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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1997 0-19674
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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 (ZIP CODE)
OFFICES)
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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 $.0001 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 December 10, 1997
as reported by NASDAQ, was approximately $215,164,749. 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 December 10, 1997 was
71,721,583.
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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.
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
1998 AND ANY CURRENT REPORTS ON FORM 8-K FILED BY THE COMPANY.
ITEM 1. BUSINESS
General
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, backup, archival storage, and physical security of data.
The Company's principal products are 3.5 inch and 5.25 inch cartridges, drives
and storage systems used with personal computers and work stations. The
Company's 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
Today's computer users are constantly confronted with the necessity of
increased storage capacity to accommodate larger software programs and the
electronic storage of data. These increased requirements can be taxing on
fixed disk drives, the computers primary auxiliary storage device, which do
not offer an efficient method of expandability. However, the Company's award
winning line of products provide users with unlimited expandability and
portability at various price points with the quality and performance
associated with the computer's fixed drive. Other competing products currently
in the market place include: 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," "Quest," "SyJet," "SparQ," "EZFlyer," "EZ230," "EZ135,"
"SQ555," "SQ400," "SQ5110C," "SQ800," "SQ5200," "SQ2000," "SQ3105,"
"SQ310," "SQ3270," "SQ327," and "SQ3135," "SQ135," "SQ1100" and "SQ110"
are trademarks of the Company. This Annual Report also includes trademarks
of companies other than SyQuest Technology, Inc.
2
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The Company believes that its removable disk cartridges and disk drives are
a competitive solution for various business and personal applications due to
their combination of interchangeability, performance and cost. SyQuest
solutions offer users an efficient and affordable media to capture their ideas
and creative genius with quality and reliability.
Products
The Company believes that it has developed and continues to refine a
sophisticated and proprietary removable technology relating to its product
designs and manufacturing processes. The Company's principle products are 3.5
inch and 5.25 inch removable Winchester disk drives, associated cartridges and
system products.
5.25 Inch Products
The 5.25 inch product line (including SyQuest branded systems products)
accounted for 43% of the Company's net revenues in fiscal 1997 compared to 44%
in fiscal 1996 and 60% in fiscal 1995. The 5.25 inch product line includes:
SQ555 & SQ400. The 44 megabyte SQ555 drive and associated SQ400
cartridge. The SQ555 was discontinued and phased out of production in the
second quarter of fiscal 1995. However, the Company continues to
manufacture and sell SQ400 cartridges as part of its legacy product lines.
SQ5110C & SQ800. The 88 megabyte SQ5110C drive and SQ800 cartridge. 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 1998.
SQ5200 & SQ2000. The 200 megabyte SQ5200 drive and SQ2000 cartridge. The
SQ5200 and SQ2000 products are still in production and are expected to
remain in production into 1998.
Additionally, the Company's recently introduced 4.7 gigabyte Quest drive
utilizes a 5.25 inch platform. There were no sales of this product in fiscal
1997.
3.5 Inch Products
The 3.5 inch product line (including SyQuest branded systems products)
accounted for 57% of the Company's net revenues in fiscal 1997 compared to 56%
in fiscal 1996 and 40% in fiscal 1995. The 3.5 inch product line includes:
SyJet 1.5 gigabyte and SQ15000. The Company's award winning SyJet product
line and associated cartridges.
SparQ and SQ10000. The Company's newly introduced SparQ 1.0 gigabyte
product line and associated cartridges.
EZFlyer 230 and SQ230. The Company's award winning 230 megabyte EZFlyer
230 and associated SQ230 Cartridge.
EZ3135 and SQ135. The 135 megabyte drive and SQ135 cartridge. Production
of this drive was discontinued in the fourth quarter of fiscal 1996, but,
the SQ135 cartridges will continue in production to serve the current
installed base.
SQ3270 and SQ327. The 270 megabyte SQ3270 drive and associated SQ327
Cartridge. The SQ3270 family of drives was discontinued in the fourth
quarter of fiscal 1996, but, the SQ327 cartridges will continue in
production to serve the existing installed base.
Systems Products
SyQuest also designs, develops, manufactures and markets storage systems
which incorporate the Company's 3.5 inch and 5.25 inch drives and cartridges.
A system generally consists of a drive, a cartridge and
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additional components necessary for a user to attach and operate the system to
his computer. These products, which include the award winning SyJet 1.5
gigabyte, SparQ 1.0 gigabyte, the award winning EZFlyer 230, and 200SS
subsystems, are marketed under the SyQuest brand name to national retail
chains, commercial distributors, computer mail order houses, through the world
wide web, 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 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 16% of the total net revenue in fiscal 1997. 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 and photography, the Internet, computer
graphics, and large software programs such as Windows 95, will benefit the
Company's market by continuing to create a need for more storage. The Company
believe that its various award winning product lines are ideally suited for
these increasing storage requirements.
The Company plans to continue developing aggressive marketing strategies
(channel marketing programs, national and consumer advertising campaigns,
aggressive merchandising, etc.) and commit additional financial resources for
these market strategies in an attempt to capture additional market share and
presence. Additionally, with the new generation of products introduced in
1997, the Company has been working 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 16% of the Company's net
revenue in fiscal 1997 and 10% of net 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 approximately 16% of the Company's worldwide
revenues. The largest superstore reseller of SyQuest products in fiscal 1997
was CompUSA, which accounted for 3% 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 4% of SyQuest's net revenue for fiscal 1997.
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.
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The Company and Legend have announced that they are in discussions 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. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Factors That May Affect Future Results--Reliance on Manufacturing
Relationships."
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,
fluctuations in foreign currency 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."
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. SyQuest makes extensive use of
computer-aided design tools in mechanical, electrical, firmware and circuit
board design areas.
In fiscal 1997, 1996 and 1995, the Company's research and development
expenses were $17.9 million, $25.9 million and $23.9 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, develop,
manufacture, market and sell new products in a timely manner. 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
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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 environment changed primarily due to the
activities of two companies. The Company's most direct competition comes from
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.
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. Both Mitsubishi Electric
Corp. and Mitsumi have also announced that they plan to manufacture a high
capacity, floppy drive that is downwardly 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, are frequently revised
to reflect changes in the customer's needs. The Company historically has not
carried a significant backlog of customer orders. Its customers tend to order
product for immediate shipment and, as such, the Company does not have
visibility on order rates and demand for its products generally beyond thirty
days.
Patents and Licenses
Since its inception, the Company has been issued more than 61 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 31 pending
U.S. and foreign
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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. 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; Intellectual Property Litigation."
Employees
As of November 28, 1997, the Company had a total of 1107 full time employees
of which 85 were in research and development, 906 were in manufacturing, 66
were in marketing, sales and support, and 50 were in finance and
administration. Of the total number of employees, the Company has 293
employees located in North America and 814 employees located throughout the
world, principally in Malaysia. The Company makes use of temporary employees,
primarily in manufacturing, who are hired on an as-needed basis. None of the
Company's employees are 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.
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
Berkshire, UK........... 825 June 1998 Administration
Boulder, Colorado....... 13,896 November 1999 Research and Development
Weingarten, Germany..... 4,600 September 1998 Unoccupied
Ismaning, Germany....... 56,000 September 1999 Administration
-------
Total................... 214,632
=======
</TABLE>
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/1/ Consists of two adjacent buildings.
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The Company also leases or rents office space for sales in the greater
metropolitan areas of Norwalk, Ohio; Fairport, New York; Wauconda, Illinois;
Eden Prairie, Minnesota; Raleigh, North Carolina; Newport Beach and Fremont,
California; Singapore; Paris, France; London and Edinburgh, United Kingdom;
and Tokyo, Japan.
ITEM 3. LEGAL PROCEEDINGS
On December 3, 1997, SPARC International, Inc. filed a lawsuit in the United
States District Court in and for the Northern District of California against
the Company. The lawsuit alleges that the Company's use of the trademark SparQ
in connection with its recently--introduced SparQ removable cartridge hard
drive product constitutes an infringement of the SPARC trademark owned by
SPARC International, Inc. The complaint requests money damages and a
preliminary and permanent injunction enjoining the Company from further
infringement. On December 19, 1997, SPARC International, Inc. filed a motion
seeking a preliminary injunction enjoining the Company from using the SparQ
trademark on its removable cartridge hard drive products and requesting a
hearing on January 26, 1998. The Company believes that it does not infringe
any valid trademarks of SPARC International, Inc. and intends to defend itself
against this action.
On July 23, 1997, Iomega Corporation ("Iomega") filed civil action No. 97-
466 in the United States District Court in and for the District of Delaware
against SyQuest Technology Inc. The law suit alleges that SyQuest has
infringed Iomega's Design Patent No. D378,518 and U.S. Patent No. 5,644,444 by
making and selling computer disk cartridges and drives which embody alleged
inventions of those patents and that SyQuest has willfully infringed Iomega's
alleged trademark "JET". The complaint requests money damages and a
preliminary and permanent injunction enjoining SyQuest from further
infringement. The Company believes that it does not infringe any valid patent
claims or trademarks of Iomega and intends to vigorously defend against this
action.
On or about June 10, 1997, the Company initiated litigation against
Castlewood Systems, Inc. and eleven (11) former Company employees in Santa
Clara Superior Court, No. 766757 asserting ten (10) causes of action,
including claims for misappropriation of trade secrets, unfair competition,
and breach of fiduciary duty. On or about July 16, 1997, Castlewood filed a
Cross-Complaint against the Company, alleging three (3) causes of action
(interference with prospective economic advantage; unfair competition; trade
libel). Since that time, the parties have engaged exclusively in hearings
before Thomas E. Schatzel, Esq., the Court-appointed Discovery Referee, to
finalize the Company's Civil Procedure (S) 2019 (d). The Company's Seconded
Amended Identification of Trade Secrets was deemed acceptable by the Discovery
Referee on October 20, 1997. Discovery has only recently begun, and there can
be no assurance as to what financial effect this litigation may have on the
Company.
In 1996, the Company filed suit against Nomai, S.A. (Nomai) and Maxell in
France for copyright and patent infringement. The Company initiated an
arbitration proceeding against Nomai seeking payment of outstanding royalties
of approximately $1 million. On January 27, 1997, the Company filed a
Complaint in the United States District Court in Northern District of
California against Nomai, S.A., Nomus, Inc., Marc Frouin, Herve Frouin,
Electronique d2, and La Cie Ltd., entitled SyQuest Technology, Inc. v. Nomai,
S.A. et al. (Case No. C97-0271 FMS) (the "Nomai Action") alleging patent and
trademark infringement, misrepresentation, breach of contract and other
claims. During April through June, Nomus, Inc., Marc Frouin and Herve Frouin
(collectively the "Nomai Parties") filed certain Cross-Complaints against the
Company. The parties have engaged in discussions concerning the terms of a
potential resolution to the Nomai Action, and the Nomai Parties and Defendants
Electronique d2 and La Cie Ltd. and the Company have agreed to certain
material terms of settlement in principle and final documentation remains
outstanding. The Nomai Action remains pending.
Periodically, the Company is made aware that technology used by the Company
in the manufacture of some or all of its products may infringe on product or
process technology rights held by others. Resolution of whether the Company's
manufacture of products has infringed on valid rights held by others could
have a material adverse effect on the Company's financial position or results
of operations, and may require material changes in production processes and
products. Several companies have individually contacted the Company concerning
its
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alleged use of intellectual property belonging to them. Companies that have
contacted the Company include one company that has alleged that the Company's
products infringe six 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 in the event this
company prevailed on its claims, the Company would be indemnified by its
vendors 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. Another company has notified the Company that it
believes a number of the Company's removable cartridge hard drives products
infringe several of its patents relating to the use of spin motors in disc
drives. The Company believes that its removable cartridge hard drive products
do not infringe the claims of these patents and that some or all of the
asserted patents are invalid.
