.5GB, a 3.5 inch, 1.5 gigabyte high performance product. Subject to the
availability of additional cash resources, the Company expects to commence
volume production of this product in January, 1997. In addition, the Company
continues to invest in developing both higher performance and lower cost product
lines. Management further expects to invest in promoting the Company's market
presence throughout fiscal 1997, including various advertising and other
promotional programs.
During fiscal 1996, new product launch processes were revised to include
formal cost reduction and controlled introduction of products to manufacturing.
Research and development efforts were re-focused to take advantage of the
Company's technological leadership in Winchester-based removable cartridge disk
drives and pursue the typically higher margins of high performance products
relative to the markets the EZ135 competed in. The Company established a
marketing strategy which emphasizes efforts to re-establish the Company's
presence in the strategically important retail and distribution channels.
However, to support the planned activities, additional capital resources
are required in the second fiscal quarter of 1997 and there can be no assurance
that the Company will be able to obtain needed funding on satisfactory terms or
that it will be successful in implementing its business re-engineering plans.
Management is aggressively pursuing additional equity investments in the Company
as well as strategic partnerships in manufacturing and marketing its products.
The inability to obtain needed funding on satisfactory terms would have a
material adverse affect on the Company's business and financial results.
Need for Additional Financing; Future Capital Needs
The Company incurred losses in its fiscal year ended September 30, 1995,
and in each quarter of its fiscal year ended September 30, 1996. To meet its
working capital needs, the Company has engaged in a series of financing
transactions.
As of September 30, 1996, the Company had $3.2 million in unrestricted cash
and cash equivalents. During fiscal 1996, the Company used $50.7 million of cash
in operating activities and an additional $17.8 million of cash for the purchase
of equipment and leasehold improvements. The Company believes that, based on a
number of events occurring, the current sources of financing available to the
Company will be sufficient to fund the Company's planned level of operations
only into the second quarter of fiscal 1997, and the Company will need
additional funds for new product introduction, for production and working
capital and to pay suppliers. The Company is presently negotiating other
possible equity investments into the Company but there can be no assurance that
any of such negotiations will be successful. The precise amount and timing of
the Company's funding needs cannot be determined at this time, and will depend
upon a number of factors, including the market demand for the Company's
products, the progress of the Company's product development efforts, the
availability of critical components, the Company's strategic alliances, if any,
for the manufacture of its products, and the Company's inventory and accounts
receivable management. If additional funds are raised through the issuance of
equity securities, the percentage ownership of the stockholders of the Company
will be reduced, stockholders may experience additional dilution, and such
securities may have rights, preferences and privileges senior to those of
holders of the Company's Common Stock. See "Factors That May Affect Future
Results -- Convertible Securities, Warrants and Options; Potential Dilution and
Adverse Impact on Additional Financing." There can be no assurance that funds
required by the Company in the future will be available on terms satisfactory to
the Company. The inability to obtain needed funding on satisfactory terms would
have a material adverse effect on the Company's business and financial results.
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Risk of Losing Nasdaq Listing
On September 16, 1996, the Company was given a temporary exception from the
net tangible asset and capital surplus listing requirements of the Nasdaq
National Market. The listing exception was conditioned on the Company's ability
to file a pro forma balance sheet as of September 30, 1996, indicating net
tangible assets of at least $2.0 million. On October 31, 1996, the Company filed
with Nasdaq and the Commission an unaudited pro forma balance sheet (the "Pro
Forma Balance Sheet") showing sufficient net tangible assets, based on the
Company's best estimate at that time of its losses for the fiscal year ended
September 30, 1996. There can be no assurance that the Company's estimate in the
Pro Forma Balance Sheet was accurate. Based on this filing, the National
Association of Securities Dealers approved the continued listing of the
Company's Common Stock on the Nasdaq National Market.
The Company has continued to incur losses, however, and there can be no
assurance that the Company will continue to meet the net tangible asset, capital
and surplus, or other listing requirements of the Nasdaq National Market in the
future. Should the Company fail to meet such listing standards, it may be
delisted from the Nasdaq Stock Market. Trading, if any, in the listed
securities would thereafter be conducted on the Electronic Bulletin Board or the
National Quotation Bureau's "pink sheets." As a result, an investor may find it
difficult to dispose of, or to obtain accurate quotations of the price of, the
Company's securities. This would likely have a material and adverse effect on
the market price of the Company's Common Stock and on the Company's ability to
raise additional capital.
Convertible Securities, Warrants and Options; Potential Dilution and
Adverse Impact on Additional Financing.
On July 15, 1996, the Company issued a 6% Convertible Subordinated
Debenture to a supplier in the amount of $7.7 million repayable in thirty-six
(36) equal monthly installments. The debenture agreement allows the holder to
convert up to $2,775,000 of the principal amount of the debenture into no more
than 400,000 shares of the Company's Common Stock at the conversion price of
$6.9375 per share. As of September 30, 1996, none of the principal of the
debenture had been converted to Common Stock.
As of October 31, 1996, the Company had outstanding options and warrants to
purchase an aggregate of 3,448,938 shares of Common Stock, at a weighted average
exercise price of approximately $7.13 per share. The Company is also obligated
to issue additional warrants to acquire up to 3,136,786 shares of Common Stock
and up to 12,078,347 shares of Common Stock upon conversion of the 7% Cumulative
Preferred Stock, the Convertible Preferred Stock and the Series 2 Preferred
Stock (the "Preferred Stock"), based on the conversion prices of the Preferred
Stock at December 20, 1996. The exact number of shares of Common Stock issuable
upon conversion of Preferred Stock and exercise of warrants issued pursuant to
such conversion cannot be estimated with certainty because, generally, such
issuances of Common Stock will vary inversely with the market price of the
Common Stock at the time of such conversion, and there is no cap on the number
of shares of Common Stock that may be issuable. The number of warrants and
shares of Common Stock issuable upon conversion of the Preferred Stock is also
subject to various adjustments to prevent dilution resulting from stock splits,
stock dividends or similar transactions. Further, the Company may, at its
election, choose to issue additional shares of Common Stock in lieu of cash
dividends due to the holders of the 7% Cumulative Preferred Stock and the Series
2 Preferred Stock.
In addition, on November 13, 1996, the Company sold to an investor an
additional 1,500,000 shares of Common Stock that will become freely tradeable,
subject to compliance with applicable securities laws, on approximately February
12, 1997. As part of this same transaction, the Company issued a warrant that
will become exercisable for between 375,000 shares and 1,875,000 shares of
Common Stock, depending on a number of factors, principally the price of the
Company's Common Stock.
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As of September 30, 1996, Warrants to purchase 100,000 shares of the
Company's Common Stock at an exercise price of $10.88 per share had been issued
as partial compensation for value received in the placement of the Company's 7%
Cumulative Convertible Preferred Stock. Those Warrants are exercisable at the
option of the holders on or before July 30, 1999.
To the extent that such options and warrants are exercised, shares of
Common Stock are issued in lieu of cash dividends or convertible securities are
converted (and the warrants issuable upon such conversion are exercised),
substantial dilution of the interests of the Company's stockholders is likely to
result and the market price of the Common Stock may be materially adversely
affected. Such dilution will be greater if the future market price of the
Common Stock decreases. For the life of such warrants, options and convertible
securities, the holders will have the opportunity to profit from a rise in the
price of the underlying securities. The existence of such warrants, options and
convertible securities is likely to affect materially and adversely the terms on
which the Company can obtain additional financing, and the holders of such
warrants, options and convertible securities can be expected to exercise them at
a time when the Company would otherwise, in all likelihood, be able to obtain
additional capital by an offering of its unissued capital stock on terms more
favorable to the Company than those provided by such warrants, options and
convertible securities.
The Company has filed registration statements on Form S-8 under the Act to
register shares of Common Stock subject to stock options and the Company's
employee stock purchase plan that will permit the resale of such shares, subject
to Rule 144 volume limitations applicable to affiliates of the Company and
vesting restrictions. The Company has also filed a registration statement,
Registration Statement No. 333-17119, to permit resale of the Common Stock
issuable upon exercise of the warrants and conversion of the convertible
securities described above. Additional shares of Common Stock issuable upon
conversion of the 7% Cumulative Preferred Stock are being offered pursuant to a
prospectus included in Registration Statement No. 333-7369. Such registered
shares can be sold without any holding period or sales volume limitations.
Uncertainty of Market Acceptance of Products
The Company's future success will depend upon market acceptance of its new
products and upon the Company's ability to establish its new products as
industry standards. The Company introduced its EZ Flyer 230 in June 1996. The
EZ Flyer 230 is a newly designed product for the Company with 230 megabytes of
capacity, which the Company began to ship in significant volume in July 1996.
While the Company believes that early indications of market acceptance of the EZ
Flyer 230 are favorable, the product has only recently been introduced and there
can be no assurance that the level of acceptance will continue or grow due to
uncertainties regarding the market for the EZ Flyer 230 and the competition it
is facing. The Company continues to refine the EZ Flyer 230 and there can be no
assurance that the Company will not experience problems or delays if and when it
attempts to manufacture and ship the EZ Flyer 230 in higher volumes.
On August 7, 1996, the Company announced that it had commenced taking
orders for its new 3.5 inch, 1.5 gigabyte SyJet system products. The Company has
begun limited production and has made limited shipments in the first quarter of
fiscal 1997. The Company intends to increase production and shipments in the
second fiscal quarter of 1997; however, there can be no assurance that the
Company will be able to introduce this new product successfully and in a timely
manner or that the product will be accepted in the market. Limitations on cash
resources restricted the ability of the Company to increase SyJet production in
the first quarter of fiscal 1997 to the levels desired by the Company.
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The SyQuest technology is different from the most widely used data storage
devices today (hard disk drives, floppy disk drives and CD-ROM drives). No new
type of read/writable data storage device has achieved widespread market
acceptance in recent years and there can be no assurance that the Company's new
products will achieve market acceptance. Whether the Company's new products
will achieve significant market acceptance will depend upon a number of factors,
including the price, performance and other characteristics of competing
solutions introduced by other vendors, the timing of the introduction of such
products, and the success of the Company in establishing OEM arrangements for
the Company's new products. See "Factors That May Affect Future Results -
Competition" and "- Shortages of Critical Components; Absence of Supply
Contracts; Supplier Workouts." There can be no assurance that the Company will
be successful in satisfying any of these factors. In addition, the two formats
of removable-media storage which have gained widespread market acceptance to
date--floppy disk drives and CD-ROM drives--are both used by software
manufacturers as a means of software distribution. The Company's products are
not currently used for software distribution. The failure of the Company's new
products to achieve widespread commercial acceptance would have a material
adverse effect on the Company's business and financial results.
Introduction of EZ Flyer 230; Discontinuation of EZ135
The Company's EZ135 products accounted for 16% of the Company's sales in
the last quarter of fiscal 1995, 42% in the first quarter of fiscal 1996, 46% in
the second quarter of fiscal 1996, 45% in the third quarter of fiscal 1996 and
approximately 16% in the fourth quarter of fiscal 1996. Although sales of EZ135
products contributed significantly to the Company's revenue during the last
quarter of the 1995 fiscal year and the majority of fiscal year 1996, the
Company sold EZ135 units at a significant loss due to cost issues which could
not be corrected as the Company had originally anticipated, and due to
competitive pressures requiring the selling price to continue to decline in the
market. The Company discontinued sales of the EZ135 during the fourth quarter
of fiscal 1996.
The Company introduced its EZ Flyer 230 on June 3, 1996. Commercial
shipments of the EZ Flyer 230 commenced in June 1996, and the Company began to
ship the EZ Flyer 230 in significant volume in July 1996. Revenue in the fourth
fiscal quarter of 1996 was $12.7 million for the EZ Flyer 230, representing 28%
of total revenue. There can be no assurance that the market acceptance of the
EZ Flyer 230 will continue or that the level of acceptance will grow.
Shortages of Critical Components; Absence of Supply Contracts; Supplier
Workouts
Many components incorporated in, or used in the manufacture of, the
Company's products are currently only available from sole source suppliers.
During the 1996 fiscal year, the Company experienced disruption in its supply of
certain components for a number of reasons including the shortage of cash to pay
suppliers. Component shortages due to limited cash availability affected the
Company's ability to produce EZ Flyer 230 products and limited the Company's
ability to implement certain cost reduction and productivity improvement plans.
Moreover, the Company may continue to experience difficulty in the future in
obtaining a sufficient supply of many key components due to the shortage of cash
to pay suppliers and other reasons. A disruption in the supply of key
components would have a material adverse affect on the Company's ability to
generate sales and the ability to cuccessfully launch the SyJet products.
26
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The Company recently completed the process of working out repayment terms
with its key suppliers. On July 15, 1996, the Company issued a $7.7 million 6%
Convertible Subordinated Debenture to one of its suppliers pursuant to which up
to 400,000 shares of Common Stock could be issued to such supplier at a
conversion price of $6.9375 per share. Subsequently, the Company negotiated with
other suppliers to extend the payment dates on amounts owed, converting
approximately $43.1 million of accounts payable and other obligations to all of
those suppliers, to notes payable reflecting extended repayment terms. In
September and October 1996, the Company exchanged certain of those notes payable
for an aggregate of 1,874,837 shares of Common Stock. As a result of the
Company's completion of recent financing transactions and other efforts by
management to improve SyQuest's balance sheet, a number of Company suppliers
have begun to transition from doing business with the Company on a C.O.D. basis
and are selling to the Company under more standard commercial terms. Many of
SyQuest's key suppliers are continuing to do business with SyQuest on a C.O.D.
basis only, however, which places demands on the Company's available cash
resources that may limit its financial flexibility and its ability to meet
market demand for its products.
The Company purchases all of its sole and limited source components and
equipment pursuant to purchase orders placed from time to time and has no
guaranteed supply arrangements. The inability to obtain sufficient components
and equipment, to obtain or develop alternative sources of supply at competitive
prices and quality, or to avoid manufacturing delays could prevent the Company
from producing sufficient quantities of its products to satisfy market demand,
result in delays in product shipments, increase the Company's material or
manufacturing costs, or cause an imbalance in the inventory levels of certain
components. Moreover, difficulties in obtaining sufficient components may cause
the Company to modify the design of its products to use a more readily available
component, and such design modifications may result in increased costs and
product performance problems. Any or all of these problems could in turn result
in the loss of customers, provide an opportunity for competing products to
achieve market acceptance and otherwise adversely affect the Company's business
and financial results.
Competition
The data storage industry is highly competitive. The Company believes that
its products compete most directly with other removable-media data storage
devices, such as disk drives offered by Iomega Corporation and magneto optical
disk drives. Although the Company believes that its products offer performance
and certain other advantages over most other removable-media storage devices
available today, the Company believes that the price/performance levels of
existing removable-media products will improve and that other companies will
introduce new removable-media storage devices. Accordingly, the Company
believes its products will face increasingly intense competition. In particular,
a consortium comprising Compaq Computer, 3M, Insite and Matsushita-Kotobuki
Electronics Industries Ltd. has announced and is selling the LS120, a high-
capacity floptical drive that is compatible with conventional floppy disks. Each
of Mitsubishi Electric Corp. and Mitsumi has also announced that it plans to
manufacture a high capacity, floppy drive that is downward compatible with
existing floppy diskettes. If successfully marketed, these drives would compete
with the Company's EZ products. The Iomega Zip drive, a high capacity floppy
disk drive, is a competitor to EZ Flyer 230. The JAZ drive is Iomega's first
removable hard drive and competes directly with SyQuest's products. In
addition, to the extent that SyQuest drives are used for incremental primary
storage capacity, they also compete with conventional hard disk drives.
Finally, the leading suppliers of conventional hard disk drives could at any
time determine to enter the removable-media storage market.
As new and competing removable-media storage solutions are introduced, it
is possible that the first such solution to achieve a significant market
presence will emerge as an industry standard and achieve a dominant market
position. If such is the case, there can be no assurance that the Company's
products would achieve significant market acceptance, particularly given the
Company's size and market position relative to its competitors.
27
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Technological Change and New Products
The Company operates in an industry that is subject both to rapid
technological change and rapid change in consumer demands. For example, over
the last 10 years the typical hard disk drive included in a new personal
computer has increased in capacity from approximately 40 megabytes (MBs) to 1
gigabyte (GB) or more, while the market price per megabyte of a hard disk drive
has dramatically decreased. The Company's future success will depend in
significant part on its ability to develop and introduce, in a continuous and
timely manner, new removable disk drive products with improved features, and to
develop and manufacture those new products within a cost structure that enables
the Company to sell such products at lower prices than those of comparable
products today. In addition, the Company depends on technological developments
from other vendors for the components in its products (such as heads,
semiconductor devices and media). The Company has recently introduced its EZ
Flyer 230 which is targeted for sale to the Company's traditional customer base
in the desktop publishing, prepress and service bureau segments, as well as to a
broad array of users in the SOHO (Small Office/Home Office) market segment. The
SyJet 1.5 GB removable cartridge hard drive is targeted towards computer, audio
and video OEMs, as well as retail, the Company's traditional customer base and
the SOHO market segment. The Company believes that this product will compete
with the Iomega JAZ. There can be no assurance that the Company will be
successful in developing, manufacturing and marketing cost effective products
(including the EZ Flyer 230 and the SyJet 1.5 GB) that meet both the performance
and price demands of the data storage market.
Dependence on Strategic Marketing Alliance
The Company's business strategy depends in significant part on establishing
successful strategic alliances with a variety of key companies within the
computer, audio and video industries. Among the types of alliances contemplated
by the Company's business strategy are: OEM arrangements with personal computer,
audio and video manufacturers that will include SyQuest products as a standard
feature or factory-installed option in their personal computers; reseller
arrangements (including private and co-branding arrangements) with major vendors
of computer products covering the resale of the Company's products by such
companies; and licensing arrangements under which the Company grants certain
computer manufacturers on a royalty-bearing basis the right to manufacture and
sell its drives or media. Moreover, the Company believes that establishing
strategic alliances (especially OEM arrangements) is critical to the success of
its business, and there can be no assurance that the Company will be successful
in doing so. In addition, the Company's strategic alliances are generally not
covered by binding contracts and may be subject to unilateral termination by the
Company's strategic partners, and may also require the Company to share control
over its manufacturing and marketing programs and technologies.
Reliance on Manufacturing Relationships; Nomai Lawsuits
The Company plans to continue to use independent parties to manufacture for
the Company a portion of the Company's components. The Company currently has
manufacturing relationships with Nomai, S.A. ("Nomai") for cartridges and with
others for manufacture and subassembly of components. The Company has filed
lawsuits against Nomai in France alleging copyright and patent infringement and
in the United States regarding various related claims, including royalty
payments owed by Nomai under a previous arrangement. On November 18, 1996, the
Company and Herve Frouin and Marc Frouin (the "Frouins"), owners of a
controlling interest in Nomai, announced the execution of a letter of intent
proposing a transaction (the "Proposed Transaction") in which the Company would
acquire a controlling interest in Nomai from the Frouins in exchange for
3,422,968 shares of the Company's Common Stock, and would commence a tender
offer to acquire up to 100% of the publicly held shares of Nomai. On November
25, 1996, however, the Company announced that plans to acquire Nomai have been
terminated, adding that it intends to pursue vigorously all available causes of
action against Nomai.
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In September 1996, the Company and Legend Group ("Legend"), the largest
computer systems manufacturer and distributor in the People's Republic of China,
announced an intention to form a joint venture company for the manufacture and
distribution of the Company's removable cartridge hard drives and products in
China. In addition, Legend would become the exclusive distributor of Company
products in the developing Chinese market. The Company would provide the
proposed joint venture company with training and manufacturing know-how to
insure that the joint venture had the requisite skills to manufacture the
Company's removable cartridge hard drives and products. It is anticipated that
both Legend and the Company would contribute the capital required for the joint
venture. The Company and Legend have entered into a Memorandum of Understanding
under which Legend would invest up to $20 million in the Company. The definitive
terms of this investment are being negotiated, and the completion of any such
investment (currently proposed for the first calendar quarter of 1997) may
require approval of the Company's stockholders pursuant to Nasdaq listing rules
and may be subject to a waiting period pursuant to the Hart-Scott-Rodino Act. In
December, 1996, the Company and Legend announced a distribution agreement
whereby Legend has become the exclusive distributor of the Company's products in
the developing Chinese market.
There can be no assurance that the Company will be successful in
prosecuting its lawsuit against, or in maintaining its manufacturing
relationships with, Nomai, that the joint venture or financing agreement with
Legend will be consummated or successful, or that the Company will successfully
establish additional relationships in the future or successfully manage such
manufacturing relationships. The lawsuit against Nomai and either the
completion of or failure to complete the proposed transactions with Legend could
have numerous consequences that could affect the Company materially and
adversely. The Company's manufacturing relationships are generally not covered
by binding contracts and may be subject to unilateral termination by the
Company's manufacturing partner. Moreover, there can be no assurance that
third-party manufacturers will be willing or able to meet the Company's quantity
or quality requirements for manufactured products.
