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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Quarter Ended June 30, 1996
Commission file number 0-19674
SYQUEST TECHNOLOGY, INC.
(Registrant)
DELAWARE 94-2793941
- ------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
47071 Bayside Parkway
Fremont, California 94538
Telephone: (510) 226-4000
-------------------------
(Registrant's principal executive
offices and telephone Number)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirement for the past 90 days.
Yes X No
----------- -----------
As of June 30, 1996, 11,509,508 shares of the Registrant's common stock, $0.001
par value, were issued and outstanding.
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<PAGE>
INDEX
SYQUEST TECHNOLOGY, INC.
PART I FINANCIAL INFORMATION Page no.
Item 1. Consolidated Condensed Financial Statements (unaudited)
Consolidated condensed statements of operations--Three and nine
months ended June 30, 1996 and June 30, 1995..................... 3
Consolidated condensed balance sheets--June 30, 1996
and September 30, 1995........................................... 4
Consolidated condensed statements of cash flows--Nine
months ended June 30, 1996 and June 30, 1995..................... 5
Notes to consolidated condensed financial statements--
June 30, 1996....................................................6-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..............................11-18
Part II OTHER INFORMATION
Item 1. Legal proceedings................................................ 19
Item 6. Exhibits and Reports on Form 8-K................................. 20
SIGNATURES................................................................. 21
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<TABLE>
SYQUEST TECHNOLOGY, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<CAPTION>
Three months ended Nine months ended
June 30, June 30,
---------------------- ----------------------
1996 1995 1996 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net revenues $ 29,459 $ 68,787 $ 155,571 $ 211,169
Cost of revenues 46,635 50,360 195,728 155,355
Provision for losses on purchase commitments 6,523 -- 18,195 --
--------- --------- --------- ---------
Gross Profit (loss) (23,699) 18,427 (58,352) 55,814
Operating Expenses:
Selling, general and administrative 10,113 10,225 38,928 29,638
Research and development 5,932 6,214 20,452 17,484
Restructuring cost 1,860 -- 5,460 --
--------- --------- --------- ---------
Total operating expenses 17,905 16,439 64,840 47,122
--------- --------- --------- ---------
Income (loss) from operations (41,604) 1,988 (123,192) 8,692
Net interest income (expense) (425) 263 (743) 939
Other income 712 -- 712 --
--------- --------- --------- ---------
Income (loss) before income taxes (41,317) 2,251 (123,223) 9,631
Provision for income taxes -- 540 3,000 2,311
--------- --------- --------- ---------
Net income (loss) ($ 41,317) $ 1,711 ($126,223) $ 7,320
========= ========= ========= =========
Income (loss) per share:
Net income (loss) ($ 3.61) $ 0.15 ($ 11.09) $ 0.62
========= ========= ========= =========
Common and common equivalent shares
used in computing per share amounts 11,450 11,676 11,386 11,804
========= ========= ========= =========
<FN>
See notes to consolidated condensed financial statements
</FN>
</TABLE>
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SYQUEST TECHNOLOGY, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands)
June 30, September 30,
1996 1995
----------- -------------
Assets (Unaudited) (Note)
Current assets:
Cash and cash equivalents $ 6,767 $ 29,248
Restricted cash 10,783 --
Short-term investments 400 400
Accounts receivable 22,945 55,653
Inventories 19,391 34,213
Prepaid expenses and deposits 3,806 2,066
Deferred income taxes -- 13,254
--------- ---------
Total current assets 64,092 134,834
Property, equipment and leasehold improvements 56,290 57,790
Less: Accumulated depreciation (28,448) (31,070)
--------- ---------
Net property and equipment 27,842 26,720
Other assets 903 3,130
--------- ---------
$ 92,837 $ 164,684
========= =========
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable $ 56,962 $ 41,213
Accrued compensation 2,658 5,206
Accrued expenses and other liabilities 17,171 15,565
Liability for losses on purchase commitments 15,668 10,510
Notes payable to bank 10,685 --
Convertible subordinated debenture, current portion 2,559 --
--------- ---------
Total current liabilities 105,703 72,494
--------- ---------
Notes payable 3,602 --
Deferred rent 224 276
Deferred income taxes 1,138 8,726
Convertible subordinated debenture 5,119 --
Redeemable convertible preferred stock 19,000 --
Stockholders' equity (deficit):
Preferred stock -- --
Common stock 13 13
Additional paid in capital 80,575 79,489
Treasury stock (12,855) (12,855)
Retained earnings (deficit) (109,682) 16,541
--------- ---------
Total stockholders' equity (deficit) (41,949) 83,188
--------- ---------
$ 92,837 $ 164,684
========= =========
Note: The consolidated condensed balance sheet at September 30, 1995 has
been derived from the audited financial statements at that date.