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 have been or 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of its stockholders and one special
meeting of its stockholders on May 6, 1997 and November 5, 1997 respectively.
All of the proposals submitted to the stockholders at the meeting were
approved, and the vote on such proposals is described below:
A proposal to elect directors to serve for the ensuing year and until their
successors are elected.
<TABLE>
<S> <C>
For............................................................ 27,532,460
Against........................................................ 7,023
Abstain........................................................ 420,705
Broker Non-Vote................................................ 0
</TABLE>
A proposal to approve an amendment to the Company's Certificate of
Incorporation to increase the number of authorized shares of the Company's
Common Stock from 60,000,000 to 120,000,000 and to decrease the stated par
value of the Company's Common Stock and Preferred Stock from $0.001 to
$0.0001.
<TABLE>
<S> <C>
For............................................................ 47,519,671
Against........................................................ 2,612,177
Abstain........................................................ 244,901
Broker Non-Vote................................................ 0
</TABLE>
A proposal to ratify the appointment of Price Waterhouse LLP as independent
accountants of the Company for the fiscal year ending September 30, 1997.
<TABLE>
<S> <C>
For............................................................ 26,114,727
Against........................................................ 1,742,141
Abstain........................................................ 103,320
Broker Non-Vote................................................ 0
</TABLE>
A proposal to approve an Amendment to the Certificate of Incorporation to
increase the authorized number of share of the Company's common stock from
120,000,000 to 240,000,000.
<TABLE>
<S> <C>
For............................................................ 27,767,100
Against........................................................ 112,583
Abstain........................................................ 80,505
Broker Non-Vote................................................ 0
</TABLE>
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A proposal to adopt the Company's 1997 Stock Incentive Plan.
<TABLE>
<S> <C>
For............................................................ 13,344,299
Against........................................................ 3,096,015
Abstain........................................................ 279,615
Broker Non-Vote................................................ 31,583,200
</TABLE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
SyQuest's Common Stock, $.0001 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, 1997 HIGH LOW
------------------ --------- --------
<S> <C> <C>
First Quarter............................................. $ 6 11/16 $3 11/16
Second Quarter............................................ $ 3 7/8 $1 3/4
Third Quarter............................................. $ 2 3/4 $1 3/4
Fourth Quarter............................................ $ 3 5/32 $2 1/4
<CAPTION>
FISCAL YEAR ENDED
SEPTEMBER 30, 1996 HIGH LOW
------------------ --------- --------
<S> <C> <C>
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 cash dividends in the last three 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 December 10, 1997, there were approximately 49,000
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.
10
<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,
------------------------------------------------
1997 1996 1995 1994 1993
-------- --------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
RESULTS OF OPERATIONS DATA:
Net revenue................... $122,723 $ 200,407 $299,544 $221,001 $206,362
Gross profit (loss)........... (901) (48,286) 51,047 60,659 75,281
Income (loss) from
operations................... (63,971) (130,676) (17,109) 5,126 19,278
Net income (loss)............. $(68,671) $(136,651) $(11,786) $ 5,405 $ 15,212
INCOME (LOSS) PER SHARE(1):
Income (loss) before value
assigned to warrants issued
in conjunction with preferred
stock offerings, embedded
discounts, preferred stock
dividends and other
accounting changes........... $ (1.97) $ (11.89) $ (1.07) $ 0.43 $ 1.23
Net income (loss)............. $ (2.25) $ (12.38) $ (1.07) $ 0.46 $ 1.23
Weighted average number of
shares outstanding........... 34,815 11,497 11,063 11,647 12,340
<CAPTION>
YEARS ENDED SEPTEMBER 30,
------------------------------------------------
1997 1996 1995 1994 1993
-------- --------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED FINANCIAL
CONDITION DATA:
Working capital............... $ 1,436 $ (37,351) $ 62,340 $ 72,652 $ 69,638
Total assets.................. 82,649 75,181 164,684 139,501 120,503
Total long-term debt.......... 4,024 20,971 -- -- --
Total stockholders' equity
(deficit).................... 5,613 (30,353) 83,188 90,845 89,544
</TABLE>
- --------
(1) The computation of loss per share for the years ended September 30, 1997
and 1996, includes adjustments representing preferred stock dividends,
adjustments for the "embedded yield" representing the discount on the
assumed potential conversion of the Convertible Preferred Stock, and
amounts representing value assigned to warrants issued in conjunction with
certain Convertible Preferred Stock financings completed during the year.
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.
During fiscal 1997, the Company reduced its net loss from $136.7 million in
fiscal 1996 to $68.7 million while net revenue declined from $200.4 million in
fiscal 1996 to $122.7 million in fiscal 1997. The revenue decrease resulted
primarily from reduced revenue from the Company's older "legacy" products
which represent earlier generations of removable cartridge hard drive products
which have generally been replaced by newer generation products with greater
performance and capacity. The Company's newer products, EZ Flyer 230 and
SyJet, partially off-set the decline in revenue from "legacy" products during
the current fiscal year. The decline in the net loss for fiscal 1997 as
compared to fiscal 1996 resulted primarily from reductions in the material
component of the cost of products, reduced reserves related to inventory,
reduced restructuring charges, warranty cost and the benefits of other cost
reduction programs implemented by management during fiscal 1996 and throughout
fiscal 1997.
11
<PAGE>
The Company has accumulated losses during the fiscal years ended September
30, 1997, 1996 and 1995 totaling approximately $220 million. The Company has
funded the cumulative losses primarily by issuance of additional capital stock
for cash proceeds of approximately $120 million. At the November, 1997 Special
Stockholders' Meeting the Stockholders approved increasing the Company's
authorized capital stock from 120 million common shares to 240 million common
shares. Further sustained losses will necessitate future additional financings
that if raised through the issuance of equity securities existing stockholders
would experience additional dilution. The inability to raise additional cash
on favorable terms when needed and continued losses will adversely effect the
Company's ability to maintain that listing on the Nasdaq National Market. The
Company's inabililty to maintain its listing would likely have a material and
adverse effect on the market price of the Company's Common Stock and on its
ability to raise additional needed capital.
FISCAL 1997 COMPARED TO FISCAL 1996
Net Revenue
Net revenue for the year ended September 30, 1997 was $122.7 million, a
decrease of 38.8 percent as compared to net revenue of $200.4 million in
fiscal 1996. The decrease resulted primarily from a decline in revenue from
the Company's older "legacy" products (EZ135, SQ3270 and associated
cartridges) of approximately $110 million or 64.5 percent which was partially
off-set by net revenue from the introduction of EZ Flyer 230 during the fourth
quarter of fiscal 1996 and the SyJet which was introduced during the second
quarter of fiscal 1997. The Company experienced significant price pressure
during fiscal 1997 which resulted in a decrease of 27.9 percent in the price
of the 3.25 drive systems. Unit shipments during fiscal 1997 decreased 85
percent for 5.25 inch drive systems, increased 38 percent for 3.25 inch drive
systems and decreased 62.3 percent for cartridges. Cartridge net revenue as a
percentage of total net revenue was 48 percent in fiscal 1997 as compared to
49 percent in fiscal 1996. Net revenue from the Company's older legacy
products represented 42.6 percent of total net revenue while EZ Flyer 230 and
SyJet represented 57.4 percent of total net revenue in fiscal 1997. The
Company anticipates that net revenue from legacy products will continue to
decline as a percentage of future net revenue.
Net revenue from European shipments represented 36 percent of total net
revenue during fiscal 1997. This reflects a decrease of approximately $13.4
million or 23.4 percent as compared to fiscal 1996. This decrease resulted
primarily from a change in European sales management, discontinuation of
channel distribution relationships and consolidation of European operations to
reduce cost.
During the first quarter of fiscal 1998 the Company introduced a new 1.0
gigabyte hard drive storage system named SparQ and a 4.7 gigabyte hard drive
storage system named Quest. SparQ is a low cost high performance product aimed
at the mass market and Quest is a competitively priced high capacity product
aimed at the Audio Video and Information Technology markets. The Company
anticipates that SparQ will contribute a significant portion of its fiscal
1998 net revenue.
Gross Profit (Loss)
The Company reported a gross loss for the current fiscal year of $0.9
million as compared to a gross loss of $48.3 million in fiscal 1996. The
improvement in the gross loss of $47.4 million or 98.1 percent resulted
primarily from reduced charges to cost of goods sold ($23.9 million) related
to the decision to discontinue the EZ135/SQ3270 drive products during the
second half of fiscal 1996, an increase in the mix of revenue toward the newer
higher margin products, manufacturing cost reductions, reduced warranty
expense, foreign exchange benefits related to the Malaysian Ringitt and
efficiencies realized as a result of increased utilization of the production
facilities. The improvements to the gross profit were off-set by significant
price reductions during the year as discussed in the net revenue section
above.
Selling, General and Administrative Expense
The reported selling, general and administrative expense for the current
year decreased $6.6 million to $45.1 million, or 36.8 percent of net revenue,
as compared to fiscal 1996. The decrease resulted primarily from reduced
12
<PAGE>
bad debt expense, consolidation of European operations and ongoing cost
reduction and business simplification efforts. These cost reductions were
partially offset by increased advertising and marketing efforts incurred to
promote the introduction of new products and stimulate sales demand and
increased legal expenses related to various legal proceedings. Overall the
number of employees decreased by 35.2 percent to 116 employees at September
30, 1997.
Research and Development Expense
The reported research and development expense for the current year decreased
$7.9 million to $18 million, or 14.7 percent of net revenue, as compared to
fiscal 1996. The decrease resulted primarily from focused engineering effort
on core product and cost reduction efforts. The number of employees decreased
by 59 percent to 85 employees at September 30, 1997.
Interest Income and Expense
The reported interest expense for the current year increased $3.1 million to
$4.3 million, or 3.5 percent of net revenue, as compared to 1 percent of net
revenue in fiscal year 1996. The increase resulted primarily from increased
borrowings under the Company's bank borrowings. The average bank borrowing for
the current year was $18.8 million as compared to $11.9 million in fiscal
1996. Additionally, approximately $2.0 million of accounts payable balances
were converted to notes payable with an average interest rate of 10 percent.
The interest expense on vendor notes payable increased $1.6 million in the
current year as compared to fiscal 1996.
Approximately $92.6 million of cash was raised through various equity
financing transactions during the fiscal year ended September 30, 1997.
Available cash was invested in liquid money market accounts and earned
interest income of approximately $0.2 million in the current year as compared
to $0.2 million in fiscal 1996.
Income Taxes
The reported provision for income taxes was $0.4 million in the current
fiscal year as compared to $3.0 million in fiscal 1996. The provision for
taxes in fiscal 1996 resulted primarily from an increase in the deferred tax
asset valuation allowance greater than the expected tax benefit computed by
applying the federal statutory rate to the fiscal 1996 loss. The provision for
income taxes in the current year reflects the mix of the sources of
income/loss by geographic region within which the Company has operations. As
of September 30, 1997, a valuation allowance in the amount equal to the net
deferred tax asset has been recorded. Realization of the deferred tax benefit
is dependent on future taxable earnings, the timing and amount of which are
uncertain.
The Company successfully negotiated a tax holiday with Malaysian authorities
exempting a significant amount of profits generated by its Penang, Malaysia
operation from Malaysian tax. While there can be no assurance that the Company
will be able to continue to meet the conditions of the tax holiday, if any,
Management believes it will be able to realize a tax holiday in Malaysia in
the future. The provision for Malaysian taxes in the current year is provided
in anticipation of the likely tax holiday.