Quarterly Fluctuations in Operating Results
The Company has experienced and in the future may continue to experience
significant fluctuations in its quarterly operating results. Factors such as
price reductions, the introduction and market acceptance of new products,
product returns, the availability of critical components and the lower gross
margins associated with the Company's newly introduced products could contribute
to this quarterly variability. Moreover, the Company's expense levels are based
in part on expectations of future sales levels, and a shortfall in expected
sales could therefore result in a disproportionate decrease in the Company's
results of operations. As a result of these and other factors, it is likely
that the Company's operating results in some future period will be below the
expectations of investors, which would probably result in a significant
reduction in the market price of the Common Stock.
Dependence on Proprietary Technology
The Company's success depends heavily on the establishment and maintenance
of proprietary technologies. The Company relies on a combination of patent,
copyright and trade secret law to protect the technology in its drives and
cartridges. The Company holds numerous U.S. and foreign patent applications
relating to its drives and hard disk cartridges. Many of these patents,
however, do not pertain to the Company's recent product generations, and there
can be no assurance that additional patents will issue in the future. There can
be no assurance that the steps taken by the Company to protect its technology
will be adequate to prevent misappropriation of its technology by third parties,
or that third parties will not be able independently to develop similar
technology. In particular, the Company's sales have been and will continue to
be materially adversely affected when parties develop cartridges compatible with
the Company's disk drives.
29
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From time to time the Company receives notices alleging that the Company's
products infringe third party proprietary rights. A third party notified the
Company in June 1995, that such party believes the Company infringes on six of
its U.S. patents. It is the Company's belief that the claims are without merit
or that the infringement claims relate to component parts purchased from
vendors. The Company also believes that if the third party prevails on its
claims, the Company will be indemnified by its vendor for any liability arising
from the alleged infringements and that this matter will not have a material
effect upon its financial condition or results of operations.
Patent and similar litigation frequently is complex and expensive and its
outcome can be difficult to predict. There can be no assurance that the Company
will prevail in any proceedings that may be commenced against the Company. In
addition, certain technology used in the Company's products is licensed from
third parties. The termination of any such license arrangements could have a
material adverse effect on the Company's business and financial results.
International Operations
International sales generated a significant portion of the Company's
revenues in fiscal years 1995 and 1996, and the Company expects international
sales to continue to constitute a significant percentage of its total sales in
the future. The international portion of the Company's business is subject to a
number of inherent risks, including difficulties in building and managing
foreign operations and foreign reseller networks, the differing product needs of
foreign customers, fluctuations in the value of foreign currencies, import-
export duties and quotas, and regulatory, economic or political changes.
Moreover, the Company relies on foreign companies for the supply of certain
critical components and is increasingly relying on foreign companies for the
manufacture of certain of its products, and these relationships may be subject
to some of the same risks affecting its international sales. There can be no
assurance that these factors will not materially and adversely affect the
Company's international sales and its overall business and financial
performance.
The Company's international sales are predominantly denominated in U.S.
dollars. Accordingly, a significant increase in the valuation of the U.S.
dollar and the resultant increase in the price of the Company's foreign currency
priced products could have a material adverse effect on the Company's sales.
Management Changes; Dependence On Key Personnel
The Chairman of the Board, the President and Chief Executive Officer, the
Executive Vice President and Chief Financial Officer, the Executive Vice
President-Sales, the Chief Technical Officer, the Executive Vice President-
Operations, and the Vice President-Marketing, have all just recently joined the
Company. Syed Iftikar, the Company's former Chairman of the Board, President and
Chief Executive Officer, ceased to be an officer of the Company on June 13, 1996
and resigned as a director on August 15, 1996.
The Company's success will depend in large part upon the capabilities of
the new management team. The inability of such individuals to become familiar
with the widespread operations of the Company and its subsidiaries and turn
around the financial situation of the Company could have a material adverse
effect on the Company. The Company's success will also depend in significant
part upon its ability to attract and retain highly-skilled management and other
personnel. Competition for such personnel in the computer industry is intense,
and the Company has from time to time experienced difficulty in finding
sufficient numbers of qualified professional and production personnel. The
Company has had a number of other executive officers leave the Company over the
last six months. There can be no assurance that the Company will be successful
in attracting and retaining the quantity and quality of personnel that it needs.
30
<PAGE>
Volatility of Stock Price; Absence of Dividends
The market prices for shares of high technology companies including the
securities of SyQuest have been volatile. The Company's Common Stock has
recently experienced substantial levels of short selling, which has depressed
the market price, and increased the volatility of the market price, of the
Company's Common Stock. Factors such as announcements of technological
innovations or new products by the Company or its competitors, variations in the
Company's quarterly operating results, continued high levels of short selling of
the Common Stock, or general economic or stock market conditions unrelated to
the Company's operating performance may have material adverse effects on the
market price of the Common Stock. In the past, following periods of volatility
in the market price of a company's securities, securities class action
litigation has often been instituted against such a company. Such litigation,
if instituted against the Company, could result in substantial costs and a
diversion of management attention and resources. See "Risk Factors - Class
Action and Shareholder Derivative Lawsuits."
In addition, the Company believes that electronic bulletin board postings
regarding the Company on America Online and other similar services, certain of
which have in the past contained false information about Company developments,
have in the past and may in the future contribute to volatility in the market
price of the Common Stock. Any information concerning the Company, including
projections of future operating results, appearing in such on-line bulletin
boards or otherwise emanating from a source other than the Company should not be
relied upon as having been supplied or endorsed by the Company.
The Company has not paid any cash dividends since its inception, and it
does not anticipate paying cash dividends on its Common Stock in the foreseeable
future.
31
<PAGE>
Certain Marketing and Sales Risks
As is common practice in its industry, the Company's arrangements with its
customers generally allow customers, in the event of a price decrease, credit
equal to the difference between the price originally paid and the new decreased
price on units in the customers' inventories on the date of the price decrease.
When a price decrease is anticipated, the Company establishes reserves for
amounts it estimates will be reimbursed to qualifying customers. There can be
no assurance that these reserves will be sufficient or that any future returns
or price protection charges will not have material adverse effects on the
Company's results of operations, particularly because future results will depend
heavily on recently introduced products for which the Company has little or no
operating history. In addition, customers generally have stock rotation rights
permitting them to return slower-moving products in inventory within specified
time periods in return for compensating orders of other products. Any build-up
of inventory at the Company or in its distribution channels that does not sell
through to end users could have material adverse effects on the Company's
operating results and financial condition.
As is typical in the industry, from time to time the Company experiences
product defects and product returns. There can be no assurance that the Company
will not experience quality or reliability problems in the future that have
material adverse effects on the Company's business and financial results.
The Company markets its products primarily through computer product
distributors and retailers. Distribution channels for personal computers and
accessories have been characterized by rapid change, including consolidation and
financial difficulties of distributors. The loss or ineffectiveness of any of
the Company's major distributors could have a material adverse effect on the
Company's results of operations. In addition, since the Company grants credit
to its customers, a substantial portion of outstanding accounts receivable are
due from computer product distributors and certain large retailers. At
September 30, 1996, the customers with the three highest outstanding accounts
receivable balances totaled $12.03 million, or 28.9%, of gross accounts
receivable. The Company has no reason to believe these receivable balances are
uncollectible, but if any one or a group of these customers' receivable balances
should be deemed uncollectible, it would have a material adverse effect on the
Company's results of operations and financial condition.
Effect of Anti-Takeover Provisions
The Company's Board of Directors has the authority to issue up to 4,000,000
shares of preferred stock and to determine the price, rights, preferences and
privileges of those shares, which, under certain circumstances, could be issued
without any further vote or action by the Company's stockholders. To date, an
aggregate of 50,000 shares of preferred stock have been issued: 20,000 shares of
7% Cumulative Preferred Stock; 5,500 shares of Convertible Preferred Stock and
24,500 shares of Series 2 Preferred Stock. The rights of the holders of Common
Stock will be subject to, and may be adversely affected by, the rights of the
holders of these preferred shares and any preferred stock that may be issued in
the future. Such issuance, while providing desirable flexibility in connection
with possible financings and acquisitions and other corporate purposes, could
make it more difficult for a third party to acquire a majority of the
outstanding voting stock of the Company. In addition, preferred stock may have
other rights, including economic rights, senior to the Common Stock, and, as a
result, the issuance thereof could have a material adverse effect on the market
value of the Common Stock. The Company is also subject to the anti-takeover
provisions of Section 203 of the Delaware General Corporation Law, which
prohibit the Company from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person first becomes an "interested stockholder,"
unless the business combination is approved in a prescribed manner. The
application of Section 203 could also have the effect of delaying or preventing
a change of control of the Company.
Class Action and Shareholder Derivative Lawsuits
The Company has been named as a defendant in four punitive class action
lawsuits. For a full discussion, see Item 3, Legal Proceedings.
32
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
For the years ended September 30, 1996, 1995, and 1994
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors 34
Consolidated Balance Sheets -- September 30, 1996, and 1995 35
Consolidated Statements of Operations -- Years Ended September 30,
1996, 1995, and 1994 36
Consolidated Statements of Stockholders' Equity -- Years Ended
September 30, 1996, 1995, and 1994 37
Consolidated Statements of Cash Flows -- Years Ended September 30,
1996, 1995, and 1994 38
Notes to Consolidated Financial Statements 40
</TABLE>
33
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors and Stockholders
SyQuest Technology, Inc.
We have audited the accompanying consolidated balance sheets of SyQuest
Technology, Inc. and subsidiaries as of September 30, 1996 and 1995, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended September 30, 1996. Our
audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 consolidated financial position of
SyQuest Technology, Inc. and subsidiaries at September 30, 1996 and 1995, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended September 30, 1996, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
Ernst & Young LLP
San Jose, California
December 11, 1996
34
<PAGE>
SyQuest Technology, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30,
1996 1995
-------------- ----------------
ASSETS (In Thousands, Except Share Data)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,470 $ 29,248
Short-term investments 200 400
Accounts receivable 30,341 55,653
Inventories 10,538 34,213
Prepaid expenses and deposits 2,471 2,066
Deferred income taxes -- 13,254
--------- --------
Total current assets 47,020 134,834
Property, equipment and leasehold improvements:
Equipment 49,340 47,291
Furniture and fixtures 2,710 2,667
Property and leasehold improvements 9,896 7,832
--------- --------
61,946 57,790
Accumulated depreciation and amortization 34,765 31,070
--------- --------
27,180 26,720
Other assets 981 3,130
--------- --------
$ 75,181 $164,684
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 23,917 $ 41,213
Bank borrowings 19,268 --
Accrued compensation and benefits 3,811 5,206
Provision for losses on purchase commitments -- 10,510
Accrued expenses and other liabilities 14,860 15,210
Income taxes payable 1,966 355
Current portion, long-term debt 20,549 --
--------- --------
Total current liabilities 84,371 72,494
Deferred rent 192 276
Long-term debt 20,971 --
Deferred income taxes -- 8,726
Commitments and contingencies -- --
Stockholders' equity (deficit):
Preferred stock, $.001 par value:
Authorized shares -- 4,000,000; issued and outstanding
shares -- 19,193 in 1996 and none in 1995 18 --
Liquidation preference -- $19,208
Common stock, $.001 par value:
Authorized shares -- 60,000,000; issued and outstanding
shares -- 12,312,769 in 1996 and 11,323,974 in 1995 14 13
Additional paid-in capital 102,580 79,489
Treasury common stock at cost -- 1,225,000 shares in 1996
and 1995 (12,855) (12,855)
Retained earnings (deficit) (120,110) 16,541
--------- --------
Total stockholders' equity (deficit) (30,353) 83,188
--------- --------
$ 75,181 $164,684
========= ========
</TABLE>
See accompanying notes.
35
<PAGE>
SyQuest Technology, Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Years Ended September 30,
1996 1995 1994
---------- --------- ---------
(In Thousands, Except Per Share Data)
<S> <C> <C> <C>
Net revenues $ 200,407 $299,544 $221,001
Cost of revenues 248,693 248,497 160,342
--------- -------- --------
Gross profit(loss) (48,286) 51,047 60,659
Operating expenses:
Selling, general, and administrative
(includes provision for losses on
accounts receivable of $5,839 in 1996,
$2,008 in 1995, and $3,151 in 1994) 51,743 44,264 37,566
Research and development 25,920 23,892 17,967
Restructuring charges 4,727 -- --
--------- -------- --------
Total operating expenses 82,390 68,156 55,533
--------- -------- --------
Income (loss) from operations (130,676) (17,109) 5,126
Other income and (expense) (1,938) 468 337
Interest income 192 1,134 1,193
Interest (expense) (1,229) -- --
--------- -------- --------
Income (loss) before income taxes
and cumulative effect of accounting change (133,651) (15,507) 6,656
Provision (benefit) for income taxes 3,000 (3,721) 1,597
--------- -------- --------
Income (loss) before cumulative effect of
accounting change (136,651) (11,786) 5,059
Cumulative effect of change in method of
accounting for income taxes -- -- 346
--------- -------- --------
Net income (loss) $(136,651) $(11,786) $ 5,405
========= ======== ========
Income (loss) per share:
Primary:
Income(loss) before cumulative effect of
accounting change $ (12.38) $ (1.07) $ .43
Cumulative effect of accounting change -- -- .03
--------- -------- --------
Net income (loss) per share $ (12.38) $ (1.07) $ .46
========= ======== ========
Common and common equivalent shares used
in computing per share amounts 11,497 11,063 11,647
========= ======== ========
</TABLE>
See accompanying notes.
36
<PAGE>
SyQuest Technology, Inc.
Consolidated Statements of Stockholders' Equity (Deficit)
<TABLE>
<CAPTION>
Additional Treasury Retained
Preferred Stock Common Stock Paid-In Common Earnings
Shares Amount Shares Amount Capital Stock (Deficit) Total
--------- ------ ------ ------ ---------- --------- ---------- ----------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at October 1, 1993 -- -- 11,283 $12 $ 72,221 $ (5,611) $ 22,922 $ 89,544
Stock options exercised -- -- 88 -- 497 -- -- 497
Shares issued under the
Employee Stock Purchase Plan -- -- 79 -- 736 -- -- 736
Purchase of treasury stock
at cost -- -- (625) -- -- (6,044) -- (6,044)
Income tax benefit from
stock options exercised -- -- -- -- 642 -- -- 642
Stock option compensation -- -- -- -- 65 -- -- 65
Net income -- -- -- -- -- -- 5,405 5,405
-------- ---- ------ ------ -------- -------- --------- ---------
Balance at September 30, 1994 -- -- 10,825 12 74,161 (11,655) 28,327 90,845
Stock options exercised -- -- 502 1 2,932 -- -- 2,933
Shares issued under the
Employee Stock Purchase Plan -- -- 97 -- 1,061 -- -- 1,061
Purchase of treasury stock
at cost -- -- (100) -- -- (1,200) -- (1,200)
Income tax benefit from
stock options exercised -- -- -- -- 1,321 -- -- 1,321
Stock option compensation -- -- -- -- 14 -- -- 14
Net income (loss) -- -- -- -- -- -- (11,786) (11,786)
-------- ---- ------ ------ -------- -------- --------- ---------
Balance at September 30, 1995 -- -- 11,324 13 79,489 (12,855) 16,541 83,188
Stock options exercised -- -- 386 1 1,421 -- -- 1,422
Shares issued under the
Employee Stock Purchase Plan -- -- 64 -- 350 -- -- 350
Issuance of preferred stock 20 19 -- -- 18,981 -- -- 19,000
Debt to equity conversion -- -- 371 -- 2,338 -- -- 2,338
Conversion of preferred stock
to common stock (1) (1) 168 -- 1 -- -- --
Net income (loss) -- -- -- -- -- -- (136,651) (136,651)
-------- ---- ------ ------ -------- -------- --------- ---------
Balance at September 30, 1996 19 $18 12,313 $14 $102,580 $(12,855) $(120,110) $ (30,353)
======== ==== ====== ====== ======== ======== ========= =========
</TABLE>
See accompanying notes.
37
<PAGE>
SyQuest Technology, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years Ended September 30,
1996 1995 1994
---------- --------- ---------
(In Thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $(136,651) $(11,786) $ 5,405
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:
Depreciation and amortization 10,578 8,052 7,129
Deferred income taxes 4,528 (4,227) (1,675)
Stock option compensation -- 14 65
Deferred rent (84) 12 34
Loss on disposal of equipment and leasehold
improvements 6,782 99 63
Changes in operating assets and liabilities:
Accounts receivable 25,312 (8,934) (14,569)
Inventories 23,675 (22,065) (1,487)
Prepaid expenses and deposits (405) (359) (991)
Accounts payable 13,413 15,161 11,036
Accrued compensation and benefits (1,395) 1,677 (437)
Provision for losses on purchase commitments 2,282 10,510 --
Accrued expenses and other liabilities (350) 5,455 2,058
Income taxes payable (refundable) 1,611 (1,144) 3,462
--------- -------- --------
Net cash provided by (used in) operating activities (50,704) (7,535) 10,093
INVESTING ACTIVITIES
Purchase of property, equipment and leasehold
improvements -- (12,509) (7,743)
Purchase of short-term investments 200 (3,178) (7,603)
Proceeds from sale of short-term investments (17,820) 4,493 5,895
Investment in Silmag -- (2,100) --
Other (5) 1,301 44
--------- -------- --------
Net cash used in investing activities (18,295) (11,993) (9,407)
FINANCING ACTIVITIES
Purchase of treasury stock -- (1,200) (6,044)
Payments of long-term debt (426) -- --
Net borrowings under line of credit agreements 22,875 -- --
Proceeds from sale of common stock and
exercise of stock options and warrants 1,772 3,994 1,233
Proceeds from sale of preferred stock 19,000 -- --
--------- -------- --------
Net cash provided by (used in) financing activities 43,221 2,794 (4,811)
--------- -------- --------
Decrease in cash and cash equivalents (25,778) (16,734) (4,125)
Cash and cash equivalents at beginning of year 29,248 45,982 50,107
--------- -------- --------
Cash and cash equivalents at end of year $ 3,470 $ 29,248 $ 45,982
========= ======== ========
</TABLE>
See accompanying notes.
38
<PAGE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Supplemental information on noncash investing and financing activities, in
thousands:
Conversion of preferred to Common Stock $738
Conversion of accounts payable to Common Stock $2,338
A number of suppliers converted approximately $31 million of net accounts
payable and purchase commitment liabilities into notes payable. The notes are
payable over six to thirty-six months and bear interest at approximately 10%.
One supplier converted approximately $7.3 million of net accounts payable
and purchase commitment liabilities into a long-term, 6% Convertible
Subordinated Debenture.
In the third quarter of fiscal 1996, the Company exchanged 4,155 common
shares of Silmag S.A. for a reduction of accounts payable in the amount of $2.8
million with one of its suppliers. The Company realized a gain of $0.7 million
on the exchange which is classified as other income.
In the quarter ended September 30, 1996, the Company entered into a
Securities Purchase Agreement with a supplier to exchange 370,000 shares of
common stock for $2.3 million of debt.
Cash paid for interest expense in fiscal year 1996 were approximately $0.9
million.
39
<PAGE>
SyQuest Technology, Inc.
Notes to Consolidated Financial Statements
September 30, 1996
1. SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation
The consolidated financial statements include the accounts of SyQuest
Technology, Inc. (the "Company" or "SyQuest") and its wholly owned
subsidiaries. All significant intercompany accounts and transactions have
been eliminated in consolidation.
Basis of Presentation
The Company's consolidated financial statements have been presented on
a going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. Over the last
two years the Company has experienced aggregate consolidated losses of
$148,437,000 including a net loss of $136,651,000 for the year ended
September 30, 1996. Working capital (deficit) at September 30, 1996 was
$(37,426,000) as compared to $62,340,000 at September 30, 1995.
Management's financial plans for fiscal 1997 anticipate raising additional
equity capital in order to stimulate business and take advantage of market
opportunities. As discussed in Note 15, during the first quarter of fiscal
1997, the Company raised approximately $38 million of additional equity
from investors. Management is currently pursuing other investment
opportunities and expects to raise additional financing during the second
quarter of fiscal 1997. There can be no assurance, however, that such
financing would be available when needed, if at all, or on favorable terms.
If results of operations for fiscal 1997 do not meet management's
expectations, or additional capital is not available, management has the
ability and intent to reduce certain expenditures so as not to require
additional capital resources.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
Certain prior year amounts have been restated to conform to the 1996
presentation.
Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. Certain of the
Company's balances of cash and cash equivalents are subject to usage
restrictions. See Note 4.
Short-Term Investments
The Company considers investments with an original maturity of more
than three months but less than twelve months to be short-term investments.
Short-term investments consist primarily of certificates of deposit,
bankers acceptances, commercial paper, and US Government agency debt
securities.