See notes to consolidated condensed financial statements
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<PAGE>
SYQUEST TECHNOLOGY, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine months ended
June 30,
1996 1995
Operating Activities: --------- ---------
Net income (loss) ($126,223) $ 7,320
Charges to operations not affecting cash:
Depreciation 6,929 5,896
Deferred income taxes 3,000 92
Provision for bad debts 4,782 1,122
Loss on disposal of equipment and leasehold
improvements 5,322 --
(Gain) on disposition of investment (712) --
Other (52) 123
Net changes in certain current assets
and current liabilities:
Accounts receivable 27,926 (144)
Inventories 14,822 (30,695)
Accounts payable 26,366 (4,948)
Accrued compensation (2,548) 595
Liability for losses on purchase commitments 5,158 --
Deferred income taxes 2,666 --
Other (134) 2,284
--------- ---------
Net cash used in operating activities (32,698) (18,355)
Investing activities:
Purchase of equipment and leasehold improvements (13,373) (5,912)
Purchase of short-term investments -- 4,493
Proceeds from short-term investments -- (3,178)
Investment in Silmag -- (1,913)
Other -- (866)
--------- ---------
Net cash used in investing activities (13,373) (7,376)
Financing activites:
Proceeds from issuance of common stock 1,086 2,344
Proceeds from redeemable convertible preferred stock 19,000 --
Proceeds from notes payable 10,685 --
Proceeds from term loan 3,602 --
Purchase of treasury stock -- (1,200)
--------- ---------
Net cash provided by financing activities 34,373 1,144
Net decrease in cash and cash equivalents (11,698) (24,587)
Cash and cash equivalents at beginning of the period 29,248 45,982
--------- ---------
Cash and cash equivalents at end of the period $ 17,550 $ 21,395
========= =========
See notes to consolidated condensed financial statements
-5-
<PAGE>
SYQUEST TECHNOLOGY, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
June 30, 1996
(Unaudited)
NOTE: 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
consolidated financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for fair
presentation have been included.
Operating results for the three and nine month periods ended June 30,1996 are
not necessarily indicative of the results that may be expected for the year
ending September 30, 1996. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's annual
report on Form 10-K, as amended, for the year ended September 30, 1995.
NOTE: 2- INVENTORIES
Inventories are comprised of the following: June 30, September 30,
1996 1995
------- -------------
(In thousands)
Raw materials $4,512 $22,258
Work in process 5,582 8,564
Finished goods 9,297 3,391
------- -------
$19,391 $34,213
NOTE: 3 - NET INCOME (LOSS) PER SHARE
Net (loss) per share for the three and nine month periods ended June 30, 1996 is
based on the weighted average number of shares of common stock outstanding
during the period. Net income per share for the three and nine
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<PAGE>
month periods ended June 30,1995 is based on the weighted average number of
shares of common stock and common stock equivalents outstanding during the
period.
NOTE: 4 - LINE OF CREDIT
At June 30,1996 the Company had a line of credit agreement (the "Agreement")
with a financial institution, expiring January 31, 1997. Borrowings under the
Agreement bear interest at the highest "LIBOR" (the one-month London Interbank
Offered Rates) 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 total borrowings are limited to the lesser of $30 million or 75
percent of the Company's eligible accounts receivable. The Agreement places
limitations on additional borrowings and payment of dividends. As of June
30,1996, approximately $6.7 million of borrowings were outstanding and
approximately $1.5 million was available for borrowing under the Agreement.
In March 1996, the Company entered into a line of credit agreement with a bank
in Penang, Malaysia. The line of credit provides for a term loan equivalent to
approximately US$ 4.2 million and an overdraft facility of approximately
US$840,000. The term loan is repayable in 120 monthly installments and bears
interest at the rate of 1.5% over the bank's base lending rate. The line of
credit is secured by factory buildings owned by SyQuest Technology (M) SDN BHD.