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 average selling prices (ASP's) 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.
13
<PAGE>
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 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.
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.
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 had 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
14
<PAGE>
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.
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 totaled $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 number of employees 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 totaled $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.
15
<PAGE>
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 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'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.
Liquidity and Capital Resources
The Company is in a turnaround situation which necessitates certain action
by Management which affect the business environment in which the Company
operates. At September 30, 1997, the Company's book net worth was $5.6 million
as compared to a book net worth of negative $30.4 million at the end of fiscal
1996. Working capital at September 30, 1997 was $1.4 million as compared to a
negative $37.4 million at the end of fiscal 1996. The increase to book net
worth and working capital resulted primarily from equity financing completed
during fiscal 1997 of approximately $92 million partially offset by a net loss
of $68.7 million. In the first quarter of fiscal 1998 the Company raised
additional cash of approximately $36.0 million by issuing $10 million of
convertible preferred stock and $20 million through the exercise of
outstanding warrants.
The Company continues to face significant risks associated with successful
execution of its turnaround strategy. These risks include, but are not limited
to technology and product development, introduction and market acceptance of
new products, changes in the marketplace, liquidity, competition from existing
and new competitors which may enter the marketplace and retention of key
personnel.
The Company has recently introduced newer generation products with greater
capacity and performance than its older "legacy" products. These newer
products in production during the current fiscal year are the EZ Flyer 230 and
SyJet. Two additional new products introduced during the first fiscal quarter
of fiscal 1998 are SparQ and Quest. The Company historically has not carried a
significant backlog of customer orders. Its customers tend to order product
for immediate shipment and, as such, Management does not have visibility on
order rates and demand for its products generally beyond thirty days. There
can be no assurance that these new products will achieve market acceptance.
As a result of new product introductions and funding continued operating
losses, the Company needs sufficient capital to implement a marketing strategy
that will adequately address the appropriate markets and generate sales demand
for its current and planned future products. Accumulated losses during the
fiscal years ended September 30, 1995, 1996 and 1997 totaled approximately
$220 million. The Company has funded the cumulative losses primarily by
issuance of additional capital stock for cash proceeds of approximately $92
million. At the November, 1997 Special Stockholders' Meeting the Stockholders
approved increasing the Company's authorized capital stock from 120 million
common shares to 240 million common shares. Further sustained losses will
necessitate future additional financings that if raised through the issuance
of equity securities existing stockholders would experience additional
dilution. The inability to raise additional cash when needed and continued
losses will adversly effect the Company's ability to maintain its listing on
the Nasdaq National Market. The Company's inability to maintain that listing
would likely have a material and adverse effect on the market price of the
Company's Common Stock and on its ability to raise additional needed capital.
16
<PAGE>
The following table sets forth in summary form the Company's material
financing activities from June 1996 through October 1997. The terms of these
financings are described in seven of the Company's Current Reports on Form 8-K
dated, respectively, June 14, 1996, October 31, 1996, November 11, 1996, April
14, 1997, May 30, 1997, August 4, 1997, and October 4, 1997.
<TABLE>
<CAPTION>
RESULTING
PREFERRED GROSS COMMON WARRANTS
DATE SERIES/TRANSACTION SHARES PROCEEDS SHARES ISSUED
---- ------------------ --------- ------------ ---------- ----------
<C> <S> <C> <C> <C> <C>
6/96 7% Cumulative Convertible Preferred 20,000(2) $ 20,000,000 10,301,708 --
Stock, Series 1
7/96 6% Convertible Subordinated -- $ 7,700,000(5) -- --
Debenture(1)
9/96-10/96 Various Debt to Equity exchanges -- 24,440,000(5) 8,047,269 --
2/97-4/97
10/96 Cumulative Convertible Preferred 5,500(2) $ 5,500,000 3,289,981 1,096,660
Stock, Series 1
10/96 5% Cumulative Convertible Preferred 24,500(2) $ 24,500,000 12,440,447 4,146,816
Stock, Series 2
11/96 Common Stock Sale -- $ 8,500,000 1,500,000 1,875,000
4/97 5% Cumulative Convertible Preferred 50,000 $ 5,000,000 2,485,070 5,000,000
Stock, Series 3
5/97 5% Cumulative Convertible Preferred 280,000(3) $ 28,000,000 10,069,645 28,000,000
Stock, Series 4
8/97 Common Stock Sale -- $ 3,500,000 1,382,716 3,500,000
9/97-10/97 5% Cumulative Convertible Preferred 30,000(4) $ 30,000,000 -- 21,000,000
Stock, Series 5
------- ------------ ---------- ----------
Total 410,000 $157,140,000 49,516,836(6) 64,618,476
======= ============ ========== ==========
</TABLE>
- --------
(1) The 6% Convertible Subordinated Debenture, was issued as part of a debt to
equity transaction, $2,775,000 is convertible into up to 400,000 shares of
the Company's Common Stock at a conversion price of $6.9375 per share.
(2) All preferred shares have been converted into the resulting common stock
noted.
(3) 53,580 shares of the Series 4 Preferred Stock remain unconverted.
(4) There have been no conversions of the Series 5 Preferred Stock.
(5) No cash proceeds were received by the Company.
(6) On December 10, 1997, assuming the conversion of all remaining preferred
stock, the exercise of warrants and other stock commitments, the Company
would have approximately 153 million shares issued and outstanding
Through much of fiscal 1996 the Company was unable to obtain regular
business terms with its suppliers as a result of continued losses and
liquidity issues. Consequently, the Company was often in a position of
conducting business with its suppliers on a C.O.D. basis. During fiscal 1997,
the Company has experienced a return to regular business terms with its key
suppliers, although some vendors still require C.O.D. terms or security
deposits. The Company may from time to time experience difficulty in the
future in obtaining a sufficient supply of many key components due to the
shortage of cash to pay suppliers on a timely basis. A disruption in the
supply of key components would have a material adverse affect on sales and the
ability to successfully produce product in volumes necessary to meet demand.
The cash and short-term investment balance at September 30, 1997 increased
to $7.1 million as compared to $3.7 million at the end of fiscal 1996. Working
capital needs have been financed through a combination of existing cash
resources, improved asset management of accounts receivable and inventory
balances, conversion of vendor notes into equity and a series of capital
financing transactions completed during the current fiscal year.
The Company's liquidity may be adversely effected in the future by factors
such as higher interest rates, inability to borrow without collateral,
availability of capital financing transactions and continued losses from
operations. Further, significant fluctuations in quarterly operating results
has had and, in the future, may continue to have a negative effect on the
Company's liquidity. Factors such as price reductions, the introduction and
17
<PAGE>
market acceptance of new products, product returns, availability of critical
components have had an adverse effect on the Company's products and have
contributed to this quarterly variability. Moreover, the 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
results of operations. As such, the results of operations in some future
period may be below the expectations of investors, which would likely result
in a significant reduction in the market price of the Common Stock. A decline
in the market price of the Common Stock would have a negative effect on the
Company's ability to raise needed capital on acceptable terms and conditions
to Management.
The revenue, operating loss and loss per share for the four quarter of
fiscal 1997 are presented below to illustrate the quarterly fluctuations
during the most recent fiscal year. The loss per share has been recalculated
in order to be presented on a consistent basis with the re-statement discussed
in footnote Number 10 and the Consolidated Financial Statements.The change in
the presentation of the earnings per share had no impact on the reporting
operating loss for the periods presented.
<TABLE>
<CAPTION>
Q1 Q2 Q3 Q4
-------- -------- -------- -------
(THE TABLE IS PRESENTED IN
MILLIONS,
EXCEPT FOR LOSS PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenue.............................. $ 48.3 $ 16.8 $ 31.7 $ 25.9
Net Loss............................. $ (6.8) $ (33.7) $ (10.7) $ (17.5)
Loss per share....................... $ (0.86) $ (1.31) $ (0.31) $ (0.33)
Weighted average shares.............. 14,673 26,206 44,054 53,806
</TABLE>
Net accounts receivable at September 30, 1997 totaled $19.5 million compared
to $30.3 million at the end of fiscal 1996. The decrease resulted primarily
from reduced sales volume in fiscal 1997. Days sales outstanding in accounts
receivable were 59 days at the end of the current fiscal year which is a
slight decline of 4 days or 7 percent from the end of fiscal 1996.
Net inventory at September 30, 1997 totaled $26.7 million compared to $10.5
million at the end of fiscal 1996. The increase resulted primarily from
investments to support introduction of new products such as SparQ and Quest.
Inventory turnover for the current fiscal year was 3 as compared to a turnover
of 11 for fiscal 1996.
On January 17, 1997, a domestic line of credit was negotiated with a
financial institution, continuing the existing terms and extending the line
through March 31, 1998. The credit line provides for a limit on borrowings of
$30.0 million based on a combination of 80 percent of eligible accounts
receivable balances and 40 percent of eligible finished goods inventory
balances. Borrowings under the agreement bear interest based on the highest
"LIBOR" (London Interbank Offered Rate) rate during the month plus 4.825
percent 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, 1997 was 10.75 percent. The agreement also places limitations on
additional borrowings, payment of dividends and is secured by substantially
all the Company's assets. The balance borrowed at September 30, 1997 under the
domestic line of credit was $17.6 million as compared to $14.7 million at the
end of fiscal 1996. Management believes its relations with the financial
institution are good, The Company has received indication from its Banks that
they intend to renew the line of credit upon expiration of the existing credit
agreement. The terms and financial covenants of the renewed line of credit
remain to be determined and negotiated. Management believes it will be
successful in renewing the line of credit. Failure to renew the line of credit
will have a material adverse effect on the Company's liquidity.
In fiscal 1996, the Company entered into a revolving banking facility with a
bank in Penang, Malaysia expiring in March, 1998. The banking facility
consists of line of credit for 17.5 RM (Malaysian Ringitts-- approximately $7
million) and a term loan for 12.5 RM (approximately $5 million). The bank
facility is secured by the production facility, equipment inventory and
eligible accounts receivable in Malaysia and a corporate guarantee from the
parent company of SyQuest Technology Sdn Bhd (M), SyQuest Technology, Inc.
Borrowings under the facility bear interest based upon 1 percent over the
bank's base lending rate while the short-term borrowings bear interst at
varying rates and become due every 180 days. The interest rate at September
30, 1997 was 8.85 percent. The borrowings outstanding under the bank facility
at September 30, 1997 was $5.4 million
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<PAGE>
(17.5 million RM) as compared to $8.1 million (26.2 million RM). Borrowings
are denominated in Malaysian Ringitts and, as such, are subject to foreign
currency fluctuations against the US dollar. During the current fiscal year
the Malaysian Ringitt weakened against the US dollar resulting in foreign
currency gains of approximately $0.65 million. There can be no assurance that
this trend will continue and the Company does not currently hedge foreign
currency exposures. Management believes its relations with the bank are good.
Failure to renew the bank facility would have a material adverse effect on the
Company's liquidity.