The Company classified its entire investment portfolio at September 30,
1996 and 1995 as available-for-sale. Available for sale securities are
stated at fair value with unrealized gains and losses included in
stockholder's equity. The amortized cost of debt securities is adjusted
for amortization of premiums and accretion of discounts to maturity. Such
amortization is included in interest income. Realized gains and losses are
included in other income (expense). The cost of securities is based on the
specific identification method. Short term investments at September 30,
1996 and 1995 are comprised of certificates of deposit.
40
<PAGE>
Inventories
Inventories are stated at the lower of cost (first-in, first-out
method) or market.
Property, Equipment and Leasehold Improvements
Property, equipment and leasehold improvements are stated on the basis of
cost. Equipment is depreciated over the estimated useful lives (three to five
years) of the assets using the straight-line method. Property and leasehold
improvements are amortized by the straight-line method over the shorter of the
life of the related asset or the term of the lease.
In 1995, the Financial Accounting Standards Board released the Statement of
Financial Accounting Standards No. 121 (SFAS 121), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of".
SFAS 121 requires the recognition of impairment of long-lived assets in the
event that the net book value of such assets exceeds the future undiscounted
cash flows attributable to such assets. SFAS 121 is effective for fiscal years
beginning after December 15, 1995. Adoption of SFAS 121 is not expected to have
a material impact on the Company's financial position or results of operations.
Foreign Currency Translation and Foreign Currency Transactions
The functional currency of the Company's foreign subsidiaries is the US
dollar. Subsidiary financial statements are remeasured into US dollars for
consolidation. Foreign currency transaction gains (losses) of ($573,000),
$468,000, and $337,000 are included in other income and expense for 1996, 1995,
and 1994, respectively.
Revenue Recognition
The Company recognizes revenue upon shipment to customers and provides an
estimated allowance for returns based on the historical return history
experienced by the Company.
Warranty
The Company generally warrants its products for one to five years. A
provision for estimated future warranty costs is recorded at the time of
shipment.
Income (Loss) Per Share
At September 30, 1996, the Company had 19,193 shares of convertible
preferred stock issued and outstanding with an assured incremental yield
embedded in the conversion terms. Included in the computation of earnings per
share is a $5.7 million charge for the embedded yield for the discount from
the average fair market value of the common stock for the five trading days
prior to September 30, 1996 times the number of common shares reserved for
conversion
Income per share for the year ended September 30, 1994 is based on the
weighted average number of shares of common stock outstanding and dilutive
common equivalent shares from stock options (using the treasury stock method).
Loss per share for years ending September 30, 1996 and 1995 is based on the
weighted average number of shares of common stock outstanding. All other common
equivalant shares would be antidilutive.
41
<PAGE>
Derivative Financial Instruments
During fiscal 1995, the Company adopted Statement of Financial Accounting
Standards No. 119, "Disclosure about Financial Instruments and Fair Value of
Financial Instruments" (FAS 119).
Fair Values of Financial Instruments
For certain of the Company's financial instruments, including cash and
equivalents, accounts receivable, notes payable, and accrued liabilities, the
carrying amounts approximate fair value due to their short maturities. The
Company further believes that the carrying amounts of its long-term obligations
approximate fair value due to the stability of interest rates since the Company
entered into the agreements.
Off Balance Sheet Risk
The Company may enter into foreign currency forward exchange contracts to
manage exposure related to certain foreign currency commitments and certain
foreign currency denominated balance sheet positions. The Company does not
enter into derivative financial instruments for trading purposes. At September
30, 1996, the Company had no forward exchange contracts. At September 30, 1995,
the Company had forward exchange contracts totaling $12,300,000 for the purchase
of Singapore dollars, $2,313,000 of forward exchange contracts for the purchase
of Malaysian Ringgits and $830,000 of forward exchange contracts for the
purchase of Japanese Yen. All forward exchange contracts entered into by the
Company had maturities of 60 days or less.
While the contract or notional amounts of the Company's forward exchange
contracts provide one measure of the volume of these transactions, they do not
represent the amount of the Company's exposure to credit risk. The amounts
potentially subject to credit risk (arising from the possible inability of
counterparties to meet the terms of their contracts) are generally limited to
the amounts, if any, by which the counterparties obligations exceed the
obligations of the Company. The Company controls credit risk through credit
approvals, limits and monitoring procedures. Credit rating criteria for off-
balance sheet transactions are similar to those for investments.
Employee Stock Plans
The Company accounts for its stock option plans and the Employee Stock
Purchase Plan in accordance with provisions of the Accounting Principles Board's
Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees". In 1995,
the Financial Accounting Standards Board released Statement of Financial
Accounting Standard No. 123 (SFAS 123), "Accounting for Stock Based
Compensation". SFAS 123 provides an alternative to APB 25 and is effective for
fiscal years beginning after December 15, 1995. The Company will adopt FAS 123
in fiscal 1997, however, the Company will continue to account for its employee
stock purchase plans in accordance with the provisions of APB 25. Accordingly,
SFAS 123 is not expected to have any material impact on the Company's financial
position or results of operations.
42
<PAGE>
2. BUSINESS SEGMENT AND CONCENTRATION OF CREDIT RISK
The Company operates in one business segment, the development,
production and marketing of removable cartridge Winchester disk drives and
associated cartridges. The Company has a manufacturing facility in Penang,
Malaysia which produces the majority of the Company's drives and
cartridges. The Company sells primarily to distributors in the personal
computer market. The Company performs ongoing credit evaluations of its
customers' financial condition and generally requires no collateral.
One customer accounted for approximately 10% of revenues in 1996 and
another customer accounted for approximately 10% of revenues in 1995.
Export sales by domestic operations accounted for approximately 10%, 1%,
and 3% of net revenues in 1996, 1995, and 1994, respectively, and are made
primarily to Europe and Far East customers.
The following tables summarize the Company's operations in different
geographic areas:
<TABLE>
<CAPTION>
Adjustments
North and
America Europe Far East Eliminations Consolidated
---------- ------- --------- ------------- -------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
1996
Sales to unaffiliated
customers $ 131,122 $57,235 $ 12,050 $ -- $ 200,407
Transfers between
geographic locations $ 27,060 $21,718 $228,288 $(277,066) $ --
Income (loss)
from operations $(107,274) $ 452 $(20,187) $ (3,667) $(130,676)
Identifiable assets $ 33,837 $ 2,536 $ 49,626 $ (10,818) $ 75,181
1995
Sales to unaffiliated
customers $ 186,276 $ -- $113,268 $ -- $ 299,544
Transfers between
geographic locations $ 8,590 $ -- $256,106 $(264,696) $ --
Income (loss) from
operations $ (20,973) $ -- $ 5,618 $ (1,754) $ (17,109)
Identifiable assets $ 97,008 $ -- $ 73,483 $ (5,807) $ 164,684
1994
Sales to unaffiliated
customers $ 144,123 $ -- $ 76,878 $ -- $ 221,001
Transfers between
geographic locations $ 31,142 $ -- $166,037 $(197,179) $ --
Income (loss) from
operations $ 793 $ -- $ 4,395 $ (62) $ 5,126
Identifiable assets $ 106,411 $ -- $ 37,228 $ (4,138) $ 139,501
</TABLE>
Sales and transfers between geographic areas generally provide a
profit after coverage of all manufacturing costs. Income from operations is
total net revenues less operating expenses.
The identifiable assets by geographic area are those assets used in
the Company's operations in each area.
43
<PAGE>
3. SUPPLEMENTARY BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
September 30,
1996 1995
------ ------
<S> <C> <C>
(In Thousands)
Accounts receivable:
Accounts receivable $36,035 $58,488
Less allowance for doubtful accounts (5,694) (2,835)
------- -------
$30,341 $55,653
======= =======
Inventories:
Raw materials $ 5,005 $22,258
Work-in-process 4,481 8,564
Finished goods 1,052 3,391
------- -------
$10,538 $34,213
======= =======
Accrued expenses and other liabilities:
Accrued warranty $ 6,757 $ 5,676
Co-op advertising/Market development funds 2,999 5,314
Other 5,104 4,220
------- -------
$14,860 $15,210
======= =======
</TABLE>
4. BORROWINGS
At September 30, 1996, the Company had a line of credit agreement with
a financial institution, expiring January 31, 1997. Borrowings under the
agreement bear interest at the highest "LIBOR" (London Interbank Offered
Rate) rate during the month plus 4.825% (10.25% at September 30, 1996) and
are subject to the higher of a minimum interest rate of 8% per annum or
$10,000 of interest per month, regardless of borrowings. The total
borrowings are limited to the lesser of $30 million or 75 percent of the
Company's eligible accounts receivable and a compensating balance, included
in cash and cash equivalents, of $282,000 is required on the loan. The
Agreement places limitations on additional borrowings and payment of cash
dividends. As of September 30, 1996, approximately $14.7 million of
borrowings were outstanding and approximately $5.3 million was available
for borrowing under the agreement.
In March 1996, the Company entered into a loan agreement with a bank
in Penang, Malaysia. The line of credit, which is denominated in Malaysian
Ringgits, provides for a term loan equivalent to approximately $4.2 million
and an overdraft facility of approximately $.8 million. The term loan is
repayable in 120 monthly installments and bears interest at the rate of
1.0% over the bank's base lending rate (9.15% at September 30, 1996).
Amounts drawn on the overdraft line are payable on demand. The line of
credit is secured by factory buildings owned by SyQuest Technology (M) SDN
BHD. The term loan is also covered by a corporate guarantee from SyQuest
Technology, Inc. A compensating balance, included in short-term
investments, of approximately $0.2 million is required on the loan. At
September 30, 1996, there were approximately $3.6 million of borrowings
outstanding under this term loan, and $0.5 million outstanding against the
overdraft facility, bearing an interest rate of 9.15%.
On May 29, 1996, the Company entered into a loan agreement based on
inventories with the same bank in Penang, Malaysia and is due on demand.
The agreement, which is denominated in Malaysian Ringgits, provides for
borrowing equivalent to approximately $ 4.0 million and is due on demand.
This loan is also secured by factory buildings owned by SyQuest Technology,
(M) SDN BHD, and is covered by a corporate guarantee from SyQuest
Technology, Inc. As of September 30, 1996 there were approximately $4.0
million of borrowings outstanding under this agreement at an interest rate
of 8.275%.
44
<PAGE>
During fiscal 1996, the Company converted accounts payable and
purchase commitments with certain suppliers to notes payable. The aggregate
amount due on those notes as of September 30, 1996, was approximately $30.7
million. The notes are payable over six to thirty-six months and bear
interest of 10%.
On July 15, 1996, the Company issued a 6% Convertible Subordinated
Debenture to a supplier in the amount of $7.7 million repayable in thirty-
six (36) equal monthly installments. The debenture agreement allows the
holder to convert up to $2,775,000 of the principal amount of the debenture
into no more than 400,000 shares of the Company's Common Stock at the
conversion price of $6.9375 per share. As of September 30, 1996, none of
the principal of the debenture had been converted to Common Stock.
Lines of credit, term loan and notes payable obligations consist of the
following:
<TABLE>
<CAPTION>
September 30, September 30,
1996 1995
------------- -------------
(In thousands)
<S> <C> <C>
BANK BORROWINGS
Line of Credit, interest payable at the rate of highest LIBOR rate
plus 4.825% (10.25% at September 30, 1996) $14,729 $ --
Line of Credit, principal and interest due on demand, interest
rate 8.275%, secured by land and buildings 4,010 --
Overdraft rider to term loan 529 --
------- -------
Total bank borrowings 19,268 --
LONG-TERM DEBT
Term Loan, principal payments deferred until July 1997, interest
rate 9.15% at September 30 1996; secured by land and buildings 3,607 --
Subordinated Debenture, $2,775,000 of principal can be converted
to Common Stock 7,252 --
Notes Payable to suppliers, principal and interest payable over
six to thirty-six months, interest rate 10% 30,661 --
------- -------
Total long-term debt 41,520 --
------- -------
Total Debt 60,788 --
Less amounts due within one year 39,817 --
------- -------
Due after one year $20,971 $ --
------- -------
</TABLE>
Future minimum payments on lines of credit, term loan and notes payable are as
follows (in thousands):
<TABLE>
<S> <C>
1997 $39,817
1998 15,260
1999 3,187
2000 361
2001 361
Due after 2001 1,802
-------
Total minimum payments $60,788
=======
</TABLE>
45
<PAGE>
5. INCOME TAXES
The income tax provisions for fiscal 1996, 1995, and 1994 consist of
the following:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- -------
(In Thousands)
<S> <C> <C> <C>
FEDERAL:
Current $(1,528) $ (421) $1,455
Deferred 3,197 (2,578) 79
------- ------- ------
1,669 (2,999) 1,534
STATE:
Current -- 181 324
Deferred 1,331 (928) (279)
------- ------- ------
1,331 (747) 45
FOREIGN:
Current -- 25 18
------- ------- ------
PROVISION (BENEFIT) FOR INCOME TAXES $ 3,000 $(3,721) $1,597
======= ======= ======
</TABLE>
Deferred tax assets and liabilities are determined based on
differences between the financial reporting and tax basis of assets and
liabilities and are measured by applying enacted tax rates and laws to the
taxable years in which such differences are expected to reverse. The
significant components of the Company's deferred tax assets and liabilities
were as follows:
<TABLE>
<CAPTION>
September 30, September 30
1996 1995
-------------- -------------
<S> <C> <C>
(In Thousands)
DEFERRED TAX ASSETS
Credit carryforwards $ 1,894 $ 1,773
Receivable reserves 2,979 879
Warranty reserves 1,575 1,152
Inventory valuation reserve 7,142 7,668
Accrued expenses 2,496 1,561
Depreciation of property, plant and equipment 560 --
Domestic and foreign tax net operating losses 38,997 728
Other -- 221
-------- -------
Total deferred tax assets 55,643 13,982
Valuation allowance (50,061) (728)
-------- -------
Net deferred tax assets 5,582 13,254
DEFERRED TAX LIABILITIES (5,582) (8,417)
Unremitted income of foreign subsidiaries -- (309)
Depreciation of property, plant and equipment -------- -------
(5,582) (8,726)
Total deferred tax liabilities -------- -------
$ -- $ 4,528
Net deferred tax assets ======== =======
</TABLE>
Realization of deferred tax assets is dependent on future earnings, if
any, the timing and amount of which are uncertain. Accordingly, a valuation
allowance, in an amount equal to the net deferred tax asset as of September
30, 1996 has been established to reflect these uncertainties. The
September 30, 1995 valuation allowance was provided for deferred tax assets
related to foreign net operating loss carryforwards.
46
<PAGE>
Approximately $702,000 of the deferred tax assets subject to the
valuation allowance at September 30, 1996 relates to the tax benefit of
stock option deductions. These benefits when realized, will be credited
directly to stockholders' equity and will not reduce the provision for
income taxes. The valuation allowance increased by $49,333,000 in fiscal
1996 and by $428,000 in fiscal 1995.
The reconciliation of income taxes provided at the federal statutory
rate to the income tax provision follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------- -------- -------
(In Thousands)
<S> <C> <C> <C>
Income taxes (benefit) computed at the federal
statutory rate $(46,610) $(5,272) $2,263
State income taxes (benefit) net of federal
income taxes effect -- (511) 30
Foreign losses for which no current tax benefit
is recognizable 1,366 -- --
Taxes provided on earnings of foreign subsidiaries
previously considered to be permanently invested
in non-US operations -- 1,768 --
Benefit from net earnings of foreign subsidiaries
considered to be permanently invested in non-
US operations -- -- (652)
Utilization of tax credits -- (566) (227)
Valuation allowance for deferred tax assets 48,244 427 300
Other -- 433 (117)
-------- ------- ------
$ 3,000 $(3,721) $1,597
======== ======= ======
</TABLE>
Income taxes paid (refunded) were ($3,139,000), $1,600,000, and
($670,000), in fiscal 1996, 1995, and 1994, respectively.
The Company's manufacturing operations in Singapore operated under a
tax holiday that expired at the end of fiscal 1996. The tax holiday had no
impact on the net loss in fiscal 1996 and 1995. The net impact of the tax
holiday in fiscal 1994 was to increase net income by $518,130 ($0.04 per
share). At September 30, 1996, the Company no longer had any manufacturing
operations in Singapore.
The Company has approximately $4,256,000 in foreign net operating loss
carryforwards. These carryforwards will expire in fiscal 1999 through
fiscal 2001.
At September 30, 1996, the Company had federal net operating loss
carryforwards of approximately $99,845,000. These carryforwards will
expire in 2010 and 2011 if not utilized. The Company had state net
operating loss carryforwards of approximately $30,000,000 that will expire
in 2001 if not utilized. In addition, the Company had research and
development tax credit carryforwards for federal and state tax purposes of
approximately $1,212,000 and $400,000, respectively. The federal tax
credit carryforwards will expire beginning in fiscal 2007 if not utilized.
The Company anticipates that in fiscal 1997, it may experience a "change of
ownership" for tax purposes that would result in an annual limitation on
the utilization of domestic net operating loss and tax credit carryforwards
in future periods. The limitation amount is determined at the point in
time when the "ownership change" occurs.
47
<PAGE>
6. RESTRUCTURING CHARGES
In the quarter ended March 31, 1996, the Company developed and began
implementation of a plan to relocate the manufacturing capabilities in
Singapore to Penang, Malaysia. The relocation was completed in the third
quarter of fiscal 1996. The Company recorded a $3.6 million charge for
direct costs related to exiting manufacturing facilities in Singapore. The
charge consisted of $1.6 million for the write-off of leasehold
improvements, $0.6 million for site closure and related costs and $1.4
million for staff severance and retrenchment. As of September 30, 1996,
substantially all of these costs had been incurred, and no additional
accrual was recorded.
In the quarter ended June 30, 1996 the Company recorded a $1.9 million
charge for restructuring costs associated with the consolidation and
closure of several of its administrative support locations. Actual charge
in the qurter ended September 30, 1996, were approximately $0.5 million
associated with the write-off of fixed assets, $0.5 million of severance
compensation, and $0.1 million for remaining lease obligations. As of
September 30, 1996, the consolidation of one location was substantially
complete, $0.8 million of the charge was reversed due to the Company's
decision to continue operations at one of the locations, and $0.6 million
remains accrued to cover remaining exit costs.
7. REDEEMABLE CONVERTIBLE PREFERRED STOCK
In the quarter ended June 30, 1996 the Company issued 20,000 shares of
7% Cumulative Convertible Preferred Stock for approximately $19 million net
of issuance costs. The Preferred Stock is convertible into Common Stock at
the lesser of $11 per share or 77% of the average market price of the
Common Stock on the five trading days prior to the conversion, which
conversion price is subject to downward adjustment under certain
circumstances. Rights relating to the Common Stock issuable upon conversion
and certain shares were negotiated pursuant to Registration No. 333-7369.
If the Common Stock is trading below $5 per share when the Preferred Stock
converts, the Company may redeem the Preferred Stock at 130% of the
original purchase price, except that the redemption price is reduced to
110% of the original purchase price to the extent that the original
purchase price of the Preferred Stock being redeemed (plus one half the
amount previously converted by the holders) exceeds $10 million. The
Company must redeem all Preferred Shares which remain outstanding on May
31, 1999, at 100% of original purchase price in cash or, at the Company's
option, in Common Stock. Should the Company's Common Stock no longer be
listed on the Nasdaq National Market, Small Cap or Electronic Bulletin
Board, the New York Stock Exchange or the American Stock Exchange, then the
repurchase price is 130% of the original purchase price. Under certain
circumstances, additional shares may be issued with any terms and without
stockholder approval.
The preferred stockholders are entitled to receive cash dividends at
the rate of 7% of the stated value per annum. Dividends accrue from the
date of issuance through and including the date that the shares are
converted or redeemed. Dividends may be paid in cash or, at the Company's
option, in common stock based on the average closing market price on the
five trading days preceding the date of conversion.
Holders of preferred shares have no voting rights. In the event of
voluntary or involuntary liquidation, the holders of the preferred shares
are entitled to receive in cash, before any amount is paid to holders of
common stock, an amount equal to the stated value of preferred share, plus
any accrued and unpaid dividends. As of September 30, 1996, 807 shares of
Preferred Stock had been converted into 168,311 shares of common stock in
accordance with the preferred stock agreement.
As of September 30, 1996, warrants to purchase 100,000 shares of the
Company's Common Stock at an exercise price of $10.88 per share had been
issued as partial compensation for value received in the placement of the
Company's 7% Cumulative Convertible Preferred Stock. Those warrants are
exercisable at the option of the holders on or before July 30, 1999.
48
<PAGE>
8. TREASURY STOCK
In 1993, the Board of Directors authorized the Company to repurchase
up to one million shares of the Company's Common Stock. In April 1994, the
Board of Directors authorized the Company to repurchase up to an additional
500,000 shares of the Company's Common Stock. There were no treasury stock
transactions during fiscal 1996. The Company acquired 100,000 and 625,000
shares of its Common Stock for approximately $1.2 million and $6.0 million
through open market transactions during fiscal 1995 and 1994, respectively.