At June 30,1996 there were $3.6 million of borrowings outstanding under this
line of credit agreement.
On May 29, 1996, the Company entered into a Banking Facility agreement with a
bank in Jalan Bahru, Malaysia. The agreement provides for borrowing equivalent
to approximately US$ 4.0 million. As of June 30, 1996 there were approximately
$4.0 million of borrowings outstanding under this agreement.
NOTE: 5 - REDEEMABLE CONVERTIBLE PREFERRED STOCK
In the quarter ended June 30, 1996 the Company issued 20,000 shares of 7%
Redeemable Cumulative Convertible Preferred Stock of approximately $19 million
net of issuance costs. In accordance with the preferred stock agreement $15.0
million of the proceeds were placed in an escrow account. Terms of the escrow
agreement require that funds be used only for specific purposes and require that
Company Officers request withdrawls and certify that usage is in accordance with
the agreement. At June 30, 1996 the balance in the escrow account was
approximately $10.8 million. The Preferred Stock is convertible into Common
Stock at the lesser of $11
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<PAGE>
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. 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,
Common Stock. Should the Company's Common Stock no longer be listed on the
Nasdaq National Market, Small Cap or Electronic Bulletin Board, New York Stock
Exchange or the American Stock exchange, then the repurchase price is 130% of
the original purchase price. Under no circumstances may more than 2,291,891
shares of Common Stock be issued on conversion of the Preferred Stock or for
dividends without the express consent of the Company's stockholders.
NOTE: 6 - CONVERTIBLE SUBORDINATED DEBENTURE
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.
NOTE: 7 - NON-CASH TRANSACTION
On May 8, 1996 the Company exchanged 4,155 common shares of Silmag S.A. for a
reduction of debt in the amount of $2.8 million with one of its suppliers. The
Company realized a gain of $712,000 on the exchange which is classified as other
income.
NOTE: 8 - INCOME TAXES
No income tax benefit was recorded for the quarter ended June 30, 1996 because
the Company anticipates that deferred tax assets attributed to temporary items
and tax net operating losses arising during fiscal 1996 will be fully offset by
a deferred tax valuation allowance. During the quarter ended June 30, 1996 the
Company reclassified its net current deferred tax
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<PAGE>
assets as noncurrent because it does not expect to realize the benefits of these
assets within the current operating cycle. For the nine month period ended June
30, 1996 the Company recorded a $3.0 million provision for income taxes
resulting from an increase in the deferred tax asset valuation allowance in the
first quarter. The Company recorded a provision for income taxes for the three
and nine month periods ended June 30, 1995 at an effective rate of 24%. The
effective tax rate was less than the statutory rate primarily because operating
income of certain foreign operations was not subject to foreign income taxes and
a portion of such operating income was considered to be permanently invested in
non-U.S. operations.
NOTE: 9 - PREFERRED AND COMMON STOCK
Shares authorized and outstanding are as follows:
Shares Outstanding
------------------
June 30, September 30,
1996 1995
---------- -----------
Preferred Stock $0.001 par value,
4,000,000 shares authorized: -- --
- Series 1 (20,000 shares authorized 20,000
and issued)
Common Stock $0.001 par value,
20,000,000 shares authorized 11,509,508 11,323,974
NOTE: 10 - RESTRUCTURING COSTS
The $3.6 million accrual for restructuring costs represents direct costs related
to exiting manufacturing facilities in Singapore. During the second quarter of
fiscal 1996, the Company developed and began implementation of a plan to
relocate the manufacturing capabilities in Singapore to Penang, Malaysia. The
transition of manufacturing operations from Singapore to Malaysia was completed
in the third quarter of fiscal 1996.
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. The charge represented costs associated
with the write-off of fixed assets as well as severance compensation and other
benefits for the approximately 30 people affected by the restructuring.
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<PAGE>
NOTE: 11 - LITIGATION
See Part II, item 1, of this Form 10-Q for a description of pending legal
proceedings.