During the current fiscal year approximately $74.1 million of cash was used
for operating activities and approximately $6 million of cash was used for
capital expenditures. Management believes, based upon the additional $36.0
million cash raised in the first quarter of fiscal 1998, anticipated extension
of its bank credit lines and available cash balances, it has sufficient cash
resources to fund operation through the end of fiscal 1998. There can be no
assurance that the Company will be successful in achieving its internal
financial plan. The Company may need additional funds for promoting new
products and working capital required to support increased sales and support
the required investments in accounts receivable and inventory. Management's
financial plans for fiscal 1998 anticipate raising additional equity capital
primarily through exercise of currently outstanding 30 million warrants issued
in conjunction with previously completed financial transactions. If these
outstanding warrants were to be exercised the Company would receive cash
proceeds of approximately $90 million, however, the outstanding warrants do
not include any demand or call provisions. Management may have to entice
existing warrant holders to exercise their warrants by offering discounts to
the contractual exercise price and/or issuing exchange warrants at market or
negotiated discount exercise prices. Management believes it has sources of
equity capital beyond the exercise of currently outstanding warrants through
issuance of additional convertible preferred stock or issuance of a debt
instrument such as a convertible debenture. There can be no assurance,
however, that such financing would be available when needed, if at all, or on
favorable terms and conditions. If results of operations for fiscal 1998 do
not meet management's expectations, or additional capital is not available,
management believes it has the ability to reduce certain expenditures so as
not to require additional capital. The precise amount and timing of the
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 quality of product development efforts, availability of critical
components, management of working capital, and continuation of normal payment
terms and conditions for purchase of materials and services.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Sustained Losses; Need for Additional Financing; Future Capital Needs
The Company has accumulated losses during fiscal years ended September 30,
1995, 1996, and 1997 totaling approximately $220 million. There can be no
assurances that the Company will cease incurring losses despite new product
introductions, as there can be no assurances that the Company's products will
be accepted in the marketplace. Continued losses would result in liquidity and
cash flow problems and could affect product delivery efforts. Further
sustained losses will necessitate future additional financings that if raised
through the issuance of equity securities, will reduce the percentage
ownership of the stockholders of the Company. Existing stockholders may
experience additional dilution, and securities issued in conjunction with new
financings may have rights, preferences and privileges senior to those of
holders of the Company's Common Stock. There can be no assurance, however,
that additional financing will be available when needed, if at all, or on
favorable terms.
The inability to raise additional financings when needed and continued
losses could impact the Company's ability to maintain its listing on 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, should delisting occur, 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. There can be no assurances that the Company would be
successful in securing additional financings which could place the Company at
risk of losing its Nasdaq listing.
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<PAGE>
CONVERTIBLE SECURITIES, WARRANTS AND OPTIONS; POTENTIAL DILUTION AND ADVERSE
IMPACT ON ADDITIONAL FINANCING
As of December 10, 1997, the Company had outstanding options and warrants to
purchase approximately 80,000,000 shares of Common Stock, at a weighted
average exercise price of $2.755 per share. The exact number of shares of
Common Stock issuable upon conversion of the Series 4 Preferred Stock and the
Series 5 Preferred Stock (collectively, the "Preferred Stock") 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 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 Series 4 Preferred Stock in lieu of cash dividends due to
the holders of the Series 4 Preferred Stock.
In addition, on November 13, 1996, SyQuest sold to an investor 1,500,000
shares of Common Stock that became 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 became exercisable
for 1,875,000 shares of Common Stock.
To the extent that such options and warrants are exercised, shares of Common
Stock or Series 4 Preferred Stock are issued in lieu of cash dividends or
convertible securities are converted, 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 as the number
of conversion shares to be issued will increase. 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. See management's discussion and analysis at Liquidity and Capital
resources.
The Company has filed Registration Statements on Form S-8 under the Act to
register shares of Common Stock subject to stock options and to 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 registered the Common Stock
issuable upon exercise of the warrants and conversion of the convertible
securities pursuant to a prospectus included in Registration Statement Nos.
333-7369 and 333-17119 and 333-28225. 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. In December 1996, the Company began shipping its SyJet 1.5
Gigabyte Removable Cartridge Hard Drive (SyJet) product line. While the
Company believes that the SyJet product line has been favorably received by
the marketplace, there can be no assurance that the level of acceptance will
continue or grow. Through March 31, 1997, SyJet production was constrained by
industry-wide shortages of critical components and other production
shortfalls. On November 3, 1997, the Company announced its SparQ 1.0 Gigabyte
Removable Cartridge Hard Drive (SparQ) product line. The Company anticipates
first customer shipments to occur in November, 1997. The initial acceptance of
the market place for SparQ has been favorable, however, there can be no
assurance that the level of acceptance will continue to grow. On November 10,
1997, the Company announced its Quest 4.7 Gigabyte Removable Cartridge Hard
Drive (Quest) product line. The initial acceptance of the marketplace for
Quest has been favorable, however, there can be no assurance that the level of
acceptance will continue to grow.
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<PAGE>
While the Company continues its sales and marketing campaigns to
successfully launch these new products there can be no assurance that they
will continue to be accepted in the marketplace. Further, the Company
continues its efforts to increase its manufacturing output for these new
products to meet the sales and projected sales demand and there can be no
assurances that the Company will be successful in manufacturing the required
unit volumes.
SyQuest removable-cartridge hard drive technology is different from the most
widely used data storage devices today (hard disk drives, floppy disk drives
and CD-ROM drives). Other types of read/writable data storage devices have
achieved widespread market acceptance in recent years and there can be no
assurance that the Company's new products will achieve the same 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 "Risk Factors--Competition" and "--Shortages of Critical
Components; Absence of Supply Contracts; Supplier Workouts." There can be no
assurance that the Company will be successful in achieving market acceptance.
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.
While the Company's products are also used for some software distribution,
there can be no assurances that software distribution on the Company's will
continue. The failure of the Company's new products to achieve widespread
commercial acceptance would have a material adverse effect on the Company's
financial results and business.
CONTINUED SALES OF THE EZ FLYER 230 AND LEGACY PRODUCTS
While the Company believes that the EZ Flyer 230 will continue to be a
contributor to the Company's revenue in the near future, there can be no
assurances, in the face of increased competition and higher capacity
solutions, that the demand for the EZ Flyer 230 will continue at current
levels.
The Company has a group of "legacy" products that represent earlier
generations of removable cartridge hard drive products. These legacy products
have generally been replaced by new generation products with greater
performance and capacity. The Company continues to sell its legacy products to
support installed systems still in use in the marketplace. There can be no
assurances that sales of legacy products will continue.
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 and fiscal 1997, the Company experienced
disruption in its supply of certain components for a number of reasons
including, industry wide shortages and the shortage of cash to pay suppliers.
During fiscal 1996, component shortages due to limited cash availability
affected the Company's ability to produce EZ Flyer 230 and SyJet products and
limited the Company's ability to implement certain improvement plans.
Moreover, the Company may continue from time to time 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 had a material adverse affect on the
Company's ability to generate sales and the ability to successfully produce
product in volumes necessary to meet demand. If such disruptions are repeated,
the Company's ability to generate sales and increase revenues will be
materially adversely effected.
On July 15, 1996, the Company issued a 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.
The Company conducted similar negotiations with other suppliers, converting a
total of approximately $43.1 million of accounts payable and other obligations
to those suppliers, to notes payable to reflect extended repayment terms. In
September and October 1996, and February, March and April 1997, the Company
received certain of
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<PAGE>
those notes payable in exchange for an aggregate of 8,047,269 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 financial
condition, most of the Company suppliers have transitioned from doing business
with the Company on a C.O.D. basis and are selling to the Company under more
standard commercial terms. However, if the Company were to experience a
shortage of cash as noted above, many of its key suppliers may again require
C.O.D. payments which would place a significant demand on the Company's
available cash resources that may limit its financial flexibility and 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 level
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, OR Technology 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. Additionally, Avastor,
Nomai and Caleb have products that compete with SyQuest products. Sony
Corporation and Fuji Photo Film Co. have also recently announced a jointly
developed "HiFD" 3.5 floppy disk system with a 200 Megabyte storage capacity.
If successfully marketed, these drives would compete with the Company's EZ
Flyer 230 products. The Iomega Zip drive, a high capacity floppy disk drive,
is also a competitor to EZ Flyer 230. The JAZ and JAZ II drives are removable
hard drives and compete 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. In addition, 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.
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 3
gigabytes (GB) or more, while
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<PAGE>
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
continually to develop and introduce, in a timely manner, new removable
cartridge hard 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's products are targeted for sale
into the Company's traditional customer base in the desktop publishing, pre-
press and service bureau segments, computer, audio and video OEMs, retail, as
well as to a broad array of users in the SOHO (Small Office/Home Office)
market segment. There can be no assurance that the Company will be successful
in developing, manufacturing and marketing cost effective products that meet
both the performance and price demands of the data storage market.
DEPENDENCE ON STRATEGIC MARKETING ALLIANCES
The Company's business strategy will be enhanced in significant part by
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 product 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 important 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 for cartridges and others for manufacture and
subassembly of components.
In January of 1997, the Company filed a suit against Nomai, S.A. and certain
other defendants in the United States District Court for the Northern District
of California alleging, among other things, patent infringement and violation
of trademark and unfair competition laws. On May 23, 1997, Nomai filed a
counterclaim against the Company alleging, among other things, breach of
contract and violations of the unfair competition laws. The parties have
entered into a settlement agreement (the "Settlement Agreement") and filed a
dismissal in this action.
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 and to make Legend the exclusive distributor of the
Company's 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 has the requisite skills to manufacture the
Company's removable cartridge hard drives and products. Legend and the Company
would contribute the capital required for the joint venture. 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
establishing the joint venture, or that the Company will successfully
establish additional relationships in the future or successfully manage such
manufacturing relationships. The Company's manufacturing relationships are
generally not covered by binding
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contracts and may be subject to unilateral termination by the Company's
manufacturing partners. 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 have had an impact on
the Company's products and have contributed 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 be likely to result in a significant reduction in the market price
of the Common Stock.
The revenue, operating loss and loss per share for the four quarters of the
fiscal year ended September 30, 1997 are presented below to illustrate the
quarterly fluctuations during the most recent fiscal year. The loss per share
has been recalculated in order to be presented on a consistent basis with the
re-statement discussed in footnote Number 10 & the Consolidated Financial
Statements. The accounting presentation had no impact on the reported
operating loss.
<TABLE>
<CAPTION>
(1) Q1 Q2 Q3 Q4
--- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenue................................. $ 48.3 $ 16.8 $ 31.7 $ 25.9
Net Loss................................ $ (6.8) $ (33.7) $ (10.7) $ (17.5)
Loss Per Share.......................... $ (0.86) $ (1.31) $ (.31) $ (.33)
Weighted average shares................. 14,673 26,206 44,054 53,806
</TABLE>
- --------
(1) table is presented in millions, except per share amounts.
DEPENDENCE ON PROPRIETARY TECHNOLOGY; INTELLECTUAL PROPERTY LITIGATION
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 would be materially
adversely affected if any unlicensed parties develop removable cartridges
compatible with the Company's disk drives.
On July 23, 1997, Iomega Corporation ("Iomega") filed civil action No. 97-
466 in the United States District Court in and for the District of Delaware
against SyQuest Technology Inc. The law suit alleges that SyQuest has
infringed Iomega's Design Patent No. D378,518 and U.S. Patent No. 5,644,444 by
making and selling computer disk cartridges and drives which embody alleged
inventions of those patents and that SyQuest has willfully infringed Iomega's
alleged trademark "JET". The complaint requests money damages and a
preliminary and permanent injunction enjoining SyQuest from further
infringement. The Company believes that it does not infringe any valid patent
claims or trademarks of Iomega and intends to vigorously defend against this
action.
The Company has filed suit against Castlewood Systems, Inc. and certain of
its employees and consultants for misappropriation of trade secrets, unfair
competition and other specified claims. Castlewood Systems, Inc. has filed a
cross-complaint against the Company alleging interference with prospective
economic advantage, unfair competition and trade libel. The Company believes
that these cross-claims are without merit and intends to vigorously defend
against them.