The Company has acquired a total of 1,225,000 shares of its Common Stock as
of September 30, 1996. These shares are held as treasury stock at September
30, 1996.
9. STOCK OPTION PLANS AND COMMON STOCK RESERVED
In 1991, the Company adopted the SyQuest Technology, Inc. 1991 Stock
Option Plan (the "Plan") covering 3,403,524 shares of common stock for
issuance under the Plan and assumed stock options currently outstanding
under predecessor stock option plans. The Plan provides for the issuance of
incentive stock options and non statutory stock options to officers,
employees (including directors who are also employees), consultants,
independent contractors and advisors to or of the Company or any parent,
subsidiary or affiliate of the Company. Options granted under the Plan are
granted at fair value on the date of grant and become exercisable within
the times or upon the events determined by the Stock Option Committee as
set forth in the grant and expire within ten years from the date of the
grant. In 1995, the Company adopted an amendment to the Plan to increase
the authorized number of shares for the plan to 4,428,524. On September 26,
1996, the shareholders approved an amendment to the Plan to increase the
number of shares issuable under the Plan to 6,000,000. Other minor changes
were made to the Plan to comply with changes in Rule 16B3 under the
Securities and Exchange Act of 1934. These changes did not affect the terms
of any existing options.
In 1992, the Company adopted the 1992 Nonemployee Director Stock
Option Plan (the "Director Plan") and reserved 150,000 shares of Common
Stock for issuance. The Director Plan was amended in 1994 to increase the
size of the annual option grants. The Board of Directors administers the
Director Plan. In 1995, the Company adopted an amendment to the
Nonemployee stock option plan to increase the authorized number of shares
for the plan to 250,000. On September 26, 1996, the shareholders approved
an amendment to the Director Plan to increase the authorized number of
shares to 500,000. Options are granted at fair value on the grant date and
options may only be granted to Directors who are not employees of the
Company or its subsidiaries (Outside Directors). All option grants are
automatic and nondiscretionary. After each annual meeting of stockholders
at which directors are elected, reelected, or continuing as directors, each
Outside Director shall be automatically granted an option or options.
These options are to purchase such number of shares of Common Stock as
necessary so that during each of the four immediately following twelve-
month periods of July 1 through June 30, such Outside Directors will have
stock options (including Company stock options granted under plans other
than the Director Plan) which become exercisable with respect to a minimum
of 10,000 shares during each such period. Prior to 1994 the minimum was
2,500 shares during each such period. On September 26, 1996, the
stockholders approved a one-time grant of 30,000 options for each new
Outside Director which were not counted in determining annual grants in the
future. Other minor changes were made to the Director Plan to comply with
changes in Rule 16 of the Securities and Exchange Commission Act of 1934.
As of September 30, 1996, options to purchase 160,000 shares of common
stock were outstanding under the Director plan.
49
<PAGE>
The following table summarizes stock option activity under the Plan
and the Director Plan:
<TABLE>
<CAPTION>
Option Price
-----------------------------------------------------
Shares Per Share (range) Aggregate
------ ----------------------- ---------
(In Thousands, Except Per Share Amounts)
Low High
--- ----
<S> <C> <C> <C> <C>
Outstanding at September 30, 1993 1,999 $ .30 $28.25 $ 17,433
Granted 750 9.00 11.63 7,189
Exercised (88) .30 18.00 (497)
Canceled (360) 1.25 28.25 (5,948)
------ ------ ------ --------
Outstanding at September 30, 1994 2,301 .30 27.25 18,177
------ ------ ------ --------
Granted 833 11.50 16.75 11,865
Exercised (502) .30 12.50 (2,933)
Canceled (431) 7.50 27.25 (6,176)
------ ------ ------ --------
Outstanding at September 30, 1995 2,201 .30 24.25 20,933
------ ------ ------ --------
Granted 2,247 4.94 11.38 13,877
Exercised (386) .30 12.50 (1,421)
Canceled (1,306) .30 24.25 (12,923)
------ ------ ------ --------
Outstanding at September 30, 1996 2,756 $ .30 $24.25 $ 20,466
====== ====== ====== ========
</TABLE>
At September 30, 1996, options to purchase 627,538 shares were
exercisable, and 1,813,926 shares were available for grant.
The following table summarizes shares of Common Stock reserved for
future issuance by the Company under the Company's stock option and
purchase plans as of September 30, 1996:
<TABLE>
<S> <C>
1991 stock option plan 4,070,232
Director stock option plan 500,000
Shares reserved for conversion of preferred stock 4,020,318
Shares reserved for conversion of warrants 100,000
Employee stock purchase plan 203,133
---------
8,893,683
=========
</TABLE>
10. EMPLOYEE STOCK PURCHASE PLAN
In 1992, the Company adopted the 1992 Employee Stock Purchase Plan
(the "Purchase Plan"), and 500,000 shares of common stock were reserved for
issuance under the Purchase Plan. The Purchase Plan is intended to qualify
under Section 423 of the Internal Revenue Code of 1986, as amended.
The Purchase Plan is implemented by a single offering for each six-
month period commencing on approximately February 1 and August 1 of each
year. The Purchase Plan is administered by the Board of Directors or a
committee appointed by the Board of Directors. The Purchase Plan permits
eligible employees to purchase common stock through payroll deductions,
which may not exceed 15% of an employee's compensation, at a price equal to
85% of the lower of the fair market value of the common stock as of the
first day or as of the last day of each offering period. As of September
30, 1996, 296,867 shares of common stock had been issued under the Purchase
Plan.
50
<PAGE>
11. BONUS, PROFIT SHARING AND 401(K) SAVINGS AND RETIREMENT PLANS
The Company has bonus and profit sharing plans that provide additional
compensation to substantially all employees. The profit sharing
compensation is determined on an annual basis based principally on a
percentage of income after taxes, before profit sharing, and the Company
meeting certain objectives for the year. Bonuses for officers and key
management personnel are determined annually at the discretion of the Board
of Directors. Such determination considers the extent to which individuals
and the Company meet objectives for the year. The Company did not incur
bonus or profit sharing expenses in 1996 or 1995. The Company recorded
bonus and profit sharing expenses of $455,000 in 1994.
The Company adopted a 401(k) Savings and Retirement Plan (the "Savings
Plan") to provide for voluntary salary deferral contributions on a pretax
basis in accordance with Section 401(k) of the Internal Revenue Code of
1986, as amended. The Company has the option of matching a certain percent
of each participant's contribution to the Savings Plan. The Company's
maximum contribution per participant was limited to $1,000 in 1996 and 1995
and $500 in 1994. The Company made matching contributions of $254,000,
$242,000 and $135,000 in 1996, 1995, and 1994, respectively.
12. COMMITMENTS
The Company leases its United States facilities under noncancelable
operating lease agreements. These leases terminate through 2001, and
certain leases include five-year renewal options as well as provisions for
adjustments to lease payments based on the fair market value of similar
properties. The Company leases its Singapore facility under noncancelable
lease agreements expiring in 1997. The Company leases its facilities in
Amsterdam, Netherlands under a noncancelable lease agreement expiring in
2000. The Company is in the process of assigning that lease, and expects
the assignment to be completed no later than the second quarter of fiscal
1997. Notwithstanding the anticipated assignment, the future lease payments
for the Amsterdam facility have been included in the commitments schedule
below.
Total rent expense amounted to $2,507,000, $3,250,000, and $3,001,000
for 1996, 1995, and 1994, respectively. Future minimum rental commitments
under non-cancelable operating leases are as follows (in thousands):
<TABLE>
<S> <C>
1997 $2,445
1998 2,230
1999 1,425
2000 197
2001 13
------
Total minimum lease payments $6,310
======
</TABLE>
51
<PAGE>
13. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------------
(in thousands, except per share data)
Dec. 31, March 31, June 30, Sept. 30,
1995 1996 1996 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net revenues $ 78,667 $ 47,445 $ 29,459 $ 44,836
Gross profit (loss) (9,262) (25,391) (23,699) 10,066
Income (loss) from operations (30,886) (50,702) (41,604) (7,484)
Net income (loss) (33,801) (51,105) (41,317) (10,428)
Net income (loss) per share $ (2.98) $ (4.49) $ (3.61) $ (1.29)
<CAPTION>
Dec. 31, March 31, June 30, Sept. 30,
1994 1995 1995 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenues $ 65,892 $ 76,490 $ 68,787 $ 88,375
Gross profit (loss) 15,927 21,460 18,427 (4,767)
Income (loss) from operations 2,088 4,695 1,355 (25,247)
Net Income (loss) 1,923 3,686 1,711 (19,106)
Net income (loss) per share $ 0.16 $ 0.31 $ 0.15 $ (1.70)
</TABLE>
14. LITIGATION
The Company has been named as a defendant in four putative class
action lawsuits. Two of the actions, Ravens, et al. v. Iftikar, et al.
---------------------------------
(filed April 2, 1996) and Bellezza, et al. v. Iftikar, et al. (filed May
-----------------------------------
24, been brought in the United States District Court for the Northern
District of California and have been assigned to the Honorable Vaughn
Walker (collectively, the "Federal Lawsuit"). Certain current and former
officers and directors also have been named as defendants in the Federal
Lawsuit. Plaintiffs have petitioned the Court to consolidate the foregoing
complaints into one consolidated action. That request, as well as other
procedural matters which arose during a July 18, 1996, case management
conference, is under consideration. The plaintiffs in the Federal Lawsuit
purport to represent a class of all persons who purchased the Company's
Common Stock between October 21, 1994 and February 1, 1996. The Federal
Lawsuit alleges that the defendants violated the federal securities laws
through material misrepresentations and omissions. The third suit is a
purported class action entitled Gary S. Kaufman v. SyQuest Technology Inc.,
-------------------------------------------
et al. was filed on March 25, 1996, in the Superior Court of the State of
------
California for the County of Alameda (the "Kaufman Lawsuit"). Certain
current and former executive officers and directors of the Company are also
named as defendants in the Kaufman Lawsuit. The plaintiffs in the Kaufman
Lawsuit purport to represent a class of all persons who purchased the
Company's Common Stock between May 2, 1995, and February 2, 1996. The
Kaufman Lawsuit alleges that defendants violated various California laws
through material misrepresentations and omissions. Unspecified damages are
sought. The fourth purported class action entitled Ravens, et al. v.
-----------------
Iftikar, et al., was filed on October 11, 1996 in the Superior Court of the
---------------
State of California for the County of Alameda (the "Ravens Lawsuit"). The
Ravens Lawsuit alleges that the Company and certain of its former officers
and directors violated various California laws through material
representations and omissions between October 21, 1994 and February 2,
1996, and is purportedly brought on behalf of persons who purchased stock
during that period. Unspecified damages are sought. The Ravens Lawsuit
has been consolidated with the Kaufman Lawsuit. Plaintiffs are preparing a
consolidated complaint. The Company intends to defend the cases vigorously.
52
<PAGE>
The Company has certain insurance coverage with respect to the above
claims, however, the amount of any ultimate claims on these actions and
related insurance coverage is not presently determinable.
On May 14, 1996, the Company was served with a shareholder's
derivative action filed in Alameda County, California, Superior Court
entitled John Nitti, et al. v. Syed Iftikar, et al. On July 22, 1996,
------------------------------------------
plaintiffs filed an amended complaint. The action seeks to recover
unspecified damages and punitive damages on behalf of the Company from
current and former officers and directors of the Company for alleged breach
of fiduciary duty, unjust enrichment and waste of corporate assets. The
Company is a nominal defendant in the action. The complaint alleges that
the officers and directors issued false and misleading information and sold
shares of the Company's stock at artificially inflated prices. The
allegations are essentially the same as those in the putative class
actions. The Company intends to defend this case vigorously.
The Company has filed suit against Nomai, S.A. (Nomai) and Maxell in
France for copyright and patent infringement, and though it did not obtain
the temporary injunction sought against Nomai prohibiting the sale and
distribution of Nomai's 200 megabyte cartridges, the underlying suit
continues. The Company has also initiated an arbitration proceeding
against Nomai seeking payment of outstanding royalties of approximately $1
million. The arbitration process began in May 1995, in San Jose,
California.
A third party has notified the Company that it believes the Company
infringes on six U.S. patents. It is the Company's belief that the claims
are without merit or that the infringement claims related to component
parts purchased from vendors. The Company also believes that in the event
the third party prevails on its claims, the Company will be indemnified by
its vendor for any liability arising from the alleged infringements and
that this matter will not have a material adverse effect upon its financial
condition or results of operations.
From time to time, the Company is involved in litigation that it
considers to be in the normal course of its business. Other than set forth
above, the Company is not engaged in any legal proceedings as of the date
hereof which the Company expects individually or in the aggregate to have a
material adverse effect on the Company's financial condition or results of
operations.
15. SUBSEQUENT EVENTS
Between October 1, 1996 and October 31, 1996, the Company exchanged
approximately $9.2 million of notes payable held by creditors for
1,504,000 shares of Common Stock and associated registration rights.
On October 8, 1996, the Company issued 5,500 shares of its Convertible
Preferred Stock, Series 1, $.001 par value per share at a price of $1,000
per share, to certain accredited investors. Net proceeds to the Company
were approximately $5,225,000. The Convertible Preferred Stock is
convertible into Common Stock at the option of the holders at any time
after December 15, 1996.
53
<PAGE>
The Convertible Preferred Stock is convertible into a number of Common
Stock equal to $1,000 plus $50 for each year between October 25, 1996, and
the conversion date, divided by a conversion price which is the lesser of
$6.50 per share or 85% of the average closing market price of the Common
Stock on the five trading days preceding the date of conversion. The
Convertible Preferred Stock cannot be converted if the converting holder
and its respective affiliates would beneficially own more than 4.9% of the
Company's Common Stock at the time of conversion. Any Convertible Preferred
Stock outstanding on October 31, 1998 will automatically convert to Common
Stock on that date. In the event of liquidation, the holders of the
Convertible Preferred Stock receive their Stated Value before the holders
of Common Stock receive any cash or assets on liquidation. If the Company
consolidates, merges or reclassifies its outstanding Common Stock, the
holders of the Convertible Preferred Stock are entitled to receive the
greater of their share of any consideration on an as-converted basis, or
$1,250 per share of the Convertible Preferred Stock. The Convertible
Preferred Stock is nonvoting, except as required by law. The holders of the
Convertible Preferred Stock are not entitled to dividends. The Company also
has certain redemption rights.
The Company has filed a registration statement covering resale of
shares of Common Stock issuable in connection with such conversions, and
will make its best efforts to have the registration statement declared
effective with respect to certain holders of the Convertible Preferred
Stock no later than January 9, 1997, or with respect to other holders, no
later than other subsequent dates. If the registration statement is not
effective by such dates, or if sales cannot be made pursuant to the
registration statement at any time after such dates, the conversion
percentage shall be reduced 3% per month (prorated on a daily basis) and
the fixed conversion price shall be reduced by $0.195 per month (prorated
on a daily basis) for each month of delayed effectiveness or inability to
sell.
In accordance with the preferred stock agreement, the proceeds were
placed in an escrow account. Terms of the escrow agreement require that the
funds be used only for specific purposes and require that only certain of
the Company's officers may request withdrawals and must certify that usage
is in accordance with the escrow agreement.
On October 8, 1996, the Company issued 24,500 shares of its 5%
Cumulative Convertible Preferred Stock, Series 2, $.001 par value per share
at a price of $1,000 per share to certain accredited investors. Net
proceeds to the Company were approximately $23,275,000. The Convertible
Preferred Stock is convertible into Common Stock at the option of the
holders, any time after December 15, 1996.
The Series 2 Preferred Stock is convertible to Common Stock at a
conversion price which is the lesser of $6.50 per share or 85% of the
average market price of the Common Stock on the five trading days prior to
conversion. The Convertible Preferred Stock cannot be converted if the
converting holder and its respective affiliates would beneficially own more
than 4.9% of the Company's Common Stock at the time of conversion. In the
event of liquidation, the holders of the Convertible Preferred Stock
receive their original purchase price plus any accrued but unpaid
dividends, before the holders of Common Stock receive any cash or assets on
liquidation. If the Company consolidates, merges or reclassifies its
outstanding Common Stock, the holders of the Convertible Preferred Stock
are entitled to receive their share of consideration on an as-converted
basis. The Convertible Preferred Stock is nonvoting, except as required by
law. Dividends accrue on the Series 2 Preferred stock at an annual rate of
5%. Such dividends are payable quarterly in cash or stock, at the Company's
option. The Company also has certain redemption rights.
The Company has filed a registration statement covering shares of
Common Stock issuable in connection with the conversion of, or payable as
dividends upon, the Convertible Preferred Stock and will make its best
efforts to have the registration statement declared effective with respect
to certain holders of the 5% Cumulative Convertible Preferred Stock no
later than January 9, 1997, or with respect to other holders, no later than
other subsequent dates. If the registration statement is not effective by
such dates, or if sales cannot be made pursuant to the registration
statement at any time after such dates, the conversion percentage and the
fixed conversion rate shall be reduced at the rate of three percentage
points per month (prorated on a daily basis) of delayed effectiveness or
inability to sell.
In accordance with the preferred stock agreement, the proceeds were
placed in an escrow account. Terms of the escrow agreement require that the
funds be used only for specific purposes and require that only certain of
the Company's officers may request withdrawals and must certify that usage
is in accordance with the escrow agreement.
54
<PAGE>
On November 13, 1996, the Company issued 1,500,000 shares of
common stock, par value $.001 per share, at a price of $5.6875 to a
company (the "Purchaser"). Net proceeds to the Company were
$8,531,300. At the same time, the Company also granted the Purchaser
a warrant to purchase additional shares of common stock at the same
price per share. The number of Warrant Shares available for purchase
will not be less than 375,000 or more than 1,875,000. The Warrant
will expire November 13, 2001.
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated by
reference to the Company's definitive Proxy Statement for its Annual
Meeting of Stockholders to be held in 1997 ("Proxy Statement"), to be
filed with the Commission within 120 days after the end of the
Company's fiscal year pursuant to General Instruction G(3) to Form 10-
K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by
reference to the Proxy Statement to be filed with the Commission
within 120 days after the end of the Company's fiscal year pursuant to
General Instruction G(3) to Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by
reference to the Proxy Statement to be filed with the Commission
within 120 days after the end of the Company's fiscal year pursuant to
General Instruction G(3) to Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by
reference to the Proxy Statement to be filed with the Commission
within 120 days after the end of the Company's fiscal year pursuant to
General Instruction G(3) to Form 10-K.
55
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Report:
(1) Financial Statements. The following Consolidated
--------------------
Financial Statements of SyQuest Technology, Inc. and
subsidiaries are included in Item 8 of this Annual
Report on Form 10-K:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors 34
Consolidated Balance Sheets - September 30 1996 and 1995 35
Consolidated Statements of Operations - Years Ended September 30,
1996, 1995, and 1994 36
Consolidated Statements of Stockholders' Equity (Deficit) -- Years Ended
September 30, 1996,1995, and 1994 37
Consolidated Statements of Cash Flows -- Years Ended
September 30, 1996, 1995 and 1994 38
Notes to Consolidated Financial Statements 40
</TABLE>
(2) Financial Statement Schedule. The following
----------------------------
consolidated financial statement schedule of the
Company and subsidiaries are filed as part of this
Report and should be read in conjunction with the
Consolidated Financial Statements of SyQuest
Technology, Inc. and subsidiaries.
<TABLE>
<CAPTION>
Schedule Page
-------- ----
<S> <C>
VIII - Valuation and Qualifying Accounts 62
</TABLE>
Schedules not listed above have been omitted because they are not
applicable or are not required or the information required to be set
forth therein is included in the Consolidated Financial Statements or
Notes thereto.
56
<PAGE>
(3)
- --------------------------------------------------------------------------------
EXHIBITS
Exhibit
Number Description of Document
- --------------------------------------------------------------------------------
3.1 Restated Certificate of Incorporation of the Company. Incorporated by
reference to Exhibit 3.1 of the Company's Annual Report on Form 10-K
for the fiscal period ended September 30, 1995.
3.2 Amendment to Restated Certificate of Incorporation of the Company.
Incorporated by reference to Exhibit 3.2 of the Company's Form S-3
Registration Statement filed December 2, 1996 (File No. 333-17119), as
amended and to be amended.
3.3 By-Laws of the Company. Incorporated by reference to the Company's
Registration Statement on Form S-1 (File No. 33-43656) filed on
November 9, 1991.
4.1 Specimen stock certificate, $.001 par value. Incorporated by reference
to Amendment No. 2 to the Company's Registration Statement on Form S-1
(File No. 33-43656) filed on December 10, 1991.
4.2 Corrected Certificate of Designations, Preferences and Rights of 7%
Cumulative Convertible Preferred Stock, Series 1. Incorporated by
reference to Exhibit 3.1 of the Company's Current Report on Form 8-K
dated June 14, 1996.