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<PAGE>
SYQUEST TECHNOLOGY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations:
Net revenues for the quarter ended June 30, 1996 were $29.5 million, a decrease
of 57% from the $68.8 million reported for the comparable year-ago quarter. In
the quarter ended June 30, 1996, the Company, in order to stimulate demand for
its 3.5 inch SQ3270 and EZ135 system products, reduced their selling prices
significantly. This pricing action required the Company to reduce net revenues
by $5.1 million for price protection of channel inventories. Compared to the
previous year quarter, drive unit shipments were lower by 79% while average
selling prices declined by 12% and non EZ135 cartridge shipments declined 55%
while non EZ135 cartridge average selling prices declined 24%. This rapid
decline in unit shipments and selling prices of non EZ products was not offset
by revenues generated by the EZ135 system and cartridge products.
During the quarter ended June 30, 1996 the Company introduced and shipped in low
volume, the next generation of the EZ product family, a 3 1/2 inch, 230 megabyte
system, the EZ Flyer 230. The Company anticipates that a significant portion of
its fourth quarter net revenues will be derived from the sale of EZ Flyer 230
system and cartridge products. Though the Company is attempting to increase its
manufacturing output to meet the sales demand there can be no assurances that
the Company will be successful in manufacturing the required unit volumes or
that the product will be accepted in the marketplace.
On August 7, 1996 the Company announced that it has commenced taking orders for
its new 3 1/2 inch, 1.3 gigabyte SyJet system products and will start to ship
product in September while it increases production over the next several months.
Though the Company intends to ship product in September and begin volume
production there can be no assurances that the Company will be able to introduce
new products successfully and in a timely manner or that the products will be
accepted in the marketplace.
For the nine month period ended June 30, 1996, net revenues decreased by 26% or
$55.6 million from the comparable nine month period in fiscal 1995. The decline
in net revenues was attributable to lower shipment volumes and declining selling
prices of the Company's non EZ drive and cartridge products. Drive revenues
declined 72%, non EZ systems
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<PAGE>
revenues were down 52%, and non EZ cartridge revenues declined 47%. The decline
in net revenues was not offset by EZ135 product revenues.
The gross loss for the quarter ended June 30, 1996 was $23.7 million compared to
a gross profit of $18.4 million in the comparable year ago quarter. The gross
margin loss was 80% in the quarter ended June 30, 1996 compared to a positive
gross margin of 27% in the quarter ended June 30, 1995. The decline in gross
profit and gross margin was due to lower unit shipments and lower average
selling prices for core products, such as the SQ5200 and SQ3270 drive, system,
and cartridge products. Also contributing to the gross profit decline was the
overall shift in revenues from profitable core product drives and systems to the
unprofitable EZ135 system products. Due to the continued decline in average
selling prices and unit shipments of the EZ135 system products the Company
revised its lower of cost or market and excess inventory reserve requirements
and provided additional reserves of approximately $5.5 million in the quarter
ended June 30, 1996. Additionally, the Company recorded a lower of cost or
market reserve of $1.0 million for the SQ3270 drive and system products.
The gross loss for the nine month period ended June 30, 1996 was $58.4 million
compared to a gross profit of $55.8 million for the nine months ended June 30,
1995. The decline in gross profit was primarily due to the losses incurred on
the EZ135 systems products. Since introduction in the fourth quarter of fiscal
1995 the EZ135 system product costs never achieved projected levels. Selling
prices of the EZ135 system products, which were primarily driven by market
conditions, were below actual costs of production which resulted in the system
being sold at a loss. Through the first nine months of fiscal 1996 approximately
65% of the Company's combined drive/system unit shipments were EZ135 products.
Additionally, the decline in unit shipments and average selling prices of the
Company's non EZ products contributed to the decline in gross profit and gross
margin. Also contributing to the decline in gross profit were the reserves
established during the quarter, discussed above, and the reserves of $15.9
million established in the second quarter for excess and obsolete inventories
and non-cancelable purchase commitments related to the 3 1/2 inch drive/system
products.
The reserves discussed above are based on Company estimates of future market
requirements. However, there can be no assurances that Company forecasts will be
achieved and that subsequent inventory write-downs will not be required.
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<PAGE>
During the third quarter the Company completed the restructuring plan announced
at the end of the first quarter. The Singapore manufacturing facility has been
closed and all manufacturing responsibilities have been transferred to the
manufacturing facility in Penang, Malaysia.
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. The charge represented costs associated
with the write-off of fixed assets as well as severance compensation and other
benefits for the approximately 30 people affected by the restructuring.