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<PAGE>
In 1996, the Company filed suit against Nomai, S.A. (Nomai) and Maxell in
France for copyright and patent infringement. The Company initiated an
arbitration proceeding against Nomai seeking payment of outstanding royalties
of approximately $1 million. On January 27, 1997, the Company filed a suit
against Nomai, S.A., Electronique d2 and La Cie Ltd. in Federal district court
in San Francisco for patent, trademark and copyright infringement, unfair
competition and breach of contract. The suit alleges that Nomai and others
have illegally used the Company's proprietary technology in certain of Nomai's
competing products. The suit seeks to block further sales of such products
along with damages deriving from harm done to the Company by this conduct.
Nomai filed a counter claim including claims for breach of contract,
misrepresentation, interference with contract and unfair competition. Both
suits have been terminated pursuant to the Settlement Agreement. See "Reliance
on Manufacturing Relationships; Nomai Lawsuits."
Periodically, the Company is made aware that technology used by the Company
in the manufacture of some or all of its products may infringe on product or
process technology rights held by others. Resolution of whether the Company's
manufacture of products has infringed on valid rights held by others could
have a material adverse effect on the Company's financial position or results
of operations, and may require material changes in production processes and
products. Several companies have individually contacted the Company concerning
its alleged use of intellectual property belonging to them. Companies that
have contacted the Company include one company that has alleged that the
Company's products infringe six 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 in the
event this company prevailed on its claims, the Company would be indemnified
by its vendors 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. Another company has notified the Company
that it believes a number of the Company's removable cartridge hard drives
products infringe several of its patents relating to the use of spin motors in
disc drives. The Company believes that its removable cartridge hard drive
products do not infringe the claims of these patents and that some or all of
the asserted patents are invalid.
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 have been or 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, 1996 and 1997, 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 decrease 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 Company's success will depend in large part upon the capabilities of the
members of the new management team, most of whom have been with the Company
for less than 18 months. The inability of such
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<PAGE>
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. There can be no assurance that the Company will be
successful in attracting and retaining the quantity and quality of personnel
that it needs.
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 in
the past 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, can result and has resulted 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, is
restricted from paying cash dividends pursuant to a credit agreement with its
lender, and it does not anticipate paying cash dividends in the foreseeable
future.
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 buildup 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 especially during periods of transition to
new products. 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
26
<PAGE>
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, 1997, the customers with the ten highest accounts
receivable balances totaled $15.2 million, or 60%, of gross accounts
receivable at that date. 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 410,000 shares of preferred stock have been issued:
20,000 shares of 7% Cumulative Preferred Stock; 5,500 shares of Convertible
Preferred Stock, 24,500 shares of Series 2 Preferred Stock; 50,000 shares of
Series 3 Preferred Stock, 280,000 shares of Series 4 Preferred Stock and
30,000 shares of the Series 5 Preferred Stock, all of which, except for the
Series 4 Preferred Stock and Series 5 Preferred Stock, have been converted.
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.
SECURITIES CLASS AND DERIVATIVE 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 Belleza, et al. v. Iftikar, et al. (filed May 24, 1996) have 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. 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 certain alleged material misrepresentations and
omissions. In January 1997, the federal court denied the motion of certain
plaintiffs to be appointed lead plaintiffs under the Private Securities
Litigation Reform Act of 1995 (the "Reform Act") on the ground, inter alia,
that the plaintiffs' published notice to the class did not constitute adequate
notice of the litigation under the Reform Act. In July 1997, the federal court
denied a motion for reconsideration of its prior order and directed the
plaintiffs to issue a revised notice and/or amend their complaint by August
22, 1997, or be subject to a motion to dismiss or for summary judgement.
Plaintiffs have informed the federal court that they elect to stand on the
existing notice and Complaint.
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"). 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
Kaufman Lawsuit and the Ravens Lawsuit (collectively the "State Court
Lawsuit") have been consolidated and a Consolidated Amended Complaint was
filed on December 6, 1996. The plaintiffs in the State Court Lawsuit allege
27
<PAGE>
that the Company and certain of its former officers and directors violated
various California laws through certain alleged material representations and
seek unspecified damages on behalf of all persons who purchased the Company's
Common Stock from October 21, 1994 and February 1, 1996. Pursuant to a
Stipulation and Order entered on August 6, 1997, the State Court Lawsuit has
been referred to mediation by a retired federal judge.
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. Counsel for plaintiffs in the Derivative
Lawsuit are participating in the mediation ordered for the State Court Lawsuit
that is described above.
The Company intends to defend the Federal Lawsuit, the State Court Lawsuit
and the Derivative Lawsuit vigorously, but there can be no assurance as to
what financial effect this litigation may have on the Company.
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 in this
prospectus, 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.
28
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
For the years ended September 30, 1997, 1996, and 1995
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Price Waterhouse LLP, Independent Accountants................... 30
Report of Ernst & Young LLP, Independent Auditors......................... 31
Consolidated Statement of Results of Operations--Years Ended September 30,
1997, 1996, and 1995..................................................... 32
Consolidated Statement of Financial Condition--September 30, 1997, and
1996..................................................................... 33
Consolidated Statement of Cash Flows--Years Ended September 30, 1997,
1996, and 1995........................................................... 34
Consolidated Statement of Stockholders' Equity--Years Ended September 30,
1997, 1996, and 1995..................................................... 35
Notes to Consolidated Financial Statements................................ 37
</TABLE>
29
<PAGE>
REPORT OF PRICE WATERHOUSE LLP, INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders
SyQuest Technology, Inc.
In our opinion the consolidated financial statements, listed in the index
appearing in Item 14(a)(1) and (2) on page 53 present fairly, in all material
respects, the consolidated financial position of SyQuest Technology, Inc. and
subsidiaries at September 30, 1997, and the consolidated results of their
operations and their cash flows for the year ended September 30, 1997, in
conformity with generally accepted accounting principles. 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 audit. We conducted our audit 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
audit provides a reasonable basis for our opinion.
Price Waterhouse LLP
San Jose, California
December 29, 1997
30
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
SyQuest Technology, Inc.
We have audited the accompanying consolidated balance sheet of SyQuest
Technology, Inc. and subsidiaries as of September 30, 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows
for each of the two years in the period ended September 30, 1996. Our audits
also included the financial statement schedule for each of the two years in
the period ended September 30, 1996 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.
Since the date of completion of our audit of the accompanying consolidated
financial statements and initial issuance of our report thereon dated December
11, 1996, the Company, as discussed in Note 1 "Basis of Presentation",
paragraph 3, has experienced operating losses and a reduction in revenues that
has adversely affected the Company's reported results of operations for the
first two fiscal quarters of 1997. Note 1 "Basis of Presentation", paragraph
3, describes management's plans to address these issues.
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 the
consolidated results of their operations and their cash flows for each of the
two 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.
/s/Ernst & Young, LLP
San Jose, California
December 11, 1996, except for Note 1, "Basis of
Presentation", paragraph 3 as to which the date is June 27, 1997
31
<PAGE>
SYQUEST TECHNOLOGY, INC.
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1997 1996
------------- -------------
(IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
Current assets:
Cash and cash equivalents........................ $ 7,083 $ 3,670
Accounts receivable, net......................... 19,535 30,341
Inventories, net................................. 26,737 10,538
Prepaid expenses and deposits.................... 6,049 2,471
-------- ---------
Total current assets........................... 59,404 47,020
Net plant, property and equipment.................. 22,999 27,180
Other assets....................................... 246 981
-------- ---------
Total Assets....................................... $ 82,649 $ 75,181
======== =========
Current liabilities:
Short-term borrowings............................ $ 23,291 $ 19,268
Accounts payable................................. 14,800 23,917
Accrued liabilities.............................. 15,532 20,637
Current portion of long-term debt................ 4,345 20,549
-------- ---------
Total current liabilities...................... 57,968 84,371
Long-term debt..................................... 4,024 20,971
Other long-term liabilities........................ 959 192
Mandatory Redeemable Warrants...................... 14,085 --
Stockholders' equity (deficit):
Preferred stock, $.0001 par value in 1997 and
$.001 in 1996: 4,000,000 shares authorized;
129,000 and 19,193 shares issued and outstand-
ing............................................. -- 18
Common stock, $.0001 par value in 1997 and $.001
in 1996: 120,000,000 and 60,000,000 shares
authorized; 59,887,000 and 12,312,769 shares
issued and outstanding.......................... 6 14
Additional paid in capital....................... 222,766 108,262
Treasury common stock at cost--1,225,000 shares
in 1997 and 1996................................ (12,855) (12,855)
Retained deficit................................. (204,304) (125,792)
-------- ---------
Total stockholders' equity (deficit)........... 5,613 (30,353)
======== =========
Total Liabilities and Shareholders Equity.......... $ 82,649 $ 75,181
======== =========
</TABLE>
See accompanying notes.
32
<PAGE>
SYQUEST TECHNOLOGY, INC.
CONSOLIDATED STATEMENT OF RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
------------------------------------
1997 1996 1995
----------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Net revenue.............................. $ 122,723 $ 200,407 $ 299,544
Cost of revenue.......................... 123,624 248,693 248,497
---------- ----------- ----------
Gross Profit (loss)...................... (901) (48,286) 51,047
Operating Expenses:
Selling, general and administrative.... 45,074 51,743 44,264
Research and development............... 17,996 25,920 23,892
Restructuring costs.................... -- 4,727 --
---------- ----------- ----------
Total operating expenses................. 63,070 82,390 68,156
Loss from operations..................... (63,971) (130,676) (17,109)
Interest income/(expense)................ (4,350) (1,037) 1,134
Other income/expense..................... -- (1,938) 468
---------- ----------- ----------
Net Loss before income taxes............. (68,321) (133,651) (15,507)
Provision for Income Taxes............. (350) (3,000) 3,721
Net Loss................................. (68,671) (136,651) (11,786)
---------- ----------- ----------
Embedded Yield on Preferred Stock........ (5,300) (5,682) --
Preferred Stock Dividend................. (1,991) -- --
Valued Assigned to Warrants.............. (2,550) -- --
---------- ----------- ----------
Net Loss applicable to common stock
holders................................. (78,512) (142,333) (11,786)
========== =========== ==========
Net Loss per share....................... $ (2.25) $ (12.38) $ (1.07)
========== =========== ==========
Common and common equivalent shares used
in computing per share amounts.......... 34,815 11,497 11,063
========== =========== ==========
</TABLE>
See accompanying notes.
33
<PAGE>
SYQUEST TECHNOLOGY, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
TOTAL
PREFERRED STOCK COMMON STOCK ADDITIONAL TREASURY
----------------- -------------- PAID-IN- COMMON ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL STOCK DEFICIT TOTAL
------- ------- ------ ------ ---------- -------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at October 1,
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 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 -- -- --
Embedded yield on
preferred stock........ -- -- -- -- 5,682 -- (5,682) --
Net loss................ -- -- -- -- -- -- (136,651) (136,651)
------- ------- ------ ---- -------- -------- --------- ---------
Balance at September 30,
1996................... 19 18 12,313 14 108,262 (12,855) (125,792) (30,353)
Issuance of common
stock.................. -- -- 3,294 3 11,367 -- -- 11,370
Issue preferred stock
and warrants, net...... 380 -- -- -- 67,348 -- -- 67,348
Conversion of debt to
equity................. -- -- 7,677 8 24,813 -- -- 24,821
Conversion of preferred
stock into common
stock.................. (276) (18) 36,175 36 (18) -- -- --
Preferred dividends paid
in preferred and common
stock.................. 6 -- 428 -- 1,991 -- (1,991) --
Adjustment due to change
in par value........... -- -- -- (55) 55 -- -- --
Warrants issued for
services received...... -- -- -- -- 1,098 -- -- 1,098
Embedded yield and
warrant value on
preferred stock........ -- -- -- -- 7,850 -- (7,850) --
Net loss................ -- -- -- -- -- -- (68,671) (68,671)
------- ------- ------ ---- -------- -------- --------- ---------
Balance September 30,
1997................... 129 $ -- 59,887 $ 6 $222,766 $(12,855) $(204,304) $ 5,613
======= ======= ====== ==== ======== ======== ========= =========
</TABLE>
See accompanying notes.