4.3 Securities Purchase Agreement, dated as of May 31, 1996, by and among
the Company and holders of 7% Cumulative Convertible Preferred Stock,
Series 1. Incorporated by reference to Exhibit 10.1 of the Company's
Current Report on Form 8-K dated June 14, 1996.
4.4 Registration Rights Agreement dated as of May 31, 1996, by and among
the Company and holders of 7% Cumulative Convertible Preferred Stock,
Series 1. Incorporated by reference to Exhibit 10.2 of the Company's
Current Report on Form 8-K dated June 14, 1996.
4.5 6% Convertible Subordinated Debenture dated July 15, 1996.
Incorporated by reference to Exhibit 10.3 of the Company's Form S-3
Registration Statement No. 333-7369 ("Registration 333-7369").
4.6 Registration Agreement dated July 15, 1996, among the Company and
WISRS (Malaysia) SDN.BMP. Incorporated by reference to Exhibit 10.4
of Registration 333-7369.
4.7 Certificate of Designations, Preferences and Rights of Convertible
Preferred Stock, Series 1, as amended and agreed to be amended.
Incorporated by Reference to Exhibit 3.1 to the Company's Current
Report on Form 8-K/A dated October 31, 1996.
4.8 Certificate of Designations, Preferences and Rights of 5% Cumulative
Preferred Stock, Series 2. Incorporated by Reference to Exhibit 3.2
to the Company's Current Report on Form 8-K/A dated October 31, 1996.
4.9 Securities Purchase Agreement dated as of October 8, 1996, among the
Company and the buyers of the Convertible Preferred Stock, Series 1
including the following exhibits: Form of Warrant, Form of
Registration Rights Agreement, Form of Escrow Agreement and certain
Schedules to the representations. Incorporated by Reference to
Exhibit 10.1 to the Company's Current Report on Form 8-K/A dated
October 31, 1996.
57
<PAGE>
4.10 Securities Purchase Agreement dated as of October 8, 1996, among
the Company and certain buyers of the Series 2 Preferred Stock,
including the following exhibits: Form of Escrow Agreement, Form
of Warrant, Form of Registration Rights Agreement and certain
Schedules to the representations. Incorporated by Reference to
Exhibit 10.2 to the Company's Current Report on Form 8-K/A dated
October 31, 1996.
4.11 Securities Purchase Agreement dated as of October 8, 1996, among
the Company and certain buyers of the Series 2 Preferred Stock,
including the following exhibits: Form of Escrow Agreement, Form
of Warrant, Form of Registration Rights Agreement and certain
Schedules to the representations. Incorporated by Reference to
Exhibit 10.3 to the Company's Current Report on Form 8-K/A dated
October 31, 1996.
4.12 Securities Purchase Agreement dated as of October 8, 1996, among
the Company and certain buyers of the Series 2 Preferred Stock,
including the following exhibits: Form of Escrow Agreement, Form
of Warrant, Form of Registration Rights Agreement and certain
Schedules to the representations. Incorporated by Reference to
Exhibit 10.4 to the Company's Current Report on Form 8-K/A dated
October 31, 1996.
4.13 Securities Purchase Agreement dated as of October 8, 1996, among
the Company and certain buyers of the Series 2 Preferred Stock,
including the following exhibits: Form of Escrow Agreement, Form
of Warrant, Form of Registration Rights Agreement and certain
Schedules to the representations. Incorporated by Reference to
Exhibit 10.5 to the Company's Current Report on Form 8-K/A dated
October 31, 1996.
4.14 Securities Purchase Agreement dated as of September 27, 1996,
between the Company and Atmel Corporation, including the exhibit
Form of Registration Rights Agreement. Incorporated by Reference
to Exhibit 10.6 to the Company's Current Report on Form 8-K/A
dated October 31, 1996.
4.15 Securities Purchase Agreement dated as of October 18, 1996,
between the Company and Petronic International, Inc., including
the exhibit Form of Registration Rights Agreement. Incorporated
by Reference to Exhibit 10.7 to the Company's Current Report on
Form 8-K/A dated October 31, 1996.
4.16 Securities Purchase Agreement dated as of October 24, 1996,
between the Company and SAE Magnetics (HK) Ltd., including the
exhibit Form of Registration Rights Agreement. Incorporated by
Reference to Exhibit 10.8 to the Company's Current Report on Form
8-K/A dated October 31, 1996.
4.17 Securities Purchase Agreement dated as of October 25, 1996,
between the Company and Freight Solutions International,
including the exhibit Form of Registration Rights Agreement.
Incorporated by Reference to Exhibit 10.9 to the Company's
Current Report on Form 8-K/A dated October 31, 1996.
4.18 Subscription Agreement dated November 12, 1996, between SyQuest
Technology, Inc. and Fletcher International Limited, including
the Annex Warrant Certificate issued November 13, 1996.
10.1 Form of Indemnification Agreement between the Company and its
directors*. Incorporated by reference to the Company's
Registration Statement on Form S-1 (File No. 33-43656) filed on
November 9, 1991.
10.2 Form of Indemnification Agreement between the Company and its
executive officers*. Incorporated by reference to Amendment No. 2
to the Company's Registration Statement on Form S-1 (File No. 33-
43656) filed on December 10, 1991.
58
<PAGE>
10.3 Industrial Space Lease dated May 15, 1990, between SyQuest
Technology and Renco Investment Company covering property located
at 47100 Bayside Parkway in Fremont, California, with other
documents related thereto. Incorporated by reference to the
Company's Registration Statement on Form S-1 (File No. 33-43656)
filed on November 9, 1991.
10.4 Industrial Space Lease dated July 30, 1991, between SyQuest
Technology and Renco Investment Company covering property located
at Building #47, Bayside Parkway in Fremont, California with
other documents related thereto. Incorporated by reference to the
Company's Registration Statement on Form S-1 (File No. 33-43656)
filed with on November 9, 1991.
10.5 Tenancy of Flatted Factory Unit dated July 18, 1990, between
SyQuest Technology (c) and Jurong Town Corporation covering
property located at 30 Kallang Place, Singapore. Incorporated by
reference to the Company's Registration Statement on Form S-1
(File No. 33-43656) filed on November 9, 1991.
10.6 Tenancy of Flatted Factory Unit dated June 26, 1991, between
SyQuest Technology International and Jurong Town Corporation
covering property located at 19 Kallang Avenue, Singapore.
Incorporated by reference to the Company's Registration Statement
on Form S-1 (File No. 33-43656) filed on November 9, 1991.
10.7 Revolving Credit Agreement dated January 1, 1991, among SyQuest
Technology, First Interstate Bank of California and Silicon
Valley Bank, together with First Amendment related thereto.
Incorporated by reference to the Company's Registration Statement
on Form S-1 (File No. 33-43656) filed on November 9, 1991.
10.8 Product License Agreement dated April 1, 1990, between SyQuest
Technology and PrairieTek Corporation. Incorporated by reference
to the Company's Registration Statement on Form S-1 (File No. 33-
43656) filed on November 9, 1991.
10.9 SyQuest Technology, Inc. 1991 Stock Option Plan, as amended*.
Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1995.
10.10 Form of Stock Option Grant for SyQuest Technology, Inc 1991 Stock
Option Plan*. Incorporated by reference to the Company's
Registration Statement on Form S-8 (File No. 33-46460) filed on
March 18, 1992.
10.11 Policy Regarding Options and Cash Bonuses to be Awarded to
Employees of Iota Memories Corporation*. Incorporated by
reference to the Company's Registration Statement on Form S-1
(File No. 33-43656) filed on November 9, 1991.
10.12 1992 Non-Employee Director Stock Option Plan, as amended*.
Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1995.
10.13 1992 Employee Stock Purchase Plan, as amended. Incorporated by
reference to the Company's Registration Statement on Form S-8
(File No. 33-48273) filed on June 9, 1992.
10.14 Credit Agreement dated January 17, 1992, among the Company and
Silicon Valley Bank and First National Bank of Boston.
Incorporated by reference to the Company's Registration Statement
on Form S-1 (File No. 33-47361) filed on April 21, 1992.
10.15 Bonus Arrangements for Executive Officers*. Incorporated by
reference to the Company's Annual Report on Form 10-K for the
fiscal period ended September 30, 1995.
59
<PAGE>
10.16 Amendment No. 2 to Credit Agreement made as of June 10, 1993,
among the Company, Silicon Valley Bank and First National Bank of
Boston. Incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1993.
10.17 Line of Credit Agreement dated February 28, 1995, with Silicon
Valley Bank, and Amendment No. 1 thereto. Incorporated by
reference to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1995.
10.18 Line of Credit Agreement with Bank of America. Incorporated by
reference to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1995.
10.19 Amendment No. 2 to Silicon Valley Bank Credit Agreement and
Limited Waiver dated November 21, 1995. Incorporated by reference
to the Company's Current Report on Form 8-K dated November 21,
1995.
10.20 Amendment No. 3 to Silicon Valley Bank Credit Agreement and
Limited Waiver dated December 27, 1995. Incorporated by reference
to the Company's Annual Report on Form 10-K for the fiscal period
ended September 30, 1995.
11.1 Computation of Earnings Per Share.
21.1 Subsidiaries of the Company. Incorporated by reference to the
Company's Registration Statement on Form S-1 (File No. 33-43656)
filed on November 9, 1991.
22.1 Published Report Regarding Special Stockholders Meeting on
September 26, 1996. Incorporated by reference to the Company's
Current Report on Form 8-K/A dated October 31, 1996.
23.1 Consent of Ernst & Young LLP.
27 Financial Data Schedule.
* A management contract or compensatory plan or arrangement required to be filed
as an Exhibit pursuant to Item 14(c) of this Report.
(b) Reports on Form 8-K:
A current report on Form 8-K, dated December 2, 1996, was filed by the
Company reporting under Item 5 the Filing of a Registration Statement on
Form S-3.
A current report on Form 8-K, dated November 25, 1996, was filed by
the Company reporting under Item 5 the Company's discontinuation of plans
to acquire a controlling interest in Nomai.
A current report on Form 8-K, dated November 11, 1996, was filed by
the Company reporting under Item 5 the continuation of the Company's Nasdaq
National Market listing and the execution of a Letter of Intent to acquire
a controlling interest in Nomai, and under Item 9 the sale by the Company
of equity securities pursuant to Regulation S.
A current report on Form 8-K, dated October 31, 1996, and an amendment
thereto were filed by the Company reporting under Item 5 the results of the
Company's Special Meeting of Stockholders held September 26, 1996, the
Company's filing with Nasdaq of a pro forma balance sheet evidencing the
Company's compliance with the listing requirements of the Nasdaq National
Market, and the Company's exchange of debt for equity with certain vendors,
sale of Convertible Preferred Stock, Series 1 and sale of 5% Cumulative
Convertible Preferred Stock, Series 2 and related warrants.
60
<PAGE>
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.
SYQUEST TECHNOLOGY, INC.
By: /s/Edwin L. Harper
________________________________
Edwin L. Harper
President and Chief Executive Officer
Dated: December 27, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
---------- ----- -----
<S> <C> <C>
/s/ Edwin L. Harper President, Chief Executive Officer December 27, 1996
- ---------------------- and Director (Principal Executive Officer)
Edwin L. Harper
/s/ Henry C. Montgomery Executive Vice President, Finance and December 27, 1996
- ---------------------- Chief Financial Officer
Henry C. Montgomery
/s/ Edward L. Marinaro Director and Chairman of the Board December 27, 1996
- ----------------------
Edward L. Marinaro
/s/ Joseph Baia Director December 27, 1996
- ----------------------
Joseph Baia
/s/ David I. Caplan Director December 27, 1996
- ----------------------
David I. Caplan
/s/ Donald P. Landry Controller December 27, 1996
- ----------------------
Donald P. Landry
</TABLE>
61
<PAGE>
SYQUEST TECHNOLOGY, INC.
SCHEDULE VIII -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance at Additions Balance at
Beginning Charged to Costs End of
Description of Period and Expenses Deductions Period
----------- --------- ---------------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C>
Year Ended September 30, 1996:
Allowance for doubtful accounts $2,835 $5,839 $(2,980)/(1)/ $5,694
Year Ended September 30, 1995:
Allowance for doubtful accounts $3,574 $2,008 $(2,747)/(1)/ $2,835
Year Ended September 30, 1994:
Allowance for doubtful accounts $2,003 $3,151 $(1,580)/(1)/ $3,574
</TABLE>
- ---------------------
(1) Represents uncollectable accounts written off.
62
<PAGE>
EXHIBIT 4.18
SUBSCRIPTION AGREEMENT
----------------------
This Subscription Agreement (the "Agreement") dated November 12, 1996 is
entered into by and between SyQuest Technology, Inc., a Delaware corporation
(together with its successors, "SyQuest"), and Fletcher International Limited, a
company organized under the laws of the Cayman Islands (together with its
successors, "Fletcher").
Unless otherwise defined herein, capitalized terms used herein and not
defined herein shall have the meanings given to them in Regulation S
("Regulation S") under the United States Securities Act of 1933, as amended (the
"Securities Act").
The parties hereto agree as follows:
1. Purchase and Sale. In consideration of and upon the basis of the
-----------------
representations, warranties and agreements and subject to the terms and
conditions set forth in this Agreement:
a. Common Stock. SyQuest agrees to issue and sell to Fletcher,
------------
and Fletcher agrees to purchase from SyQuest, on the Closing Date specified
in Section 2 hereof, 1,500,000 newly issued shares of SyQuest common stock,
par value $.001 per share (the "Common Stock"), at a purchase price equal
to FIVE and 68.75/100 DOLLARS ($5.6875) per share (the "Purchase Price",
--------------------
the last sales price of the Common Stock as reported by Bloomberg L.P.
("Bloomberg") for the date hereof. The shares of Common Stock purchased
pursuant to this Section 1.a are referred to herein as the "Initial
Shares."
b. Warrant. In consideration of the purchase of the Initial
-------
Shares by Fletcher, SyQuest will issue to Fletcher on the Closing Date a
warrant (the "Warrant") having the terms set forth in the Warrant
Certificate attached hereto as Annex A to purchase shares of Common Stock
(the "Warrant Certificate"). The shares of Common Stock issuable pursuant
to the Warrant are referred to herein as the "Warrant Shares."
2. Closing. The delivery of the Initial Shares referred to in
-------
Section 1.a and the delivery of the Warrant referred to in Section 1.b (the
"Closing") shall take place via facsimile at 2:00 p.m. (New York time) on
November 13, 1996, or at such other date and time as Fletcher and SyQuest may
agree in writing (such date and time being referred to herein as the "Closing
Date").
<PAGE>
At the Closing, the following deliveries shall be made:
a. Initial Shares Certificate. SyQuest shall deliver the
--------------------------
certificate representing the Initial Shares to Fletcher.
b. Warrant. SyQuest shall deliver the Warrant Certificate to
-------
Fletcher.
c. Closing Documents. The closing documents required by Sections
-----------------
7 and 8 shall be delivered to Fletcher and SyQuest, respectively.
d. Purchase Price. Fletcher shall cause to be wire transferred
--------------
to SyQuest, in accordance with instructions furnished by SyQuest at least
one day prior to the Closing, an amount, in immediately available United
States dollars, equal to the product of the Purchase Price multiplied by
1,500,000.
The foregoing deliveries shall be deemed to occur simultaneously as
part of a single transaction, and no delivery shall be deemed to have been made
until all such deliveries have been made.
3. Representations and Warranties of SyQuest. Except as set forth in
-----------------------------------------
the Schedule of Exceptions attached hereto, SyQuest hereby represents and
warrants to Fletcher on the date hereof and on the Closing Date and on each
Warrant Exercise Date (as defined in the Warrant Certificate) as follows:
a. SyQuest has been duly incorporated and is validly existing in
good standing under the laws of Delaware, or, after the Closing Date if
another entity has succeeded SyQuest in accordance with the terms hereof,
under the laws of one of the United States.
b. The execution, delivery and performance of this Agreement and
the Warrant Certificate by SyQuest have been duly authorized by all
requisite corporate action and no further consent or authorization of
SyQuest, its Board of Directors or its stockholders is required. This
Agreement and the Warrant Certificate have been duly executed and delivered
by SyQuest and, when duly authorized, executed and delivered by Fletcher,
will be valid and binding agreements enforceable against SyQuest in
accordance with their terms, subject to bankruptcy, insolvency, reorgani-
2
<PAGE>
zation, moratorium and similar laws of general applicability relating to or
affecting creditors' rights generally and to general principles of equity.
c. SyQuest has full corporate power and authority necessary to
execute and deliver this Agreement and the Warrant Certificate and to
perform its obligations hereunder and thereunder.
d. No consent, approval, authorization or order of any court,
governmental agency or other body is required for execution and delivery by
SyQuest of this Agreement and the Warrant Certificate or the performance by
SyQuest of any of its obligations hereunder or thereunder, other than, with
respect to any Warrant Exercise Date, any consent, approval, authorization
or order which has been received on or prior to such date.
e. Neither the execution and delivery by SyQuest of this
Agreement and the Warrant Certificate nor the performance by SyQuest of any
of its obligations hereunder or thereunder:
(1) violates, conflicts with, results in a breach of, or
constitutes a default (or an event which with the giving of notice or
the lapse of time or both would be reasonably likely to constitute a
default) under (A) the Certificate of Incorporation or by-laws of
SyQuest or any of its subsidiaries or any Certificate of Designation
relating to any securities of SyQuest or any of its subsidiaries, (B)
any decree, judgment, order, law, treaty, rule, regulation or
determination of which SyQuest is aware (after due inquiry) of any
court, governmental agency or body, or arbitrator having jurisdiction
over SyQuest or any of its subsidiaries or any of their respective
properties or assets, (C) the terms of any bond, debenture, note or
any other evidence of indebtedness, or any agreement, stock option or
other similar plan, indenture, lease, mortgage, deed of trust or other
instrument to which SyQuest or any of its subsidiaries is a party, by
which SyQuest or any of its subsidiaries is bound, or to which any of
the properties or assets of SyQuest or any of its subsidiaries is
subject, (D) the terms of any "lock-up" or similar provision of any
underwriting or similar agreement to which SyQuest or any of its
subsidiaries is a party or (E) any rules of the National Association
of Securities Dealers, Inc. applicable to SyQuest or the transactions
contemplated hereby; or
3
<PAGE>
(2) results in the creation or imposition of any lien,
charge or encumbrance upon (A) any Initial Share, the Warrant or any
Warrant Share or (B) any of the properties or assets of SyQuest or any
of its subsidiaries.
f. SyQuest has validly reserved 1,875,000 shares for issuance
pursuant to the Warrant. When issued to Fletcher against payment therefor
in accordance with the terms of this Agreement and the Warrant Certificate,
each Initial Share, the Warrant and each Warrant Share:
(1) will have been duly and validly authorized, duly and
validly issued, fully paid and non-assessable;
(2) will be free and clear of any security interests,
liens, claims or other encumbrances (other than those resulting solely
from actions by Fletcher); and
(3) will not have been issued or sold in violation of any
preemptive or other similar rights of the holders of any securities of
SyQuest.
g. The Initial Shares have been, and upon notice of issuance the
Warrant Shares will be, duly listed and admitted for trading on the NASDAQ
National Market ("NASDAQ") or, following the Closing Date, listed and
registered on a national securities exchange (as defined in the United
States Securities Exchange Act of 1934, as amended (the "Exchange Act")).