Research and development expenses for the quarter ended June 30, 1996 were $5.9
million, a slight decrease compared to the $6.2 million reported in the
comparable year ago quarter. For the nine month period ended June 30, 1996
research and development expenses were $20.5 million compared to $17.5 million
for the comparable period ended June 30, 1995. The increase in expense was
attributable to development activities related to the recently introduced EZ
Flyer 230 and the 1.3 gigabyte SyJet products.
Selling, general and administrative expenses were $10.1 million for the quarter
ended June 30, 1996, which was comparable to the $10.2 million reported for the
quarter ended June 30, 1995. For the nine months ended June 30, 1996 selling,
general and administrative expenses were $38.9 million, an increase of 31% from
the $29.6 million reported in the comparable year ago period. The increase in
expense was primarily attributable to operational expenses of the European
regional headquarters in the Netherlands, which became operational October 1,
1995, higher sales and marketing expenses associated with the retail
distribution of the EZ135 products, and increased bad debt provisions.
Net interest expense was $425,000 for the quarter ended June 30, 1996 compared
to net interest income of $263,000 for the comparable year-ago quarter. The
Company incurred $435,000 of interest expense on its borrowings in the third
fiscal quarter and earned $10,000 of interest income on its investments. For the
nine months ended June 30, 1996 the Company incurred $879,000 of interest
expense on its borrowings and earned $136,000 of interest income on its
investments. The Company had no interest expense in the comparable three and
nine month periods a year-ago as there were no borrowings under the Company's
line of credit agreements.
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<PAGE>
Other income of $712,000 for the quarter ended June 30, 1996 represents a
realized gain on the disposition of 4,155 shares of Silmag common stock which
was exchanged for a reduction of debt with one of the Company's suppliers.
No income tax benefit was recorded for the quarter ended June 30, 1996 because
the Company anticipates that deferred tax assets attributed to temporary items
and tax net operating losses arising during fiscal 1996 will be fully offset by
a deferred tax valuation allowance. During the quarter ended June 30, 1996 the
Company reclassified its net current deferred tax assets as noncurrent because
it does not expect to realize the benefits of these assets within the current
operating cycle. For the nine month period ended June 30, 1996 the Company
recorded a $3.0 million provision for income taxes resulting from an increase in
the deferred tax asset valuation allowance in the first quarter. The Company
recorded a provision for income taxes for the three and nine month periods ended
June 30, 1995 at an effective rate of 24%. The effective tax rate was less than
the statutory rate primarily because operating income of certain foreign
operations was not subject to foreign income taxes and a portion of such
operating income was considered to be permanently invested in non-U.S.
operations.
Liquidity and Capital Resources:
At June 30, 1996 the Company had cash and short-term investments of $18.0
million, a decrease of $11.7 million compared to $29.7 million at September 30,
1995. Borrowings under the Company's credit facilities amounted to $14.3 million
at June 30, 1996. There were no borrowings outstanding at September 30, 1995.
Accounts receivable totaled $22.9 million at June 30, 1996, a decline of $32.7
million from September 30, 1995. The decline in accounts receivable was due
primarily to lower sales in the third quarter when compared to the quarter ended
September 30, 1995. Accounts receivable represented 92 days sales outstanding,
an increase of 47 days when compared to the quarter ended September 30, 1995.
The increase in days sales outstanding reflects the continuing shift of the
Company's customer base towards the slower paying retail channel.
Inventories declined $14.8 million from September 30, 1995 and totaled $19.4
million at June 30, 1996. The decline in inventories is attributable to the
Company's second quarter decision to discontinue further production of the
SQ3270 and EZ135 drive and systems products which allowed the Company to reduce
existing stores and work-in process inventories.
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<PAGE>
At June 30,1996 the Company had a line of credit agreement (the "Agreement")
with a financial institution, expiring January 31, 1997. Borrowings under the
Agreement bear interest at the highest "LIBOR" (the one-month London Interbank
Offered Rates) 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 total borrowings are limited to the lesser of $30 million or 75
percent of the Company's eligible accounts receivable. The Agreement places
limitations on additional borrowings and payment of dividends. As of June
30,1996, approximately $6.7 million of borrowings were outstanding and
approximately $1.5 million was available for borrowing under the Agreement.