34
<PAGE>
SYQUEST TECHNOLOGY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
1997 1996 1995
-------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Operating Activities:
Net (loss).................................... $(68,671) $(136,651) $(11,786)
Adjustment to reconcile net (loss) to cash
used in operating activities:
Depreciation................................ 7,874 10,578 8,052
Deferred income taxes....................... -- 4,528 (4,227)
Write-off of fixed assets................... 2,296 6,782 99
Other....................................... 374 (84) 26
Net cash used in operating activities
Accounts receivable......................... 9,892 25,312 (8,934)
Inventories................................. (16,199) 23,675 (22,065)
Accounts payable............................ (3,216) 13,413 15,161
Accrued expenses and other liabilities...... (3,123) 2,148 16,498
Other....................................... (3,342) (405) (359)
-------- --------- --------
Net cash used in operating activities......... (74,115) (50,704) (7,535)
Investing activities:
Purchase of short-term Investments............ -- -- (3,178)
Purchase of equipment and leasehold improve-
ments........................................ (5,990) (17,820) (12,509)
Other......................................... -- (675) (799)
Proceeds from sale of short-term investments.. -- -- 4,893
-------- --------- --------
Net cash used in investing activities......... (5,990) (18,495) (11,593)
Financing activites:
Proceeds from issuance of common stock and
warrants..................................... 12,442 1,772 3,994
Proceeds from issuance of preferred stock and
warrants..................................... 80,200 19,000 --
Purchase of treasury stock.................... -- -- (1,200)
Net proceeds from bank borrowings............. 4,023 22,875 --
Repayments of long-term debt.................. (13,147) (426) --
-------- --------- --------
Net cash provided by financing activities..... 83,518 43,221 2,794
Net increase (decrease) in cash and cash equiva-
lents.......................................... 3,413 (25,978) (16,334)
Cash and cash equivalents at beginning of the
period......................................... 3,670 29,648 45,982
-------- --------- --------
Cash and cash equivalents at end of the period.. $ 7,083 $ 3,670 $ 29,648
======== ========= ========
</TABLE>
See accompanying notes.
35
<PAGE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ -----
<S> <C> <C> <C>
Conversion of debt and accounts payable to common
stock.............................................. 24,821 4,638 --
Interest paid....................................... 4,295 1,100 --
Taxes paid.......................................... -- 900 --
</TABLE>
36
<PAGE>
SYQUEST TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of these 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.
Prior Year Presentation
Certain prior years statement of financial condition, statement of results
of operations, and statement of cash flow amounts have been reclassified to
conform to the 1997 presentation.
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
$205,322,000 including a net loss of $68,671,000 for the year ended September
30, 1997. Working capital at September 30, 1997 was $1,436,000 as compared to
$(37,351,000) at September 30, 1996.
Management's financial plans for fiscal 1998 anticipate raising additional
equity capital in order to stimulate business and take advantage of market
opportunities. As discussed in Note 14, during the first quarter of fiscal
1998, the Company raised approximately $36 million of additional equity from
investors. Management continues to pursue other investment opportunities and
expects to raise additional financing as needed.
As disclosed in Forms 10-Q filed with the SEC for the first and second
fiscal quarters of 1997, the Company has released its results from continuing
operations and its financial condition through March 31, 1997. Such Forms 10-Q
address the Company's operating losses, decrease in revenues, subsequent
financing and management's plans to continue to reduce costs, increase
revenues and obtain additional financing.
Cash and Cash Equivalents
Cash equivalents consist of highly liquid investments with a maturity of
three months or less when purchased. These investments consist of income
producing securities, which are readily convertible to cash and are stated at
cost, which approximates market.
Fair Value of Financial Instruments
The carrying value of the Company's financial instruments, including cash
and cash equivalents, accounts receivable, accounts payable, accrued expenses
and liabilities approximate fair value due to their short maturity.
Concentration of Credit Risk
The Company performs on-going credit evaluations of its customer's financial
condition and limits the amount of credit extended when deemed necessary. No
collateral is generally required. The Company maintains an allowance for
potential credit losses which is based on the expected collectibility of all
accounts receivable.
37
<PAGE>
SYQUEST TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997
Management believes that any risk of loss is significantly reduced by the
ongoing and frequent evaluation of customer balances and related allowances.
At September 30, 1997, one customer accounted for approximately 16% of the
Company's worldwide revenues.
Inventories
Inventories are stated at the lower of cost (determined on the first-in,
first-out method) or market. The Company provides for obsolete, slow moving or
excess inventories in the period when obsolescence or inventory in excess of
annual demand is first identified.
Net Plant, Property and Equipment
Net plant, property and equipment is 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 fiscal 1997, the Company adopted Statement of Financial Accounting
Standard No. 121 "Accounting for the Impairment of Long Lived Assets and for
Long Lived Assets to be Disposed Of." Accordingly, the Company evaluates asset
recoverability at each balance sheet date or when an event occurs that may
impair recoverability of the asset.
Revenue Recognition
The Company recognizes revenue upon shipment to customers and provides an
estimated allowance for returns based on the return history experienced by the
Company. The Company also provides an allowance for estimated price protection
upon announcement of a reduction in published prices.
Product Warranty
The Company generally warrants its products for one to three years. A
provision for estimated future warranty costs is recorded at the time of
shipment.
Income Taxes
Deferred tax assets and liabilities are recognized for the expected tax
consequences of temporary differences between the income tax bases of assets
and liabilities and the amounts reported for financial reporting purposes for
all periods presented. (Note 5)
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 and foreign exchange gain and losses are recognized in the
current period results of operations. Foreign currency transaction gains
(losses) of $671,000, ($573,000), and $468,000 are included in other income
and expense for 1997, 1996, and 1995, respectively.
Off Balance Sheet Risk
The Company currently does not enter into foreign currency forward exchange
contracts to hedge exposure related to foreign currency exchange risk and it
does not enter into derivative financial instruments for trading purposes. At
September 30, 1997 and 1996, the Company had no forward exchange contracts
outstanding.
38
<PAGE>
SYQUEST TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997
Stock Based Compensation
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 adopted FAS 123 in
fiscal 1997, however, the Company continued to account for its employee stock
compensation purchase plans in accordance with the provisions of APB 25.
Additional pro forma disclosures as required by SFAS 123 are presented in note
11.
Loss Per Share
Loss per share for years ending September 30, 1997, 1996, and 1995 is based
on the weighted average number of shares of common stock outstanding. All
other common equivalent shares were antidilutive. In 1997, the Financial
Accounting Standards Board released Statement of Financial Accounting Standard
No. 128 (SFAS 128), "Earnings per Share". SFAS 128 is effective for fiscal
years ending after December 15, 1997. The statement redefines earnings per
share under Generally Accepted Accounting Principles. Under the new standard,
primary earnings per share is replaced by basic earnings per share and fully
diluted earnings per share is replaced by diluted earnings per share. If the
Company had adopted SFAS 128, the Company's loss per share would not have been
materially different.
Comprehensive Income
In 1997, the Financial Accounting Standards Board released Statement of
Financial Accounting Standard No. 130 (SFAS 130), "Comprehensive Income". SFAS
130 is effective for fiscal years ending June 30, 1999. The statement
establishes presentation and disclosure requirements for reporting
comprehensive income. Comprehensive income includes charges or credits to
equity that are not the result of transactions with owners. The Company plans
to adopt the disclosure requirement and report comprehensive income as part of
the Consolidated Statement of Stockholders' Equity as required under SFAS 130,
and expects that there will be no material impact on the Company's financial
position and results of operations as a result of the adoption of SFAS 130.
Segments of an Enterprise and Related Information
In 1997, the Financial Accounting Standards Board released Statement of
Financial Accounting Standard No. 131 (SFAS 131), "Disclosures about Segments
of an Enterprise and Related Information Comprehensive Income". SFAS 131 is
effective for the Company's fiscal years ending September 30, 1999. The
statement requires the Company to report certain financial information about
operating segments in the Company's financial statements. It also requires the
Company to report certain information about its products and services, the
geographic areas in which it operates and its major customers. The SFAS
established the "management approach" for reporting which provides that
segments should be reported consistent with management's internal segments for
operation decision making purposes and assessing performance.
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. At September 1997, one customer accounted
for approximately 16% of the Company's worldwide revenues.
39
<PAGE>
SYQUEST TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997
The following tables summarize the Company's operations in different
geographic areas:
<TABLE>
<CAPTION>
ADJUSTMENTS
NORTH AND
AMERICA EUROPE FAR EAST ELIMINATIONS CONSOLIDATED
--------- ------- -------- ------------ ------------
1997 (IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Sales to unaffiliated
customers.............. $ 69,146 $43,854 $ 9,723 -- $ 122,723
Transfers between geo-
graphic locations...... $ 10,370 $ 5,719 $117,503 $(133,592) --
Loss from Operations.... $ (64,125) $ 74 $ 3,759 $ (3,679) $ (63,971)
Identifiable Assets..... $ 56,191 $ 4,971 $ 28,642 $ (7,155) $ 82,649
1996
Sales to unaffiliated
customers.............. $ 131,122 $57,235 $ 12,050 -- $ 200,407
Transfers between geo-
graphic locations...... $ 27,060 $21,718 $228,288 $(277,066) --
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 geo-
graphic locations...... $ 8,590 -- $256,106 $(264,696) --
Loss from Operations.... $ (20,973) -- $ 5,618 $ (1,754) $ (17,109)
Identifiable Assets..... $ 97,008 -- $ 73,483 $ (5,807) $ 164,484
</TABLE>
Sales and transfers between geographic areas generally provide a profit.
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.
3. SUPPLEMENTARY BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Accounts receivable:
Accounts receivable...................................... $25,318 $36,035
Less allowances ......................................... (5,783) (5,694)
------- -------
$19,535 $30,341
======= =======
Inventories:
Raw materials............................................ $13,675 $ 5,005
Work-in-process.......................................... 6,840 4,481
Finished goods........................................... 6,222 1,052
------- -------
$26,737 $10,538
======= =======
Property, equipment and leasehold improvements:
Equipment................................................ 47,971 49,340
Furniture and Fixtures................................... 5,734 2,710
Property and leasehold improvements...................... 10,001 9,896
------- -------
63,706 61,946
Accumulated depreciation and amortization................ 40,707 34,765
------- -------
22,999 27,180
======= =======
Accrued expenses and other liabilities:
Accrued Warranty......................................... 1,832 6,757
Advertising.............................................. 2,123 2,999
Accrued compensation and benefits........................ 2,451 3,811
Other.................................................... 9,126 7,070
------- -------
15,532 20,637
======= =======
</TABLE>
40
<PAGE>
SYQUEST TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997
4. BORROWINGS AND COMMITMENTS
At September 30, 1997, the Company had a line of credit agreement with a
U.S. financial institution, expiring March 1998. Borrowings under the
agreement bear interest at "LIBOR" (London Interbank Offered Rate) plus 4.825%
(10.75% at September 30, 1997 and 10.25% at September 30, 1996). The Company
is obligated to pay $10,000 of interest per month, regardless of outstanding
borrowings. The agreement provides for borrowings not to exceed $30 million or
an amount equal to 80% of the Company's eligible accounts receivables plus the
lesser of 40% of the Company's eligible finished goods inventories or $5.0
million. The agreement places limitations on additional borrowings and payment
of cash dividends. As of September 30, 1997, approximately $17.6 million of
borrowings were outstanding under the line of credit agreement.