On the Closing Date, SyQuest shall continue to satisfy all quantitative
maintenance criteria of the NASDAQ.
h. SyQuest is a Reporting Issuer within the meaning of
Regulation S, provided, however, that the representations and warranties
-------- -------
contained in this Section 3(h) shall not be required to be given in respect
of any Warrant Exercise Date if the provisions of Section 3A are applicable
and SyQuest is in full compliance therewith and Fletcher is permitted to
resell the Common Stock thereunder.
i. On the Closing Date, there is no pending or, to the best
knowledge of SyQuest, threatened action, suit, proceeding or investigation
before any court, governmental agency or body, or arbitrator having
4
<PAGE>
jurisdiction over SyQuest or any of its affiliates that would materially
affect the execution by SyQuest of, or the performance by SyQuest of its
obligations under, this Agreement or the Warrant Certificate, provided,
--------
however, that the representations and warranties contained in this Section
-------
3(i) shall not apply to any action, threatened action, suit, proceeding or
investigation initiated by Fletcher.
j. SyQuest has timely filed all filings with the United States
Securities and Exchange Commission (the "SEC") under the Securities Act or
under Section 13(a) or 15(d) of the Exchange Act (each, an "SEC Filing")
required to be filed by SyQuest pursuant to such acts and no SEC Filing, or
press release containing information material to the business of SyQuest as
a whole, contains any untrue statement of a material fact or omits to state
any material fact necessary in order to make the statements, in the light
of the circumstances under which they were made, not misleading.
k. Since the date of SyQuest's most recent SEC Filing, there has
not been, and SyQuest is not aware of any development that might be
reasonably likely to result in, any material adverse change in the
condition, financial or otherwise, or in the business affairs or business
prospects of SyQuest, whether or not arising in the ordinary course of
business, except as disclosed in such SEC Filing, provided, however, that
-------- -------
the representations and warranties contained in this Section 3(k) shall not
be required to be given in respect of any Warrant Exercise Date; and
provided further that (i) the parties hereto acknowledge that Fletcher has
-------- -------
neither requested of nor received from SyQuest any non-public information
relating to SyQuest or the business affairs or business prospects of
SyQuest and (ii) without limiting Fletcher's reliance on any of the
representations, warranties, covenants and agreements of SyQuest contained
herein, Fletcher assumes the risk that the knowledge of any of the non-
public information described in proviso (i) of this Section 3(k) might have
materially influenced Fletcher's decision to enter into and perform this
Agreement. As of the Closing Date, SyQuest is not aware of any
development that might result in SyQuest not satisfying all quantitative
maintenance criteria of the NASDAQ.
l. The offer and sale of the Initial Shares, the Warrant and the
Warrant Shares to Fletcher pursuant to this Agreement and the Warrant
Certificate will, subject to compliance by Fletcher with the applicable
representations and warranties contained in Section 4 hereof and with the
5
<PAGE>
applicable covenants and agreements contained in Section 6 hereof, be made
in accordance with the provisions and requirements of Regulation S and any
applicable state law, provided, however, that the representations and
-------- -------
warranties contained in this Section 3(l) shall not be required to be given
in respect of any Warrant Exercise Date if the provisions of Section 3A are
applicable and SyQuest is in full compliance therewith and Fletcher is
permitted to resell the Common Stock thereunder.
m. Neither SyQuest nor any of its affiliates nor any person
acting on its or their behalf has engaged or will engage in any Directed
Selling Efforts with respect to the Initial Shares, the Warrant or the
Warrant Shares, and all such persons understand and have complied and will
otherwise comply with the requirements of Regulation S.
n. The transactions contemplated by this Agreement and the
Warrant are not part of a plan or scheme on the part of SyQuest, any of its
subsidiaries or any person acting on its or their behalf to evade the
registration provisions of the Securities Act.
o. Reserved.
p. Except for securities proposed to be sold for an aggregate
purchase price of approximately $20 million to Beijing Legend Group Ltd.
and its affiliates (the "BLC Transaction"), on the Closing Date, neither
SyQuest nor any of its affiliates has offered to sell or sold any Common
Stock or any securities convertible into or exchangeable or exercisable for
Common Stock in reliance upon Regulation S at any time during the past 12
months and there are no outstanding convertible or exchangeable securities
that have been offered or sold in reliance upon Regulation S, except, in
each case the Initial Shares, the Warrant and the Warrant Shares sold
pursuant hereto.
q. Capitalization. As of the date hereof, the authorized
--------------
capital stock of SyQuest consists of 60,000,000 shares of Common Stock, and
4,000,000 shares of Preferred Stock, par value $.001 per share, of SyQuest
("Preferred Stock"). As of October 31, 1996, (i) 13,867,370 shares of
---------------
Common Stock and 48,956 shares of Preferred Stock were issued and
outstanding, (ii) 16,903,356 shares of Common Stock were reserved for
issuance upon exercise of outstanding stock options, convertible Preferred
Stock, warrants or other rights (based, with respect to 12,468,118 shares
of Common Stock, on a conversion price of $5.7503 per share of Common
Stock) and (iii) 1,225,000 shares of Common Stock were held in the treasury
6
<PAGE>
of SyQuest. All the outstanding shares of Common Stock are, and all shares
which may be issued pursuant to stock options, warrants or other
convertible rights will be, when issued and paid for in accordance with the
respective terms thereof, duly authorized, validly issued, fully paid and
nonassessable and free of any preemptive rights in respect thereof. As of
the date hereof, except as set forth above, and except for shares of Common
Stock or other securities issued upon conversion, exchange, exercise or
purchase associated with the securities, options, warrants, rights and
other instruments referenced above from October 31, 1996 to the date
hereof, (i) no shares of capital stock or other voting securities of
SyQuest were outstanding, (ii) no equity equivalents, interests in the
ownership or earnings of SyQuest or other similar rights were outstanding
and (iii) there were no existing options, warrants, calls, subscriptions or
other rights or agreements or commitments relating to the capital stock of
SyQuest or any of its subsidiaries or obligating SyQuest or any of its
subsidiaries to issue, transfer, sell or redeem any shares of capital
stock, or other equity interest in, SyQuest or any of its subsidiaries or
obligating SyQuest or any of its subsidiaries to grant, extend or enter
into any such option, warrant, call, subscription or other right, agreement
or commitment. In October 1996, SyQuest issued and sold 30,000 shares of
its Preferred Stock substantially on the terms set forth in the
Certificates of Designation and securities purchase agreements filed with
SyQuest's Current Report on Form 8-K/A filed by SyQuest with the SEC on
November 1, 1996, including the payment to an escrow account for the
benefit of SyQuest of an aggregate of $30 million in cash.
3A. Registration Provisions.
-----------------------
a. If, at any time after the date hereof, there is any
determination of application of, or change in, any law or regulation
relating to the issuance and resale of the Initial Shares, the Warrant or
the Warrant Shares, including any interpretation or revision by the SEC or
action by the United States government relating to Regulation S or any
successor or revision to Regulation S, and such determination, change,
interpretation, successor provision or revision imposes a Restricted Period
applicable to any security issued or issuable hereunder or under the
Warrant that is greater than that in effect on the date of this Agreement,
or would materially impair the ability of Fletcher or any of its affiliates
to offer, sell or otherwise dispose of any such security pursuant to
Regulation S as contemplated hereby, or requires any such offer, sale or
other disposition to be registered under the Securities Act, then upon the
written request of Fletcher (a "Registration Request"), SyQuest shall, as
promptly as practicable thereafter and at its own expense, file a
registration statement (the "Registration Statement") under the Securities
Act covering the
7
<PAGE>
sale or resale of all such securities (each a "Covered Security") and shall
use its best efforts to cause such registration statement to be declared
effective as promptly as possible; provided that Fletcher shall have
provided such information and cooperation in connection therewith as
SyQuest may reasonably request. Upon the ef-fectiveness of such
Registration Statement (A) SyQuest shall issue such securities to Fletcher
in accordance with the terms hereof and (B) the provisions of Sections
3(l), (m) and (o), 4(e), (f), (g), (h), (i) and (j), 5(a), (b), (c) and
(d), 6 (collectively, the "Specified Provisions"), 7(a) and (b) (to the
extent applicable to the Specified Provisions), 8(b), (c) and (d) (to the
extent applicable to the Specified Provisions) shall thereafter be of no
force and effect with respect to the issuance of such Covered Securities.
b. In the case of the registration effected by SyQuest pursuant
to this Section 3A registration provisions, SyQuest will use its best
efforts to: (i) keep such registration effective until the earlier of (A)
the third anniversary of the issuance of each Covered Security, (B) such
date as all of the Covered Securities shall have been sold by Fletcher or
(C) such time as all of the Covered Securities held by Fletcher can be sold
by Fletcher or any of its affiliates within a three-month period without
compliance with the registration requirements of the Securities Act
pursuant to Rule 144 under the Securities Act ("Rule 144"); (ii) prepare
and file with the SEC such amendments and supplements to the Registration
Statement and the prospectus used in connection with the Registration
Statement (as so amended and supplemented from time to time, the
"Prospectus") as may be necessary to comply with the provisions of the
Securities Act with respect to the disposition of all Covered Securities by
Fletcher or any of its affiliates; (iii) furnish such number of
Prospectuses and other documents incident thereto, including any amendment
of or supplement to the Prospectus, as Fletcher from time to time may
reasonably request; (iv) cause all Covered Securities that are Common Stock
to be listed on each securities exchange and quoted on each quotation
service on which similar securities issued by SyQuest are then listed or
quoted; (v) provide a transfer agent and registrar for all Covered
Securities and a CUSIP number for all Covered Securities; (vi) otherwise
use its best efforts to comply with all applicable rules and regulations of
the SEC; and (vii) file the documents required of SyQuest and otherwise use
its best efforts to obtain and maintain requisite blue sky clearance in (A)
all jurisdictions in which any of the Covered Securities are originally
sold and (B) all other states specified in writing by Fletcher, provided,
however, that as to this clause (B), SyQuest shall not be required to
qualify to do business or consent to service of process in any state in
which it is not now so qualified or has not so consented.
c. SyQuest shall furnish to Fletcher upon request a reasonable
number of copies of a supplement to or an amendment of such
8
<PAGE>
Prospectus as may be necessary in order to facilitate the public sale or
other disposition of all or any of the Covered Securities by Fletcher or
any of its affiliates pursuant to the Registration Statement.
d. With a view to making available to Fletcher and its affiliates
the benefits of Rule 144 and Form S-3 under the Securities Act, SyQuest
covenants and agrees to: (i) make and keep available adequate current
public information (within the meaning of Rule 144(c)) concerning SyQuest,
until the earlier of (A) the third anniversary of the issuance of each
Covered Security or (B) such date as all of the Covered Securities shall
have been resold by Fletcher or any of its affiliates; (ii) maintain its
status as a Reporting Issuer and file with the SEC in a timely manner all
reports and other documents required of SyQuest for use of Form S-3; and
(iii) furnish to Fletcher upon request, as long as Fletcher owns any
Covered Securities, (A) a written statement by SyQuest that it has complied
with the reporting requirements of the Securities Act and the Exchange Act,
(B) a copy of the most recent annual or quarterly report of SyQuest, and
(C) such other information as may be reasonably requested in order to avail
Fletcher and its affiliates of Rule 144 or Form S-3 with respect to such
Covered Securities.
e. Notwithstanding anything else in this Section 3A, if, at any
time during which a Prospectus is required to be delivered in connection
with the sale of any Covered Securities, SyQuest determines in good faith
that a development has occurred or a condition exists as a result of which
the Registration Statement or the Prospectus contains a material
misstatement or omission, SyQuest will immediately notify Fletcher thereof
by telephone and in writing. Upon receipt of such notification, Fletcher
and its affiliates will immediately suspend all offers and sales of any
Covered Securities pursuant to the Registration Statement. In such event,
SyQuest will amend or supplement the Registration Statement as promptly as
practicable and will take such other steps as may be required to permit
sales of the Covered Securities thereunder by Fletcher and its affiliates
in accordance with applicable federal and state securities laws. SyQuest
will promptly notify Fletcher after it has determined in good faith that
such sales have become permissible in such manner and will promptly deliver
copies of the Registration Statement and the Prospectus (as so amended or
supplemented) to Fletcher in accordance with paragraph (b) of this Section
3A. Notwithstanding the foregoing, (A) under no circumstances shall
SyQuest be entitled to exercise its right to suspend sales of any Covered
Securities pursuant to the Registration Statement more than two times in
any twelve-month period, (B) the period during which such sales may be
suspended (each a "Blackout Period") shall not exceed thirty days and (C)
no Blackout Period may commence less than 30 days after the end of the
preceding Blackout Period.
9
<PAGE>
Upon the commencement of a Blackout Period pursuant to this Section
3A, Fletcher will immediately notify SyQuest of any contracts to sell any
Covered Securities (each a "Sales Contract") that Fletcher or any of its
affiliates has entered into prior to the commencement of such Blackout
Period and that would require delivery of such Covered Securities during
such Blackout Period, which notice will contain the aggregate sale price
and volume of Covered Securities pursuant to such Sales Contract. Upon
receipt of such notice, SyQuest will immediately notify Fletcher of its
election either (i) to terminate the Blackout Period and, as promptly as
practicable, amend or supplement the Registration Statement or the
Prospectus in order to correct the material misstatement or omission and
deliver to Fletcher copies of such amended or supplemented Registration
Statement and Prospectus in accordance with paragraph (b) of this Section
3A or (ii) to continue the Blackout Period in accordance with this
paragraph. If SyQuest elects to continue the Blackout Period, and Fletcher
or any of its affiliates is therefore unable to consummate the sale of
Covered Securities pursuant to the Sales Contract (such unsold Covered
Securities being hereinafter referred to herein as the "Unsold
Securities"), SyQuest will promptly indemnify each Fletcher Indemnified
Party (as such term is defined in Section 11(a) below) against any
Proceeding (as such term is defined in Section 11(a) below) that each
Fletcher Indemnified Party may incur arising out of or in connection with
Fletcher's breach or alleged breach of any such Sales Contract, and SyQuest
shall reimburse each Fletcher Indemnified Party for any reasonable costs or
expenses (including reasonable legal fees) incurred by such party in
investigating or defending any such Proceeding (collectively, the
"Indemnification Amount"); provided, however, that each Fletcher
-------- -------
Indemnified Party shall take all actions reasonably necessary or
appropriate to mitigate such Indemnification Amount; and provided further,
-------- -------
however, that the Indemnification Amount shall be reduced by an amount
-------
equal to the number of Unsold Securities multiplied by the difference
between (x) the actual per share price received by Fletcher or any of its
affiliates upon the sale of the Unsold Securities (if such sale occurs
within three Trading Days of the end of the Blackout Period) or the closing
sale price of the Common Stock on NASDAQ or other national securities
exchange on which the Common Stock is then listed on the third Trading Day
after the end of the Blackout Period (if the Unsold Securities are not sold
by Fletcher or any of its affiliates within three Trading Days of the end
of the Blackout Period), and (y) the per share sale price for the Unsold
Securities provided in the Sales Contract. As used herein, the term
"Trading Day" means any day on which SyQuest's Common Stock is quoted on
NASDAQ or, if applicable, other national securities exchange.
10
<PAGE>
4. Representations and Warranties of Fletcher. Fletcher hereby
------------------------------------------
represents and warrants to SyQuest on the date hereof and on the Closing Date,
and agrees with SyQuest, as follows:
a. Fletcher has been duly incorporated and is validly existing
in good standing under the laws of the Cayman Islands.
b. The execution, delivery and performance of this Agreement by
Fletcher have been duly authorized by all requisite corporate action and no
further consent or authorization of Fletcher, its Board of Directors or its
stockholders is required. This Agreement has been duly executed and
delivered by Fletcher and, when duly authorized, executed and delivered by
SyQuest, will be a valid and binding agreement enforceable against Fletcher
in accordance with its terms, subject to bankruptcy, insolvency,
reorganization, moratorium and similar laws of general applicability
relating to or affecting creditors' rights generally and to general
principles of equity.
c. Fletcher understands that no United States federal or state
agency has passed on, reviewed or made any recommendation or endorsement of
the Initial Shares, the Warrant or the Warrant Shares.
d. In making the decision to purchase the Initial Shares, the
Warrant and the Warrant Shares in accordance with this Agreement, Fletcher
has relied solely upon independent investigations made by it and not upon
any representations made by SyQuest other than those made in this
Agreement.
e. Fletcher understands that the Initial Shares, the Warrant and
the Warrant Shares have not been and , subject to Section 3A, will not be
registered under the Securities Act and may not be reoffered or resold
other than pursuant to such registration or an available exemption
therefrom.
f. Fletcher is not a U.S. Person and is not acquiring the
Initial Shares, the Warrant or any Warrant Shares for the account or
benefit of any U.S. Person, and Fletcher is not an affiliate of SyQuest.
g. At the time the buy orders for the Initial Shares and the
Warrant (and any Warrant Shares to be issued during the Restricted Period)
were originated, Fletcher was located outside the United States.
h. Neither Fletcher nor any of its affiliates nor anyone acting
on its or their behalf has engaged or will engage in any Directed Selling
Efforts with respect to the Initial Shares, the Warrant or any Warrant
Shares,
11
<PAGE>
and all such persons understand and have complied and will otherwise comply
with the requirements of Regulation S.
i. Fletcher:
(1) will not, during the Restricted Period applicable to the
Initial Shares, the Warrant and the Warrant Shares, offer or sell any
of the foregoing securities (or create or maintain any derivative
position equivalent thereto) in the United States, to or for the
account or benefit of a U.S. Person or other than in accordance with
Regulation S; and
(2) will, after the expiration of the applicable Restricted
Period, offer, sell, pledge or otherwise transfer the Initial Shares,
the Warrant or any Warrant Shares (or create or maintain any
derivative position equivalent thereto) only pursuant to registration
under the Securities Act or an available exemption therefrom and, in
any case, in accordance with applicable state securities laws; and
(3) will not, for a period of 90-days following the Closing
Date, offer or sell the Initial Shares, the Warrant, the Warrant
Shares or any other shares of Common Stock (or create or maintain any
derivative position equivalent thereto, except for stock index
derivatives or derivatives of a group of securities), provided,
however, that the parties hereto expressly agree that Fletcher may
pledge the Initial Shares, the Warrant, the Warrant Shares or any
other shares of Common Stock pursuant to a bona fide pledge securing a
full recourse debt or other obligation and that, subject to compliance
with the Securities Act and any other applicable securities law, such
a pledgee will have the right to exercise all remedies under such
pledge, including a right to foreclose upon the Initial Shares, the
Warrant, the Warrant Shares or any other shares of Common Stock, as
the case may be.
j. Fletcher is purchasing the Initial Shares, the Warrant and
the Warrant Shares for its own account, for the purpose of investment and
not with a view to a distribution thereof.
k. The transactions contemplated by this Agreement and the
Warrant Certificate are not part of a plan or scheme on the part of
Fletcher, any of its affiliates or any person acting on its or their behalf
to evade the registration requirements of the Securities Act.
12
<PAGE>
5. Covenants of SyQuest. SyQuest covenants and agrees with Fletcher
--------------------
as follows:
a. For so long as any portion of the Warrant remains
outstanding, and in any case for a period of 40 days thereafter, SyQuest
will continue to be a Reporting Issuer within the meaning of Regulation S
and will maintain the eligibility of the Common Stock for quotation on
NASDAQ or listing on a national securities exchange (as defined in the
Exchange Act).
b. Except with the written consent of Fletcher, for a period of
six months following the date of this Agreement, SyQuest will not offer or
sell any Common Stock or any securities convertible into or exchangeable
into Common Stock in reliance upon Regulation S, other than the BLC
Transaction, and in any event will not take any action which would extend
the Restricted Period hereunder.
c. For so long as any portion of the Warrant remains
outstanding, and in any case for a period of 40 days thereafter, neither
SyQuest nor any of its affiliates nor any person acting on its or their
behalf will engage in any Directed Selling Efforts with respect to the
Warrant or any Warrant Shares.
d. For so long as any portion of the Warrant remains
outstanding, and in any case for a period of 40 days thereafter, SyQuest
will ensure that all applicable Offering Restrictions with respect to the
Warrant and the Warrant Shares are thoroughly complied with and satisfied.
e. Beginning on the date hereof and for so long as any portion
of the Warrant remains outstanding, and in any case for a period of 40 days
thereafter, SyQuest will promptly notify Fletcher if there is any public
disclosure by SyQuest of material information regarding SyQuest or its
financial condition, prospects or results of operation and provide Fletcher
with copies of all SEC Filings.
f. Reserved.
g. SyQuest will comply with the terms and conditions of the
Warrant as set forth in the Warrant Certificate (as duly amended from time
to time by the parties hereto).
h. For so long as any portion of the Warrant remains
outstanding, SyQuest shall at all times reserve and keep available, free
from preemptive rights, out of its authorized but unissued Common Stock,
for
13
<PAGE>
issuance upon exercise of such Warrant, the maximum number of Warrant
Shares then so issuable.
6. Covenants of Fletcher. Fletcher hereby covenants and agrees with
---------------------
SyQuest as follows:
a. During any Restricted Period applicable to the Initial
Shares, the Warrant or the Warrant Shares, neither Fletcher nor any of its
affiliates nor any person acting on its or their behalf will:
(1) offer or sell such initial Shares, Warrant or Warrant
Shares other than in an Offshore Transaction;
(2) engage in any Directed Selling Efforts with respect to
such Initial Shares, Warrant or Warrant Shares;
(3) offer or sell such Initial Shares, Warrant or Warrant
Shares other than: (A) in accordance with Rule 903 or Rule 904 of
Regulation S; (B) pursuant to registration under the Securities Act or
(C) pursuant to an available exemption therefrom; or
(4) offer or sell such Initial Shares, Warrant or Warrant
Shares, to any U.S. Person or for the account or benefit of any U.S.
Person.
b. Neither Fletcher nor any of its affiliates nor any person
acting on its or their behalf will at any time offer or sell any Initial
Shares, the Warrant or any Warrant Shares other than pursuant to
registration under the Securities Act or pursuant to an available exemption
therefrom.