In March 1996, the Company entered into a line of credit agreement with a bank
in Penang, Malaysia. The line of credit provides for a term loan equivalent to
approximately US$ 4.2 million and an overdraft facility of approximately
US$840,000. The term loan is repayable in 120 monthly installments and bears
interest at the rate of 1.5% over the bank's base lending rate. The line of
credit is secured by factory buildings owned by SyQuest Technology (M) SDN BHD.
At June 30,1996 there were $3.6 million of borrowings outstanding under this
line of credit agreement.
On May 29, 1996, the Company entered into a Banking Facility agreement with a
bank in Jalan Bahru, Malaysia. The agreement provides for borrowing equivalent
to approximately US$ 4.0 million. As of June 30, 1996 there were approximately
$4.0 million of borrowings outstanding under this agreement.
In the quarter ended June 30, 1996 the Company issued 20,000 shares of 7%
Redeemable Cumulative Convertible Preferred Stock of approximately $19 million
net of issuance costs. In accordance with the preferred stock agreement $15.0
million of the proceeds were placed in an escrow account. Terms of the escrow
agreement require that funds be used only for specific purposes and require that
Company Officers request withdrawls and certify that usage is in accordance with
the agreement. At June 30, 1996 the balance in the escrow account was
approximately $10.8 million. 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. 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
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<PAGE>
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, Common Stock. Should the Company's Common
Stock no longer be listed on the Nasdaq National Market, Small Cap or Electronic
Bulletin Board, New York Stock Exchange or the American Stock exchange, then the
repurchase price is 130% of the original purchase price. Under no circumstances
may more than 2,291,891 shares of Common Stock be issued on conversion of the
Preferred Stock or for dividends without the express consent of the Company's
stockholders.
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.
The Company believes that, based on a number of events occurring, current
sources of financing will be sufficient to fund the Company's operations through
the end of its fiscal year. However, the Company is currently negotiating to
obtain additional financing for new product introductions, to increase
production capacity and to pay down suppliers. The company will require
additional funds during its first quarter in the next fiscal year or thereafter
to finance its operations. The precise amount and timing of the Company's
funding needs cannot be determined 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 inventory management. There can be no assurances
that the 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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<PAGE>
Notice Concerning Forward Looking Statements and Factors That May Affect Future
Results, Financial Condition and Liquidity:
Some of the statements made in this Form 10-Q are forward-looking in nature,
including but not limited to the Company's product introduction plans and other
statements that are not historical facts. Forward-looking statements in this
Form 10-Q include language in the form of one or more of the following words:
"intend", "believe", "will", "may", "anticipate" and "expect." The occurrence of
the events described, and the achievement of the intended results, are subject
to the future occurrence of many events, some or all of which are not
predictable or within the Company's control; therefore, actual results may
differ materially from those anticipated in any forward-looking statements. Many
risks and uncertainties which could affect the possible results described in
forward-looking statements are inherent in the Company's industry; others are
more specific to the Company's business. Risks related to the Company's business
are described in the Company's Form 10-K, as amended, and Forms 10-Q for prior
quarters, including risks associated with technology and product development,
risks relating to new product introduction and acceptance of new products,
changes in the Company's marketplace, intellectual property matters, regulatory
and manufacturing issues, liquidity issues, and risks associated with
competition from other companies, as well as the following:
RISK OF LOSING NASDAQ LISTING
As of June 30, 1996 the Company did not meet the continued listing requirements
for Nasdaq National Market securities. The Company did not meet the net tangible
asset requirement or the capital and surplus requirement. The Company has been
in discussions with Nasdaq concerning the steps it has taken and continues to
pursue to meet the net tangible asset requirement and the capital surplus
requirement. Should the Company not be successful in the discussions, it could
be delisted from the Nasdaq system. Trading, if any, in the listed securities
would therefore be conducted on the NASD Electronic Bulletin Board or in what is
commonly referred to as the "pink sheets." As a result, an investor may find it
difficult to dispose of, or obtain accurate quotations as to the price of the
Company's securities and this could affect the Company's ability to raise
additional capital.
NEW PRODUCT INTRODUCTION
While the Company believes that it will be able to introduce new products
successfully and in a timely manner, inability to successfully introduce new
products in a timely manner may have a material adverse impact on the
-17-
<PAGE>
Company's results of operations and financial condition. Additionally, there can
be no assurances that the competitive environment in which the Company operates
will allow the Company to achieve its objectives with respect to sale of new
products at the Company's anticipated selling prices.