On September 30, 1997, The Company's had a revolving banking facility (the
"facility") with a Malaysian financial institution consisting of a line of
credit of Malaysian Ringitts (RM) 17.5 million (approximately $5.4 million)
expiring March 1998 and a term loan of (RM) 9.9 million (approximately $3.0
million). The interest rate associated with the line of credit was 8.85% at
September 30, 1997, as compared to 8.28% at September 30, 1996. The term loan
is to be repaid in 120 monthly installments which began July 1997, and bears
interest at the rate of 1.0% over the bank's base lending rate (10.65% at
September 30, 1997 and 9.15% at September 30, 1996). The term loan has a
related overdraft facility of (RM) 2.0 million (approximately $0.6 million)
due on demand. The facility is secured by the subsidiary's building,
equipment, inventory and eligible receivables.
During fiscal years 1997 and 1996, the Company converted approximately $33.0
million in accounts payable and purchase commitments with certain suppliers to
notes payable. The notes, which bear interest at a rate of 10%, are scheduled
to be repaid by September 1998.
On July 15, 1996, the Company issued a 6% Convertible Subordinated Debenture
to a supplier in the amount of $7.7 million. 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, 1997, none of
the principal of the debenture had been converted to Common Stock. The balance
of the debenture agreement of approximately $3.5 million at September 30, 1997
is scheduled to be repaid by February 1999.
Lines of credit, term loan and notes payable obligations consist of the
following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Short-term Borrowings
Line of Credit, expiring March 1998...................... $17,619 $14,729
Line of Credit, principal and interest due on demand..... 5,383 4,010
Overdraft facility to term loan.......................... 289 529
------- -------
Total short term....................................... 23,291 19,268
Long-term Debt
Term Loan, payments due in monthly installments through
June 2007............................................... 3,039 3,607
Subordinated Debenture, payable in monthly installments
through February 1999................................... 3,544 7,252
Notes Payable to suppliers, payable in monthly
installments through September 1998..................... 1,786 30,661
------- -------
Total long-term debt................................... 8,369 41,520
------- -------
Total Debt................................................. 31,660 60,788
Less: Current portion...................................... 27,636 39,817
------- -------
Long-term debt............................................. $ 4,024 $20,971
======= =======
</TABLE>
41
<PAGE>
SYQUEST TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997
Future minimum payments on lines of credit, term loan and notes payable are
as follows (in thousands):
<TABLE>
<S> <C>
1998............................................................... $27,636
1999............................................................... 1,480
2000............................................................... 495
2001............................................................... 495
2002............................................................... 495
Thereafter......................................................... 1,059
Total minimum payments............................................... $31,660
</TABLE>
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.
Total rent expense amounted to $2,300,000, $2,507,000, and $3,250,000 for
1997, 1996, and 1995, respectively.
Future minimum rental commitments under non-cancelable operating leases are
as follows (in thousands):
<TABLE>
<S> <C>
1998................................................................. 2,230
1999................................................................. 1,425
2000................................................................. 197
2001................................................................. 13
------
Total minimum lease payments......................................... $3,865
======
</TABLE>
5. INCOME TAXES
The income tax provisions for fiscal 1997, 1996, and 1995 consist of the
following:
<TABLE>
<CAPTION>
1997 1996 1995
---- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Federal:
Current............................................ $-- $(1,528) $ (421)
Deferred........................................... -- 3,197 (2,578)
---- ------- -------
1,669 (2,999)
State:
Current............................................ -- -- 181
Deferred........................................... -- 1,331 (928)
---- ------- -------
-- 1,331 (747)
Foreign:
Current............................................ 350 -- 25
---- ------- -------
Provision (benefit) for income taxes............... 350 $ 3,000 $(3,721)
==== ======= =======
</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:
42
<PAGE>
SYQUEST TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Deferred Tax Assets
Credit carryforward...................................... $ 1,894 $ 1,894
Receivable reserves...................................... 2,295 2,979
Warranty reserves........................................ 724 1,575
Inventory valuation reserve.............................. 6,372 7,142
Domestic and foreign tax net operating losses............ 64,465 38,997
Other.................................................... 2,819 3,056
-------- --------
Total deferred tax assets................................ 78,569 55,643
Valuation allowance...................................... (71,844) (50,061)
-------- --------
Net deferred tax assets.................................. 6,725 5,582
Deferred Tax Liabilities................................. (6,725) (5,582)
-------- --------
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, 1997 has been established to reflect these uncertainties.
The reconciliation of income taxes provided at the federal statutory rate to
the income tax provision follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Income taxes (benefit) computed at the federal
statutory rate................................ $(24,035) $(46,610) $(5,272)
State income taxes (benefit) net of federal in-
come taxes effect............................. - -- (511)
Foreign losses for which no current tax benefit
is recognizable............................... 2,602 1,366 --
Taxes provided on earnings of foreign subsidi-
aries previously considered to be permanently
invested in non-US operations................. -- -- 1,768
Utilization of tax credits..................... -- -- (566)
Valuation allowance for deferred tax assets.... 21,783 48,244 427
Other.......................................... -- -- 433
-------- -------- -------
$ 350 $ 3,000 $(3,721)
======== ======== =======
</TABLE>
Income taxes paid (refunded) were ($3,139,000), and $1,600,000, in fiscal
1996, and 1995, respectively.
The Company has approximately $12,000,000 in foreign net operating loss
carryforwards. These carryforwards will expire in fiscal 1999 through fiscal
2002.
At September 30, 1997, the Company had federal net operating loss
carryforwards of approximately $163 million. These carryforwards will expire
in 2010 and 2011 if not utilized. The Company had state net operating loss
carryforwards of approximately $93 million that will expire in 2002 if not
utilized. In addition, the Company had research and development tax credit
carryforwards for federal and state tax purposes of approximately $1.3 million
and $0.4 million, respectively. The federal tax credit carryforwards will
expire beginning in fiscal 2007 if not utilized.
43
<PAGE>
SYQUEST TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997
During fiscal 1997, the Company experienced 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.
6. RESTRUCTURING CHARGES
In the quarter ended March 31, 1996, the Company developed and began
implementation of a plan to relocate the international 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. 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 1997. 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, 1997. These shares are held as treasury stock at September
30, 1997.
8. CONVERTIBLE PREFERRED STOCK
In June 1996, the Company issued 20,000 shares of 7% Cumulative Convertible
Preferred Stock, Series 1 ("Series 1") for net proceeds of approximately $19.0
million. The shares were convertible at the lessor of $11.0 per share or 77%
of the average market price for the 5 trading days immediately preceding
conversion. At September 30, 1997, all of the "Series 1" shares had been
converted into approximately 10,301,708 shares of the Company's common stock.
Refer to the Annual Report on Form 10-K for the period ending 1996 for further
information on the Series 1 transaction.
In October 1996, the Company issued 5,500 shares of its Cumulative
Convertible Preferred Stock, Series 1 ("Convertible Preferred Stock") for
proceeds of $5,500,000. In order to minimize the discount to market present in
the "Series 1" financing, the "Convertible Preferred Stock" included warrant
coverage to acquire 550,000 shares of the Company's Common Stock at an
exercise price of $5.50 per share. The "Convertible Preferred Stock" was
convertible at the lessor of $6.50 per share or 85% of the average market
price for the 5 trading days immediately preceding conversion. In addition to
the warrants noted above, the holders of the Series 1 Preferred Stock were
entitled to receive, for every three shares of Common Stock acquired through
conversion,
44
<PAGE>
SYQUEST TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997
a warrant to purchase one share of Common Stock at an exercise price equal to
the lesser of $7.15per share or 110% of the average market price for the 5
trading days immediately preceding conversion. All "Series 1" warrants expire
three years after the date of issue. At September 30, 1997, all of the
"Convertible Preferred Stock" had been converted into approximately 3,289,981
shares of the Company's Common Stock. Refer to the Company's October 31, 1996
8-K for a more detailed description of the "Convertible Preferred Stock"
transaction.
In October 1996, the Company also issued 24,500 shares of its 5% Cumulative
Convertible Preferred Stock, Series 2 ("Series 2") for proceeds of
$24,500,000. The "Series 2" financing included warrant coverage to acquire
approximately 4,146,816 shares of the Company's Common Stock. The "Series 2"
Stock was convertible at the lessor of $6.50 per share or 85% of the average
market price for the 5 trading days immediately preceding conversion. The
"Series 2" warrant formula specified that for every three shares of Common
Stock acquired through conversion, the holder would receive a warrant to
purchase one share of Common Stock at an exercise price equal to the lesser of
$7.15per share or 110% of the average market price for the 5 trading days
immediately preceding conversion. The "Series 2" warrants expire in three
years after the date of issue. The "Series 2" stock also contained a 5%
cumulative dividend payable in cash or common stock at the option of the
Company. At September 30, 1997, all of the "Series 2" Stock had been converted
into approximately 12,440,447 shares of the Company's Common Stock. Refer to
the Company's October 31, 1996 8-K for a more detailed description of the
"Series 2" transaction.
In April 1997, the Company issued 50,000 shares of its 5% Cumulative
Convertible Preferred Stock, Series 3 ( "Series 3") for proceeds of
$5,000,000. The "Series 3" stock is convertible at the greater of the
arithmetical average of the closing sale price of the Common Stock for the 5
trading days immediately preceding the conversion or 90% of the closing sale
price the day before the conversion, but not greater than the closing sale
price on April 2, 1997 ($2.25). The "Series 3" Stock included warrant coverage
to acquire 5,000,000 shares of the Company's Common Stock at an exercise price
equal to the greater of the arithmetical average of the closing sale price of
the Common Stock for the 5 trading days immediately preceding the exercise of
the warrants or 90% of the closing sale price of the Common Stock on the day
immediately prior to the exercise of the warrants, but in no event greater
than $2.25 per share. The warrants expire seven years from the date of
issuance. The "Series 3" stock also contained a 5% cumulative dividend payable
in cash or common stock at the option of the Company. At September 30, 1997,
25,000 shares of the "Series 3" stock have been converted into approximately
1,386,500 shares of the Company's Common Stock. Refer to the Company's April
14, 1997 8-K for a more detailed description of the "Series 3" transaction.
In May 1997, the Company issued 280,000 shares of its 5% Cumulative
Convertible Preferred Stock, Series 4 ( "Series 4") for proceeds of
$28,000,000. The "Series 4" stock is convertible at the greater of the
arithmetical average of the closing sale prices of the Common Stock for the 5
trading days immediately preceding the conversion or 90% of the closing sale
price the day before the conversion, but in no event greater than $2.3438 The
"Series 4" Stock included warrant coverage to acquire 28,000,000 shares of the
Company's Common Stock. The "Series 4" stock also contained a 5% cumulative
dividend payable in cash or common stock at the option of the Company. At
September 30, 1997, 25,000 shares of the "Series 4" stock have been converted
into approximately 1,386,500 shares of the Company's Common Stock. Refer to
the Company's May 30, 1997 8-K for a more detailed description of the "Series
4" transaction. The exercise price (the "Exercise Price")of the Warrants will
be the greater of the arithmetical average of the closing sales price per
share of common stock on the five consecutive trading days preceding the
delivery of the Exercise Notice (as defined below) and 90% of such closing
sale price on the day immediately prior to the delivery of the Exercise
Notice, but in any event not greater than $3.0469 per share. (The Warrants
issued to the Purchasers are not exercisable until the lapse of a period
ending on the sixty-fifth day after such Purchaser delivers a notice to
Registrant
45
<PAGE>
SYQUEST TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997
designating an aggregate number of Warrant Shares to be purchased. Once such
notice is given and the 65-dayperiod has passed, a Purchaser may exercise its
Warrant up to the number of shares designated in the 65-day notice by
providing further notice to Registrant that the Purchaser is exercising the
Warrant (the "Exercise Notice"). The Warrants expire seven years from the date
of each Purchaser's respective Agreement.)