6A. Legend. The term "Restricted Period," with respect to any
------
security, shall mean the Restricted Period then applicable to such security
pursuant to Regulation S (or any applicable successor thereto), provided that,
the parties agree that, absent an intervening change in the applicable law, the
Restricted Period with respect to the Initial Shares, the Warrant and the
Warrant Shares will expire on the 40th day after the Closing Date. SyQuest
shall place the following legend on the certificate representing the Initial
Shares:
The securities represented by this certificate were issued
on November 13 , 1996 (the "Closing Date") pursuant to the
Subscription Agreement dated November 12, 1996 between
SyQuest Technology, Inc. ("SyQuest") and Fletcher International
Limited. The
14
<PAGE>
securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended
(the "Securities Act"), and have been sold in reliance on
the exemption from registration provided by Regulation S
under the Securities Act ("Regulation S"). Prior to the
expiration of a 40-day restricted period beginning on the
Closing Date (the "Restricted Period"), the securities
represented by this certificate may not be offered or sold,
directly or indirectly, within the United States (as defined
in Regulation S under the Securities Act), to a U.S. Person
(as defined in Regulation S under the Securities Act) or for
the account or benefit of a U.S. Person. After the
Restricted Period, such securities may be resold in the
United States or to a U.S. Person only if they are
registered under the Securities Act or an exemption from
registration is available.
At any time after the expiration of the Restricted Period in
connection with the sale or pledge of any of the Initial Shares, upon the
written request of Fletcher accompanied by either (i) a certification of an
appropriate officer of Fletcher that in the case of a sale, the proposed
purchaser is not a U.S. Person or, in the case of a pledge, such Initial Shares
are being pledged pursuant to a bona fide pledge securing a full recourse debt
or other obligation, or, (ii) at SyQuest's option, an opinion of counsel
reasonably satisfactory to SyQuest to the effect that it is not necessary in
connection with the reoffer and resale, or pledge, as the case may be, of such
Initial Shares to register such Initial Shares under the Securities Act, SyQuest
shall, or shall cause its transfer agent (if any) to, (i) accept from Fletcher
the legended certificates representing such Initial Shares and deliver in their
place unlegended certificates therefor, unless such legend is required by law
and (ii) release, and not subsequently issue, any stop transfer order or other
order impeding such sale and delivery of such Initial Shares. At any time after
the expiration of the Restricted Period with respect to the Warrant,
certificates for any Warrant Shares issued or in respect of transferred shares
of Common Stock will not be legended unless required by law, upon satisfaction
of the conditions set forth in Section 8 and, if applicable, in the Warrant
Certificate.
7. Conditions Precedent to Fletcher's Obligations. The obligations
----------------------------------------------
of Fletcher hereunder are subject to the performance by SyQuest of its
obligations hereunder and to the satisfaction of the following additional
conditions precedent, unless expressly waived in writing by Fletcher:
a. On the Closing Date and on each Warrant Exercise Date (as
defined in the Warrant Certificate), (i) the representations and warranties
15
<PAGE>
made by SyQuest in this Agreement shall be true and correct, and (ii)
SyQuest shall have complied fully with all the covenants and agreements in
this Agreement and the Warrant Certificate; and Fletcher shall have
received on each such date a certificate of the Chief Executive Officer and
the Chief Financial Officer of SyQuest dated such date and to such effect.
b. On the Closing Date and on each Warrant Exercise Date (as
defined in the Warrant Certificate), SyQuest shall have delivered to
Fletcher an opinion of counsel reasonably satisfactory to Fletcher, dated
the date of delivery, confirming in substance the matters covered in
paragraphs (a), (b), (c), (d), (e), (f), (g), (h) and (i) of Section 3
hereof; provided, however, that no such opinion delivered in respect of any
-------- -------
Warrant Exercise Date shall be required to cover the matters set forth in
paragraph (i) of Section 3 hereof.
c. On the Closing Date, SyQuest shall have delivered to Fletcher
the opinion of counsel reasonably satisfactory to Fletcher, dated the
Closing Date, to the effect that the offer and sale of the Initial Shares
and the Warrant hereunder do not require registration under the Securities
Act.
8. Conditions Precedent to SyQuest's Obligations. The obligations of
---------------------------------------------
SyQuest hereunder are subject to the performance by Fletcher of its obligations
hereunder and to the satisfaction of the following additional conditions
precedent, unless expressly waived in writing by SyQuest:
a. On the Closing Date and on each Warrant Exercise Date (as
defined in the Warrant Certificate), (i) the representations and warranties
made by Fletcher in this Agreement shall be true and correct, and (ii)
Fletcher shall have complied fully with all the covenants and agreements in
this Agreement and the Warrant Certificate; and SyQuest shall have received
on each such date a certificate of an appropriate officer of Fletcher dated
such date and to such effect.
b. On the Closing Date, Fletcher shall have delivered to SyQuest
a written certification of an appropriate officer of Fletcher dated such
date stating that Fletcher is not a U.S. Person.
c. On each Warrant Exercise Date, Fletcher shall have delivered
to SyQuest a written certification of an appropriate officer of Fletcher
dated such date stating that Fletcher is not a U.S. Person.
d. On the date of any transfer by Fletcher of the Warrant or any
Common Stock during the applicable Restricted Period, Fletcher shall
16
<PAGE>
have delivered to SyQuest a written certification of an appropriate officer
of Fletcher dated such date stating that Fletcher is not a U.S. Person and
that the Warrant is not being exercised on behalf of a U.S. Person.
e. On the Closing Date, Fletcher shall have delivered to SyQuest
the opinion of counsel substantially in the form attached hereto, dated the
Closing Date, to the effect that the offer and sale of the Initial Shares
and the Warrant hereunder do not require registration under the Securities
Act.
9. Fees and Expenses. Each of Fletcher and SyQuest agrees to pay its
-----------------
own expenses incident to the performance of its obligations hereunder,
including, but not limited to the fees, expenses and disbursements of such
party's counsel, except as is otherwise expressly provided in this Agreement and
the Warrant Certificate.
10. Non-Performance.
---------------
If, on any Warrant Exercise Date, SyQuest shall fail to deliver
the Warrant Shares required to be delivered pursuant to this Agreement and
the Warrant Certificate for any reason other than the failure of any
condition precedent to SyQuest's obligations hereunder or the failure by
Fletcher to comply with its obligations hereunder, then SyQuest shall:
(1) hold Fletcher harmless against any loss, claim or damage
arising from or as a result of such failure by SyQuest; and
(2) reimburse Fletcher for all of its reasonable out-of-pocket
expenses, including fees and disbursements of its counsel, incurred by
Fletcher in connection with this Agreement and the Warrant and the
transactions contemplated herein and therein;
provided, however, that SyQuest shall then be under no further liability to
- -------- -------
Fletcher except as provided in this Section 10 and Section 11 hereof.
11. Indemnification.
---------------
a. Indemnification of Fletcher. SyQuest hereby agrees to
---------------------------
indemnify Fletcher and each of its officers, directors, employees, agents
and affiliates and each person that controls (within the meaning of Section
20 of the Securities Exchange Act of 1934, as amended) any of the foregoing
persons (each a "Fletcher Indemnified Party") against any claim, demand,
action, liability, damages, loss, cost or expense (including, without
limitation, reasonable legal fees) (a "Proceeding"), that it may incur in
connection with any of the transactions contemplated hereby arising out of
or based upon:
17
<PAGE>
(1) any untrue or alleged untrue statement of a material
fact by SyQuest or any of its affiliates or any person acting on its
or their behalf or omission or alleged omission to state any material
fact necessary in order to make the statements, in the light of the
circumstances under which they were made, not misleading by SyQuest or
any of its affiliates or any person acting on its or their behalf ;
(2) any of the representations or warranties made by
SyQuest herein being untrue or incorrect; and
(3) any breach or non-performance by SyQuest of any of its
covenants, agreements or obligations under this Agreement and the
Warrant Certificate;
and SyQuest hereby agrees to reimburse each Fletcher Indemnified Party for any
reasonable legal or other expenses incurred by such Fletcher Indemnified Party
in investigating or defending any such Proceeding;
provided, however, that the foregoing indemnity shall not apply to any
- -----------------
Proceeding to the extent that it arises out of or is based upon the gross
negligence or wilful misconduct of Fletcher in connection therewith.
b. Indemnification of SyQuest. Fletcher hereby agrees to
--------------------------
indemnify SyQuest and each of its officers, directors, employees, agents
and affiliates and each person that controls (within the meaning of Section
20 of the Securities Exchange Act of 1934, as amended) any of the foregoing
persons (each a "SyQuest Indemnified Party") against any Proceeding, that
it may incur in connection with any of the transactions contemplated hereby
arising out of or based upon:
(1) any untrue or alleged untrue statement of a material
fact by Fletcher or any of its affiliates or any person acting on its
or their behalf or omission or alleged omission to state any material
fact necessary in order to make the statements, in the light of the
circumstances under which they were made, not misleading by Fletcher
or any of its affiliates or any person acting on its or their behalf:
(2) any of the representations or warranties made by
Fletcher herein being untrue or incorrect; and
(3) any breach or non-performance by Fletcher of any of its
covenants, agreements or obligations under this Agreement and the
Warrant Certificate;
18
<PAGE>
and Fletcher hereby agrees to reimburse each SyQuest Indemnified Party for
any reasonable legal or other expenses incurred by such SyQuest Indemnified
Party in investigating or defending any such Proceeding;
provided, however, that the foregoing indemnity shall not apply to any
-----------------
Proceeding to the extent that it arises out of or is based upon the gross
negligence or wilful misconduct of SyQuest in connection therewith.
c. Conduct of Claims.
-----------------
(1) Whenever a claim for indemnification shall arise under
this Section, the party seeking indemnification (the "Indemnified
Party"), shall notify the party from whom such indemnification is
sought (the "Indemnifying Party") in writing of the Proceeding and the
facts constituting the basis for such claim in reasonable detail;
(2) Upon delivery of such notice, such Indemnified Party
shall have a duty to take all reasonable steps to mitigate any losses,
liabilities, costs, charges and expenses relating to any such
Proceeding;
(3) Such Indemnifying Party shall have the right to retain
the counsel of its choice in connection with such Proceeding and to
participate at its own expense in the defense of any such Proceeding;
provided, however, that counsel to the Indemnifying Party shall not
-------- -------
(except with the consent of the relevant Indemnified Party) also be
counsel to such Indemnified Party. In no event shall the Indemnifying
Party be liable for fees and expenses of more than one counsel (in
addition to any local counsel) separate from its own counsel for all
Indemnified Parties in connection with any one action or separate but
similar or related actions in the same jurisdiction arising out of the
same general allegations or circumstances; and
(4) No Indemnifying Party shall, without the prior written
consent of the Indemnified Parties (which consent shall not be
unreasonably withheld), settle or compromise or consent to the entry
of any judgment with respect to any litigation, or any investigation
or proceeding by any governmental agency or body, commenced or
threatened, or any claim whatsoever in respect of which
indemnification could be sought under this Section unless such
settlement, compromise or consent (A) includes an unconditional
release of each Indemnified Party from all liability arising out of
such litigation, investigation, proceeding or claim and (B) does not
include a statement
19
<PAGE>
as to or an admission of fault, culpability or a failure to act by or
on behalf of any Indemnified Party.
12. Survival of the Representations, Warranties, etc. The respective
------------------------------------------------
representations, warranties, and agreements made herein by or on behalf of the
parties hereto shall remain in full force and effect, regardless of any
investigation made by or on behalf of the other party to this Agreement or any
officer, director or employee of, or person controlling or under common control
with, such party and will survive delivery of and payment for the Initial
Shares, the Warrant and any Warrant Shares.
13. Notices. all communications hereunder shall be in writing, and
-------
a. if sent to Fletcher, shall be delivered by hand, sent by
registered mail or transmitted and confirmed by facsimile to Fletcher at:
Fletcher International Limited
c/o Midland Bank Trust Corporation (Cayman) Limited
P.O. Box 1109, Mary Street
Grand Cayman, Cayman Islands
British West Indies
Telephone: (809) 949-7755
Facsimile: (809) 949-7634
with a copy to:
Skadden, Arps, Slate, Meagher & Flom LLP
1440 New York Avenue, N.W.
Washington, D.C. 20005
Attention: Stephen W. Hamilton
Telephone: (202) 371-7010
Facsimile: (212) 393-5760
b. registered mail or transmitted and confirmed by facsimile to
SyQuest at: if sent to SyQuest, shall be delivered by hand, sent by
SyQuest Technology, Inc.
47071 Bayside Parkway
Fremont, CA 94538
Attention: Chief Financial Officer
Telephone: (510) 226-4000
Facsimile: (510) 226-4114
20
<PAGE>
with a copy to:
Shartsis, Friese & Ginsburg LLP
One Maritime Plaza, 18th Floor
San Francisco, CA 94111
Attention: Douglas L. Hammer
Telephone: (415) 421-6500
Facsimile: (415) 421-2922
14. Miscellaneous
-------------
a. This Agreement may be executed in one or more counterparts
and it is not necessary that signatures of all parties appear on the same
counterpart, but such counterparts together shall constitute but one and the
same agreement.
b. This Agreement and the Warrant shall inure to the benefit of
and be binding upon the parties hereto, their respective successors and assigns
and, with respect to Section 11 hereof, their respective officers, directors,
employees, agents, affiliates and controlling persons, and no other person shall
have any right or obligation hereunder. SyQuest may not assign this Agreement
or the Warrant Certificate.
c. This Agreement and the Warrant Certificate shall be governed
by, and construed in accordance with, the internal laws of the State of New
York, and each of the parties hereto hereby submits to the non-exclusive
jurisdiction of any State or Federal court in the Borough of Manhattan in the
City and State of New York and any court hearing any appeal therefrom, over any
suit, action or proceeding against it arising out of or based upon this
Agreement and the Warrant (a "Related Proceeding"). Each of the parties hereto
hereby waives any objection to any Related Proceeding in such courts whether on
the grounds of venue, residence or domicile or on the ground that the Related
Proceeding has been brought in an inconvenient forum.
d. The provisions of this Agreement and the Warrant Certificate
are severable, and if any clause or provision hereof shall be held invalid,
illegal or unenforceable in whole or in part, such invalidity or
unenforceability shall not in any manner affect any other clause or provision of
this Agreement or the Warrant Certificate.
e. The headings of the sections of this document have been
inserted for convenience of reference only and shall not be deemed to be a part
of this Agreement.
21
<PAGE>
f. This Agreement, including the Warrant Certificate, constitutes
the entire agreement, and supersedes all prior agreements and understandings,
both written and oral, among the parties with respect to the subject matter of
this Agreement and the Warrant Certificate and is not intended to confer upon
any person other than the parties any rights or remedies hereunder.
g. The term "affiliate" is used herein as defined in Rule
144(a)(1) under the Securities Act.
15. Time of Essence. Time shall be of the essence in this Agreement
---------------
and the Warrant.
22
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed and
delivered this Agreement, all as of the day and year first above written.
SYQUEST TECHNOLOGY, INC.
By: /s/ EDWARD L. MARINARO
---------------------------------
Name: Edward L. Marinaro
Title: Chairman of the Board
FLETCHER INTERNATIONAL LIMITED
By: /s/ TODD J. FLETCHER
---------------------------------
Name: Todd J. Fletcher
Title: Vice Chairman
<PAGE>
SCHEDULE OF EXCEPTIONS
<PAGE>
ANNEX A
(Form of Warrant Certificate)
The Warrant represented by this certificate was issued on November 13,
1996 (the "Closing Date) pursuant to the Subscription Agreement dated
November 12, 1996 between SyQuest Technology, Inc. and Fletcher
International Limited. Neither the Warrant represented by this
certificate nor the securities issuable upon exercise hereof have been
registered under the Securities Act of 1933, as amended (the "Act").
The Warrant represented by this certificate may not be exercised by or
on behalf of any U.S. Person (as defined in Regulation S under the Act
("Regulation S")) unless the securities issuable upon exercise hereof
are registered under the Act or an exemption from such registration is
available. The Warrant represented hereby has been issued and sold in
reliance on the exemption from registration provided by Regulation S.
Warrant No. __________
Warrant Certificate
SYQUEST TECHNOLOGY, INC.
This Warrant Certificate certifies that FLETCHER INTERNATIONAL LIMITED
("Fletcher"), or its registered assigns, is the registered holder of one Warrant
(the "Warrant") expiring on November 13, 2001 (the "Termination Date") to
purchase shares of common stock, par value $.001 per share (the "Common Stock"),
of SYQUEST TECHNOLOGY, INC., a Delaware corporation (the "Issuer"). The Warrant
entitles the holder to purchase from the Issuer up to the Maximum Amount (as
defined below) of Warrant Shares (as defined below) at a per share Exercise
Price (as defined below). A "Warrant Share" initially represents one fully paid
and nonassessable share of Common Stock, based upon an Exchange Rate
<PAGE>
(as defined below) of one-for-one, subject to adjustment pursuant to Section 10
hereof.
The Warrant represented hereby was issued on November 13, 1996 (the
"Closing Date") pursuant to the Subscription Agreement dated November 12, 1996
(the "Subscription Agreement"), between the Issuer and Fletcher, and is subject
to the terms and conditions thereof. Unless otherwise defined herein,
capitalized terms used herein shall have the meanings set forth in the
Subscription Agreement. A copy of the Subscription Agreement may be obtained by
the registered holder hereof upon written request to the Issuer.
The initial number of Warrant Shares will equal:
[ 8 ]
1,500,000 x [ ------ 1.35 ]
[ X 1.15 ]
where X represents the average of the daily volume-weighted average prices
of the Common Stock as reported by Bloomberg, L.P. ("Bloomberg") for the
eight-month period beginning on the Closing Date and ending on July 12,
1997 (the "Initial Period"); provided that the number of Warrant Shares
will not be greater than 1,875,000 or be less than 375,000; provided
further that if, on the last date of the Initial Period, Fletcher owns at
least 750,000 shares of Common Stock, then the number of Warrant Shares
shall be 1,875,000. If a third party merges or consolidates with, or
acquires all or substantially all the assets of, the Issuer during the
Initial Period, the number of Warrant Shares shall equal 1,875,000. The
number of Warrant Shares issuable hereunder as determined in this paragraph
is referred to herein as the "Maximum Amount". If the Exchange Rate of
each Warrant Share is adjusted as provided in Section 10, the total number
of shares of Common Stock issuable hereunder may be greater or fewer than
the Maximum Amount.
The exercise price per Warrant Share shall be $5.6875, the last sales price
of the Common Stock as reported by Bloomberg on November 12, 1996 (plus transfer
taxes, if applicable, the "Exercise Price"). The Exercise Price multiplied by
the Exercise Amount (as defined below) at any Exercise Date (as defined below)
is referred to as a "Warrant Purchase Price".
The Warrant represented hereby shall have the following additional terms:
2
<PAGE>
1. The Warrant is not exercisable until 65 days (the "Notice Period") after
the holder delivers a notice (a "65 Day Notice") to the Issuer designating
an aggregate number of Warrant Shares (the "Exercisable Number"). A 65 Day
Notice may be given at any time after the Closing Date, provided that the
Exercisable Number may not exceed 375,000 during the Initial Period,
except, if, during the Initial Period, a third party merges or consolidates
with, or acquires all or substantially all the assets of, the Issuer, in
which case the Exercisable Number shall equal 1,875,000. If the initial 65
Day Notice does not designate all of the Warrant Shares, the Warrant will
become exercisable for some or all of the remaining Warrant Shares upon
delivery of one or more 65 Day Notices increasing the Exercisable Number
after a further Notice Period. From time to time following the Notice
Period, the Warrant represented hereby may be exercised on any Business Day
prior to the Termination Date (an "Exercise Date") for any quantity of
Warrant Shares, such that the aggregate number of Warrant Shares issued
hereunder is less than or equal to the Exercisable Number. To exercise the
Warrant, the registered holder must, prior to the Termination Date,
surrender this Warrant Certificate to the Issuer at its principal office
with the Exercise Notice attached hereto (an "Exercise Notice") duly
completed and signed by the registered holder hereof and stating the total
number of Warrant Shares in respect of which the Warrant is then exercised
(the "Exercise Amount") and tender the applicable Warrant Purchase Price.
In order to exercise the Warrant, the registered holder hereof is required
to give written certification that it is not a U.S. Person (as defined in
Regulation S) and the Warrant is not being exercised on behalf of a U.S.
Person or, at the Issuer's option, deliver an opinion of counsel to the
effect that the Warrant and the Warrant Shares have been registered under
the Act or are exempt from registration thereunder. The Warrant shall be
exercisable only in the minimum amount of 10,000 Warrant Shares and
integral multiples of 10,000 Warrant Shares in excess thereof (or such
lesser amount as shall constitute the full amount remaining of this
Warrant). As used herein the term "Business Day" means any day on which
banks in the City of New York and the State of California are open for
business.
2. On the Business Day following an Exercise Date (an "Issue Date"), the
Issuer shall issue and cause to be delivered to the registered holder
hereof at such address as such holder shall specify in the Exercise Notice
a certificate or certificates for the number of full Warrant Shares
issuable upon the exercise of such Warrant, registered in such holder's
name, together with cash (if any)
3
<PAGE>
as provided in paragraph 4. Such certificate or certificates shall be
deemed to have been issued and any person so designated to be named therein
shall be deemed to have become a holder of record of such Warrant Shares as
of such Exercise Date.