FUTURE DEMAND FOR PRODUCTS
While the Company believes there is sufficient market demand for the Company's
products and that it is adequately reserved for potential losses resulting from
excess inventories, there are a number of risks associated with assessing that
demand. Excess inventory reserves were established based on estimates of future
requirements and there can be no assurances that the Company's forecasts will be
achieved or that introduction of new products by the Company, such as the EZ
Flyer 230 or the SyJet, or its competitors, may reduce demand for the Company's
products sooner than expected and that subsequent write-downs will not be
required.
In addition, with the discontinuance of production of the EZ135 and the SQ3270
drive and systems products, there can be no assurances that the Company's
forecasts for sales of those products will be achieved and that subsequent
inventory write-downs will not be required.
FUTURE PROFITABILITY
Although the Company continues to execute its turnaround plan, adjusting
operations to reduce losses and rebuild the business, the Company will not
return to profitability in the fourth quarter. Although the Company believes it
will be successful in its turnaround attempts, and that the Company will return
to profitability in the future, there can be no assurances that the Company will
be successful or that it will have, or be capable of obtaining, sufficient
capital to withstand prolonged operating losses.
-18-
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
The Company has been named as a defendant in three 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 States District 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 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 "State Lawsuit"). Certain current and former executive officers and
directors of the Company are also named as defendants in the lawsuit. The
plaintiffs in the State Lawsuit purport to represent a class of all persons who
purchased common stock between May 2, 1995 and February 2, 1996. The complaint
in the State Lawsuit alleges that defendants violated various California laws
and statutes through material misrepresentations and omissions.
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 the cases vigorously.
A third party has notified the Company that it believes SyQuest infringes on six
U.S. patents. It is the Company's belief that the claims are without merit or
that
-19-
<PAGE>
the infringement claims relate 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 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 is seeking a temporary injunction to
prohibit the sale and distribution of Nomai's 200 megabyte cartridges.
The Company is involved in other litigation arising in the ordinary course of
business. In the opinion of management, after consultation with legal counsel,
the ultimate outcome of such matters is not expected to have a material adverse
effect on the Company's results of operations or financial position.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibit 11.1 Computation of Earnings per share
b. Exhibit 27 Financial data schedule
c. Reports on Form 8-K
A report on Form 8-K dated June 14, 1996, was filed reporting
an Item 5 and Item 7 events with exhibits.
-20-
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
(Registrant)
Date: August 13, 1996 By: /s/ John W. Luhtala
--------------------------- -------------------
John W. Luhtala
Vice President, Finance &
Chief Financial Officer
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<PAGE>
EXHIBIT INDEX
EXHIBIT Sequentially Numbered Page
- ------------ --------------------------
Exhibit 11.1 - Computation of Earnings
per share 23
Exhibit 27 - Financial data schedule 24
-22-
EXHIBIT 11.1
SYQUEST TECHNOLOGY, INC.
COMPUTATION OF EARNINGS PER SHARE
(In thousands, except per share data)
Three months ended Nine months ended
June 30, (1) June 30, (1)
----------------- ------------------
1996 1995 1996 1995
------- ------- -------- -------
Net income (loss) ($41,317) $ 1,711 ($126,223) $ 7,320
======= ======= ======== =======
Common and common equivalent shares
outstanding:
Common stock 11,450 11,026 11,386 11,003
Options -- 650 -- 801
------- ------- -------- -------
Common and common equivalent shares
used in computing per share amounts 11,450 11,676 11,386 11,804
======= ======= ======== =======
Net income (loss) per share ($ 3.61) $ 0.15 ($ 11.09) $ 0.62
======= ======= ======== =======
(1 Primary and fully diluted income (loss) per share are the same for the three
month and nine month periods ended June 30, 1996 and June 30, 1995.
-23-
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> APR-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 17,550
<SECURITIES> 0
<RECEIVABLES> 22,945
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0
0
<OTHER-SE> (41,962)
<TOTAL-LIABILITY-AND-EQUITY> 92,837
<SALES> 29,459
<TOTAL-REVENUES> 29,459
<CGS> 46,635
<TOTAL-COSTS> 53,158
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<INTEREST-EXPENSE> 425
<INCOME-PRETAX> (41,317)
<INCOME-TAX> 0
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