3. If on such Issue Date the number of Warrant Shares to be delivered shall be
less than the total number of Warrant Shares deliverable hereunder, there
shall be issued to the holder hereof or his assignee on such Issue Date a
new warrant certificate substantially identical to this Warrant
Certificate, except that such new warrant certificate shall evidence the
right to purchase the number of Warrant Shares equal to (x) the total
number of Warrant Shares deliverable hereunder less (y) the number of
Warrant Shares so delivered.
4. The Issuer shall not be required to issue fractional Warrant Shares on the
exercise of the Warrant represented hereby. The number of full Warrant
Shares which shall be issuable upon the exercise of the Warrant shall be
computed on the basis of the aggregate number of Warrant Shares purchasable
on exercise of the Warrant so presented. If any fraction of a Warrant
Share would, except for the provisions of this paragraph 4, be issuable on
the exercise of the Warrant, the Issuer shall pay an amount in cash equal
to the last per share sale price of the Common Stock on the day immediately
preceding the date the Warrant is presented for exercise, multiplied by
such fraction (subject to adjustment pursuant to Section 10).
5. For so long as the Warrant represented hereby has not been exercised in
full, the Issuer shall at all times prior to the Termination Date reserve
and keep available, free from pre-emptive rights, out of its authorized but
unissued Common Stock, for issuance upon exercise of the Warrant
represented hereby, the number of shares of Common Stock and any other
Capital Stock (as defined below) then so issuable. In furtherance of the
foregoing, subject to adjustment pursuant to Section 10, the Issuer shall
reserve for issuance hereunder, not less than 1,875,000 shares of Common
Stock during the Initial Period, and not less than the Maximum Amount
thereafter. In the event the number of shares of Common Stock or other
securities issuable in respect of the Warrant Shares exceeds the authorized
number of shares of Common Stock or other securities, the Issuer shall
promptly take all actions necessary to increase the authorized number,
including causing its Board of Directors to call a special meeting of
stockholders and recommend such increase.
4
<PAGE>
6. By accepting delivery of this Warrant Certificate, the registered holder
hereof covenants and agrees with the Issuer not to exercise or transfer the
Warrant or any Warrant Shares except in compliance with the terms of the
Subscription Agreement and this Warrant Certificate.
7. By accepting delivery of this Warrant Certificate, the registered holder
hereof covenants and agrees with the Issuer that the Warrant may not be
sold, assigned, conveyed, encumbered, pledged, hypothecated or in any other
manner disposed of or transferred, in whole or in part, unless and until
such holder shall deliver to the Issuer (i) written notice thereof and of
the name and address of the transferee, (ii) a written agreement, in form
and substance reasonably satisfactory to the Issuer, of the transferee to
comply with the applicable terms of the Subscription Agreement and this
Warrant Certificate and (iii) a written certification of appropriate
officers of the transferee that such transferee is not a U.S. Person (as
defined in Regulation S) or any person holding on behalf of any U.S. Person
or, at the Issuer's option, an opinion of counsel to the effect that such
transfer of the Warrant is exempt from registration under the Act. If a
portion of the Warrant is transferred, all rights of the registered holder
hereunder may be exercised by the transferee (subject to the requirement
that such transferee shall (i) be neither a U.S. Person nor exercising on
behalf of a U.S. Person or (ii) otherwise provide an opinion of counsel to
the effect that the Warrant and the Warrant Shares have been registered
under the Act or are exempt from registration thereunder) in respect of the
number of Warrant Shares transferred with the portion of the Warrant,
provided that any registered holder of the Warrant may deliver a 65 Day
Notice, an Exercise Notice or elect the form of consideration pursuant to
Section 10 only with respect to the Warrant Shares subject to such holder's
portion of the Warrant, and, for purposes of paragraph 10(d), the
calculation of the Black-Scholes Warrant Value shall be made by the
registered holder(s) of a majority in interest of the Warrant.
8. The Issuer will pay all documentary stamp taxes (if any) attributable to
the issuance of Warrant Shares upon the exercise of the Warrant by the
registered holder hereof; provided, however, that the Issuer shall not be
-------- -------
required to pay any tax or taxes which may be payable in respect of any
transfer involved in the registration of the Warrant Certificate or any
certificates for Warrant Shares in a name other than that of the registered
holder of the Warrant Certificate surrendered upon the exercise of a
Warrant, and the Issuer shall not be required to issue or deliver the
Warrant Certificate or certificates for
5
<PAGE>
Warrant Shares unless or until the person or persons requesting the
issuance thereof shall have paid to the Issuer the amount of such tax or
shall have established to the satisfaction of the Issuer that such tax has
been paid.
9. In case this Warrant Certificate shall be mutilated, lost, stolen or
destroyed, the Issuer may in its discretion issue in exchange and
substitution for and upon cancellation of the mutilated Warrant
Certificate, or in lieu of and substitution for the lost, stolen or
destroyed Warrant Certificate, a new Warrant Certificate of like tenor, but
only upon receipt of evidence reasonably satisfactory to the Issuer of such
loss, theft or destruction of such Warrant Certificate and indemnity, if
requested, reasonably satisfactory to the Issuer. Applicants for a
substitute Warrant Certificate shall also comply with such other reasonable
regulations and pay such other reasonable charges as the Issuer may
prescribe.
10. The number of shares of Common Stock (and other Capital Stock or property)
(as adjusted from time to time, the "Exchange Rate") issuable in respect of
each Warrant Share upon the exercise of the Warrant and the terms and
conditions of the Warrant are subject to adjustment by the Issuer, in
consultation with the holder hereof, from time to time as follows:
(a) If the Issuer:
1. subdivides its outstanding shares of Common Stock into a greater
number of shares;
2. combines its outstanding shares of Common Stock into a smaller
number of shares; or
3. issues by reclassification of its Common Stock any shares of its
Capital Stock;
then the Exchange Rate in effect immediately prior to such action
shall be adjusted so that the registered holder hereof shall
thereafter be entitled to receive upon exercise of the Warrant in
respect of each Warrant Share the number of shares of Common Stock or
other Capital Stock of the Issuer that such holder would have received
immediately following such action if such holder had so exercised the
Warrant immediately prior to such action.
6
<PAGE>
As used herein, the term "Capital Stock" means, with respect to any
corporation, any and all shares, interests, rights to purchase,
warrants, options, participations or other equivalents of or interests
(however designated) in stock issued by that corporation.
Such adjustment shall become effective simultaneously with the
effective date of any subdivision, combination or reclassification.
If, after an adjustment, the registered holder hereof would receive
upon exercise shares of two or more classes of Capital Stock of the
Issuer, the Exchange Rate shall thereafter be subject to adjustment
upon the occurrence of an action taken with respect to each such class
of Capital Stock as is contemplated hereby with respect to the Common
Stock, on terms comparable to those applicable to Common Stock
hereunder.
(b) Whenever any of the actions described in this Section 10 are to be
taken, the Issuer shall provide the notices required by paragraph 12
hereof.
(c) Reserved.
(d) The Issuer covenants and agrees with the registered holder hereof not
to consolidate or merge with or into, or sell, transfer or lease all
or substantially all its assets to, any person (any of which, a
"Transaction"), unless, at the election of the registered holder
hereof (or if such holder does not notify the Issuer of such election
within 20 days after being notified of the Transaction, at the
election of the Issuer) on the effective date of such Transaction (the
"Transaction Date"), either:
1. the Issuer shall have redeemed the Warrant represented hereby by
paying to such holder, upon surrender of this Warrant
Certificate, a cash payment equal to the Black-Scholes value of
the unexercised portion of the Warrant from the effective date of
the Transaction until the Warrant Expiration Date (the "Black-
Scholes Warrant Value"), computed as of such Transaction Date; or
7
<PAGE>
2. (a) such person shall expressly assume in writing all of
the obligations of the Issuer under the Subscription
Agreement and hereunder and deliver notice thereof to the
registered holder hereof; and
(b) upon consummation of such Transaction, the Warrant shall
automatically become exercisable for the common stock of the
acquiror (without regard to the form of acquisition
consideration) with similar terms and at an exercise price
that would result in a Black-Scholes Warrant Value of the
Warrant computed immediately after the Transaction equal to
the Black-Scholes Warrant Value of the Warrant computed
immediately before the Transaction.
For purposes of this paragraph 10(d), the factors to be used in the
calculation of the Black-Scholes Warrant Value are as follows:
Stock Price: the last sales price of the Common Stock reported
by Bloomberg on the last Trading Day prior to the
Transaction Date (the "Last Trading Day")
Time To Expiration: the number of Trading Days between the Last
Trading Day and the Termination Date
Exercise Price: Exercise Price
Volatility: volatility shown by Bloomberg for the past 260
days at close on the Last Trading Day, unless the
Time to Expiration is less than 260 Trading Days,
in which case use volatility shown by Bloomberg
at close on the Last Trading Day for the number
of Trading Days from the Last Trading Day to the
Termination Date
Risk-Free closing yield as of the Last Trading Day as
Interest Rate: quoted in the Wall Street Journal for U.S.
Treasury bond with a maturity date closest
to the Termination Date
8
<PAGE>
Number of Shares
Outstanding (N): total number of shares of Common Stock
outstanding as of the Last Trading Day
Exercisable
Common Stock (n): the number of shares of Common Stock exercisable
under the Warrant as of the Transaction Date
The Black-Scholes Warrant Value will be calculated using the factors
shown above. A preliminary calculation of the Black-Scholes Warrant
Value, and, if applicable, the exercise price contemplated by
paragraph 10(d)2.(b) hereof, (utilizing then-current values for each
factor) will be delivered by Fletcher to SyQuest not later than the
tenth day after it receives notice of a Transaction by SyQuest.
SyQuest, in turn, will respond within five days with any comments or
questions and reach agreement with Fletcher on the preliminary
factors. On the Transaction Date, Fletcher, in consultation with
SyQuest, will calculate the final Black-Scholes Warrant Value
utilizing the then-current values for each factor; such calculation
will be utilized to compute the values called for in paragraph 10(d).
It shall be a condition to any Transaction that the consideration
provided for herein shall be paid in full, in the case of cash, or
delivered, in the case of a warrant, all in accordance with the terms
hereof, immediately prior to the consummation of the Transaction. As
used herein, the term "Trading Day" means any day on which SyQuest's
Common Stock is quoted on NASDAQ or, if applicable, other national
securities exchange.
(e) After an adjustment to the Exchange Rate hereunder, any subsequent
event requiring an adjustment hereunder shall cause an adjustment to
the Exchange Rate as so adjusted.
(f) Upon the issuance of any stock dividend or distribution of Common
Stock pro rata to all holders of Common Stock, the Exchange Rate shall
be adjusted so that the registered holder hereof on the record date
for such distribution shall be entitled to receive such dividend or
distribution on the same terms as the holders of Common Stock upon
exercise hereof.
11. Reserved.
9
<PAGE>
12. Except as provided in the following paragraph, upon any adjustment of the
Exchange Rate pursuant to paragraph 10, the Issuer shall promptly
thereafter but in any event within 15 days following such adjustment (i)
cause to be delivered to the registered holder hereof a certificate of its
Chief Financial Officer setting forth the Exchange Rate after such
adjustment and setting forth in reasonable detail the method of calculation
and the facts upon which such calculations are based, which certificate
shall be conclusive evidence of the correctness of the matters set forth
therein, and (ii) cause to be delivered to the registered holder hereof at
its address appearing on the Warrant Register written notice of such
adjustments by first-class mail, postage prepaid. Where appropriate, such
notice may be given in advance and included as part of the notice required
to be mailed under the other provisions of this paragraph 12.
In case:
(a) the Issuer shall authorize the issuance to all holders of shares of
Common Stock of rights, options or warrants to subscribe for or
purchase shares of Common Stock or of any other subscription rights or
warrants; or
(b) of any proposal for a consolidation or merger to which the Issuer is a
party, the sale or transfer of all or substantially all of the assets
of the Issuer, or any reclassification or change of Common Stock
issuable upon exercise of the Warrant (other than a change in par
value, or from par value to no par value, or from no par value to par
value, or as a result of a subdivision or combination), or of a tender
offer or exchange offer for shares of Common Stock; or
(c) of the voluntary or involuntary dissolution, liquidation or winding up
of the Issuer; or
(d) the Issuer proposes to take any action which would require an
adjustment of the Exchange Rate pursuant to paragraph 10;
then the Issuer shall cause to be given to the registered holder hereof at
his or her address appearing on the Warrant Register (as defined below), at
least 20 days (or 10 days in any case specified in clause (a) above) prior
to the applicable record date hereinafter specified, or promptly in the
case of events for which there is no record date, by first class mail,
postage prepaid, a
10
<PAGE>
written notice stating (i) the date as of which the holders of record of
shares of Common Stock to be entitled to receive any such rights, options,
warrants or distribution are to be determined, or (ii) the initial
expiration date set forth in any tender offer or exchange offer for shares
of Common Stock, or (iii) the date on which any such reclassification,
consolidation, merger, conveyance, transfer, dissolution, liquidation or
winding up is expected to become effective or consummated, and the date as
of which it is expected that holders of record of shares of Common Stock
shall be entitled to exchange such shares for securities or other property,
if any, deliverable upon such reclassification, consolidation, merger,
conveyance, transfer, dissolution, liquidation or winding up.
13. The Issuer shall serve as warrant agent (the "Warrant Agent") under this
Agreement. The Warrant Agent hereunder shall at all times maintain a
register (the "Warrant Register") of the holders of Warrants. Upon 30
days' notice to the registered holder hereof, the Issuer may appoint a new
Warrant Agent. Such new Warrant Agent shall be a corporation doing
business and in good standing under the laws of the United States or any
state thereof, and having a combined capital and surplus of not less than
$50,000,000. The combined capital and surplus of any such new Warrant
Agent shall be deemed to be the combined capital and surplus as set forth
in the most recent annual report of its condition published by such Warrant
Agent prior to its appointment; provided that such reports are published at
--------
least annually pursuant to law or to the requirements of a federal or state
supervising or examining authority. After acceptance in writing of such
appointment by the new Warrant Agent, it shall be vested with the same
powers, rights, duties and responsibilities as if it had been originally
named herein as the Warrant Agent, without any further assurance,
conveyance, act or deed; but if for any reason it shall be reasonably
necessary or expedient to execute and deliver any further assurance,
conveyance, act or deed, the same shall be done at the expense of the
Issuer and shall be legally and validly executed and delivered by the
Issuer.
Any corporation into which the Issuer or any new Warrant Agent may be
merged or any corporation resulting from any consolidation to which the
Issuer or any new Warrant Agent shall be a party or any corporation to
which the Issuer or any new Warrant Agent transfers substantially all of
its corporate trust or shareholders services business shall be a successor
Warrant Agent under this Agreement without any further act; provided that
--------
such corporation (i) would be eligible for appointment as successor to the
Warrant Agent under the provisions of this paragraph 13 or (ii) is a wholly
owned subsidiary of the Warrant Agent. Any such successor Warrant Agent
shall promptly cause notice of its succession as Warrant Agent to be mailed
(by first class mail,
11
<PAGE>
postage prepaid) to the registered holder hereof at such holder's last
address as shown on the Warrant Register.
This Warrant Certificate shall not be valid unless signed by the Issuer.
12
<PAGE>
IN WITNESS WHEREOF, SyQuest Technology, Inc. has caused this Warrant
Certificate to be signed by its duly authorized officer.
Dated: November 13, 1996
SYQUEST TECHNOLOGY, INC.
By: /s/ EDWIN L. HARPER
----------------------------------------------
Name: Edwin L. Harper
Title: President and Chief Executive Officer
<PAGE>
FORM OF EXERCISE NOTICE
(To Be Executed Upon Exercise of the Warrant)
[DATE]
SyQuest Technology, Inc.
47071 Bayside Parkway
Fremont, CA 94538
Attention: Chief Financial Officer
Re: Warrant No.
---------------------------
Ladies and Gentlemen:
The undersigned is the registered holder of the above-referenced
warrant (the "Warrant") issued by SyQuest Technology, Inc., evidenced by the
Warrant Certificate attached hereto, and hereby elects to exercise the Warrant
to purchase _________ Warrant Shares (as defined in such Warrant Certificate)
and herewith tenders $_____________ by certified or official bank check to the
order of SyQuest Technology, Inc. as payment for such Warrant Shares in
accordance with the terms of such Warrant Certificate and the Subscription
Agreement (as defined in the Warrant Certificate). The undersigned either (i)
hereby certifies that it is not a "U.S. Person" (as defined in Regulation S
under the Securities Act of 1933, as amended (the "Act")), it is not exercising
this Warrant on behalf of any U.S. Person and the Warrant is not being exercised
within the United States, or (ii) at the Issuer's option, delivers herewith an
opinion of counsel to the effect that the Warrant and the Warrant Shares have
been registered under the Act or are exempt from registration thereunder. This
exercise notice is accompanied by the certificates required to be delivered
pursuant to Section 8 of the Subscription Agreement.
In accordance with the terms of the attached Warrant Certificate, the
undersigned requests that certificates for such Warrant Shares be registered in
the name of and delivered to the undersigned at the following address:
________________________
________________________
________________________
By providing the above address, the undersigned confirms that, upon
exercise of the Warrant, the Warrant Shares will not be delivered within the
United States (as defined in Regulation S under the Act) unless (i) in an
offering deemed to meet the definition of "offshore transaction" pursuant to
paragraph (i)(3) of Rule 902 under the Act or (ii) an opinion of counsel has
been provided to the effect that the
<PAGE>
Warrant and the Warrant Shares have been registered under the Act or an
exemption from such registration is available.
[IF THE NUMBER OF WARRANT SHARES TO BE DELIVERED IS LESS THAN THE
TOTAL NUMBER OF WARRANT SHARES DELIVERABLE UNDER THE WARRANT, INSERT THE
FOLLOWING -- The undersigned requests that a new warrant certificate
substantially identical to the attached Warrant Certificate be issued to the
undersigned evidencing the right to purchase the number of Warrant Shares equal
to (x) the total number of Warrant Shares deliverable under the Warrant less (y)
the number of Warrant Shares to be delivered in connection with this exercise.]
NAME OF REGISTERED HOLDER
[ADDRESS]
By:
--------------------------------
Name:
Title:
<PAGE>
Exhibit 11.1
------------
SYQUEST TECHNOLOGY, INC.
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Fiscal Years Ended September 30,
1996/(1)/ 1995/(1)/ 1994/(1)/
------------ ----------- ----------
(in thousands, except per share data)
<S> <C> <C> <C>
Income before cumulative effect
of accounting change and
extraordinary credit $(136,651) $(11,786) $ 5,059
Cumulative effect of accounting
change -- -- 346
Effect of incremental yield embedded
in conversion terms $ (5,733) $ -- $ --
--------- -------- -------
Net Income $(142,384) $(11,786) $ 5,405
Common and common equivalent
shares outstanding:
Common Stock 11,497 11,063 11,029
Options -- -- 618
Warrants -- -- --
Common and common equivalent
shares used in computing per share
amounts 11,497 11,063 11,647
========= ======== =======
Income per share before cumulative
effect of accounting change and
extraordinary credit $ (12.38) $ (1.07) $ .43
Cumulative effect of accounting
change per share -- -- .03
--------- -------- -------
Net income per share $ (12.38) $ (1.07) $ .46
========= ======== =======
</TABLE>
/(1)/ Primary and fully diluted income per share are the same.
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 Nos. 33-46460, 33-482273, 33-99224, 33-99372) pertaining to the 1991
Stock Option Plan, the 1992 Non-Employee Director Stock Option Plan and the 1992
Employee Stock Purchase Plan and in the Registration Statement (Form S-3 No.
333-7369) of SyQuest Technology, Inc. of our report dated December 11, 1996 with
respect to the consolidated financial statements and schedule of SyQuest
Technology, Inc. included in this Annual Report (Form 10-K) for the year ended
September 30, 1996.
/s/ Ernst & Young LLP
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<CASH> 3,470
<SECURITIES> 200
<RECEIVABLES> 30,341
<ALLOWANCES> 5,694
<INVENTORY> 10,538
<CURRENT-ASSETS> 47,020
<PP&E> 61,946
<DEPRECIATION> 34,765
<TOTAL-ASSETS> 75,181
<CURRENT-LIABILITIES> 84,371
<BONDS> 20,971
0
18
<COMMON> 14
<OTHER-SE> 89,725
<TOTAL-LIABILITY-AND-EQUITY> 75,181
<SALES> 200,407
<TOTAL-REVENUES> 200,407
<CGS> 248,693
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 30,647
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,229
<INCOME-PRETAX> (133,651)
<INCOME-TAX> 3,000
<INCOME-CONTINUING> (136,651)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (136,651)
<EPS-PRIMARY> (12.38)
<EPS-DILUTED> (12.38)
</TABLE>