In September, 1997, the Company issued 20,000 shares of its 5% Cumulative
Convertible Preferred Stock, Series 5 ( "Series 5") for proceeds of
$20,000,000. The "Series 5" stock is convertible at the greater of the
arithmetical average of the closing sale prices of the Common Stock for the 5
trading days immediately preceding the conversion or 90% of the closing sale
price the day before the conversion, but in no event greater than $3.0469. The
"Series 5" Stock included warrant coverage to acquire 14,000,000 shares of the
Company's Common Stock at an exercise price equal to the greater of the
arithmetical average of the closing sale price of the Common Stock for the 5
trading days immediately preceding the exercise of the warrants or 90% of the
closing sale price of the Common Stock on the day immediately prior to the
exercise of the warrants, but in no event greater than $3.0469 per share. The
warrants expire seven years from the date of issuance. At September 30, 1997,
none of the "Series 5" stock had been converted. Refer to the Company's August
4, 1997 8-K for a more detailed description of the "Series 5" transaction.
Holders of the Company's Preferred Stock have no voting rights. In the event
of a voluntary or involuntary liquidation, the holders of the Preferred Stock
have a liquidation preference over the holders of the Company's Common Stock.
9. MANDATORILY REDEEMABLE SECURITIES
The Series 3 and Series 4 warrants noted above and certain warrants issued
with common stock contain a mandatory redemption feature whereby in the event
of an unsolicited tender offer for the majority of the Company's then
outstanding Common Stock ("change in control"), at the option of the warrant
holder, the warrants become redeemable for the cash value of the warrants. The
warrant agreement specifies the methodology to be used to determine the cash
value in the event of a change in control. Consequently, at September 30,
1997, the fair value of the warrants has been classified as temporary equity
on the Consolidated Statement of Financial Condition.
The Series 5 warrants contain a clause whereby if the Company is unable to
provide sufficient shares of the Company's Common Stock to completely fulfill
the exercise of the warrants, then the Company must pay the warrant holder
parity for each warrant share tendered for exercise. Parity is determined as
the difference between the fair market value of the Company's Stock on the
date of exercise and the exercise price of the warrants. Consequently, at
September 30, 1997, the fair value of the warrants has been classified as
temporary equity on the Consolidated Statement of Financial Condition. This
clause was removed as a result of the shareholder vote discussed further at
the subsequent events footnote at note 14.
10. RESTATEMENT
The financial statements for the year ended September 30, 1997 have been re-
stated to reflect the classification of the fair value assigned to warrants
issued during the year (that were subject to the mandatory redemption features
noted above) as a liability on the Consolidated Statement of Financial
Condition. Total Stockholders' Equity on the Consolidated Statement of
Financial Condition at September 30, 1997 has been reduced by the fair value
assigned to warrants of $14.1 million to $5.6 million. The fair value assigned
to the warrants is based on an independent appraisal received by the Company.
In addition, the fair value of warrants issued in connection with certain
mandatorily redeemable Preferred Stock has been reflected as reducing the
income available to common shareholders for the purposes of the earnings per
share computation. Previously, the Company had included the fair value of
warrants issued in
46
<PAGE>
SYQUEST TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997
conjunction with all Preferred Stock in the determination of the earnings per
share. Accordingly, the reported net loss per share has been re-stated to
reduce the net loss per share for the year and quarters affected as follows.
<TABLE>
<CAPTION>
Q1 Q2 Q3 Q4 YTD
------ ------ ----- ----- ------
<S> <C> <C> <C> <C> <C>
Net loss per share as reported.... $ (.86) $(1.31) $(.80) $(.54) $(3.34)
Change to net loss per share...... -- -- .47 .21 1.09
Revised net loss per share........ $ (.86) $(1.31) $(.31) $(.33) $(2.25)
</TABLE>
The re-statement did not effect the reported net loss or cash flows of the
Company during the year ended September 30, 1997.
11. 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.
On August 8, 1997, all outstanding options, except for Officer and Director
options, with a share price ranging from $28.25 per share to $3.0625 per share
were canceled and repriced with new options having an exercise price of
$2.5938 per share, the fair market value as of the date of the repricing. A
total of 1,401,934 shares were repriced.
47
<PAGE>
SYQUEST TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997
The following table summarizes stock option activity under the Plan and the
Director Plan:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
SHARE
SHARES PRICE
------ --------
<S> <C> <C>
Outstanding at September 30, 1994........................ 2,301 9.75
Granted.................................................. 833 13.4
Exercised................................................ (502) 5.85
Cancelled................................................ (431) 14.12
------ -----
Outstanding at September 30, 1995........................ 2,201 12.04
Granted.................................................. 2,247 5.79
Exercised................................................ (386) 3.69
Cancelled................................................ (1,306) 9.57
------ -----
Outstanding at September 30, 1996........................ 2,756 8.21
Granted.................................................. 2,302 3.24
Exercised................................................ (16) 1.02
Cancelled................................................ (1,765) 5.83
------ -----
Outstanding at September 30, 1997........................ 3,277 6.09
</TABLE>
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, 1997:
<TABLE>
<S> <C>
(AMOUNTS ARE IN THOUSANDS)
1991 stock option plan.................................................... 3,700
Director stock option plan................................................ 130
Employee stock purchase plan.............................................. 353
-----
4,183
=====
</TABLE>
As of September 30, 1997, options to purchase approximately 586,731 shares
of Common stock were exercisable. Options granted vest over a period of 4
years.
The weighted average estimated fair value at the date of grant, as defined
by SFAS 123, for options granted in fiscal 1996 and 1997 was $2.5399 and
$1.2502 per option, respectively. The estimated grant date fair value
disclosed above was calculated using the Black-Scholes model. This model, as
well as other currently accepted option valuation models, was developed to
estimate the fair value of freely tradable, fully transferable options without
vesting restrictions, which significantly differ from the Company's option
awards. These models also require subjective assumptions, including future
stock price volatility and expected time to exercise, which greatly affect the
calculated values. Significant option groups outstanding at September 30, 1997
and related weighted average exercise price and contractual life information
are as follows:
OUTSTANDING AND EXERCISABLE BY OPTION RANGE
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE WEIGHTED
REMAINING AVERAGE NUMBER
RANGE OF NUMBER CONTRACTUAL EXERCISE VESTED AND
EXERCISE PRICE OUTSTANDING LIFE PRICE EXERCISABLE
- -------------- ----------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C>
$2.5938 -- $3.873 ............. 3,298,359 4 years 3.32 727,036
$0.30 -- $12.50 ............. 2,683,540 4 years 5.5463 758,662
</TABLE>
48
<PAGE>
SYQUEST TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997
The Company's calculations were made using the following weighted average
assumptions:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 1996
------------- ------- -------
<S> <C> <C>
Expected life.............................................. 2 years 2 years
Risk-free interest rate.................................... 6.13% 6.12%
Volatility................................................. 57.14% 56.99%
Dividend yield............................................. 0% 0%
</TABLE>
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. Under the
plan, eligible employees of the Company may purchase shares of Common Stock
through payroll deductions. The ESPP consists of two 6-month offering and
purchasing periods each year. The purchase price per share is 85% of the lower
of the fair market values of the Common Stock at the commencement period or
the last day of the purchase period. Purchases are limited to 15% of an
eligible employee's compensation subject to a maximum annual employee
contribution limited to a $15,000 fair market value. Of the 500,000 shares
authorized under the ESPP, 89,206 shares were issued during fiscal 1997.
Compensation costs (including pro forma net income per share amounts) for
the grant date fair value, as defined by SFAS 123, of the purchase rights
granted under the ESPP were calculated using the Black-Sholes model. The
following weighted average assumptions are included in the estimated grant
date fair value calculations for rights to purchase stock under the ESPP:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
------------------
<S> <C>
Expected life...................................................... 6 months
Risk-free interest rate............................................ 5.97%
Volatility......................................................... 58.96%
Dividend yield..................................................... 0%
</TABLE>
The weighted average estimated grant date fair value, as defined by SFAS
123, or rights to purchase stock under the ESPP granted in fiscal 1997 was
$1.2088 per share.
PRO FORMA NET LOSS AND NET LOSS PER SHARE
Had the Company recorded compensation expense based on the estimated grant
date fair value, as defined by SFAS 123, for awards granted under the 1991 and
1992 Stock Option Plans and the Employee Stock Purchase Plan, the Company's
pro forma net loss and net loss per share for the years ended September 30,
1997 and 1996, would have been as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 1996
------------- --------- ----------
IN THOUSANDS EXCEPT
PER SHARE DATA
<S> <C> <C>
Pro forma net (loss)................................. $ (69,702) $ (138,355)
Pro forma net (loss) per share....................... (2.28) (12.53)
</TABLE>
The pro forma effect on net loss and net loss per share for fiscal 1997 and
1996 is not representative of the pro forma effect on net income (loss) in the
future years because it does not take into consideration pro forma
compensation expense related to grants prior to fiscal 1995.
49
<PAGE>
SYQUEST TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997
12. BONUS, PROFIT SHARING AND 401(K) SAVINGS AND RETIREMENT PLANS
The Company has an incentive stock bonus plan for certain key employees that
provides shares of the Company's stock based on meeting certain milestones.
Such determination considers the extent to which individuals and the Company
meet objectives during the year. The Company incurred approximately $353,000
of stock bonus expense in 1997. The Company did not incur bonus expenses in
1996 and 1995.
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 is limited to $1,000. The Company made matching
contributions of approximately $266,000, $254,000 and $242,000 in 1997, 1996,
and 1995, respectively.
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 profit sharing expenses in 1997 or 1996.
13. LITIGATION
Kaufman, et al. vs. SyQuest Technology, et al. Superior Court for the State
of California, County of Alameda
This purported securities class action complaint, filed on March 25, 1996,
alleges that the Company and certain of its former officers and directors
violated California state securities law and common law by making false and
misleading statements of material fact about the Company's future between
October 21, 1994 and February 2, 1996 inclusive. This action is allegedly
brought for all persons who purchased SyQuest common stock during that period
and seeks an unspecified amount of damages. On October 11, 1996, this state
action was consolidated with Ravens, et al. vs. Iftikar, et al. filed in
United States District Court for the Northern District of California (case
number: 96-1224-VRW). The Company has filed a demurrer (a motion for dismissal
of the complaint for failure to state a claim) to the consolidation action.
The demurrer was fully briefed but was taken off the Court's calendar during
negotiations between the parties. On August 6, 1997, by stipulation and order,
the Court referred the parties to mediation for settlement purposes.
Ravens, et al. vs. Iftikar, et al. United States District Court for the
Northern District of California
This purported securities class action complaint, filed on April 2, 1996
alleges that the Company and certain of its former officers and directors
violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and
Rule 10b-5 promulgated thereunder, by making false and misleading statements
of material fact about the Company's future between October 21, 1994 and
February 2, 1996 inclusive. This action is allegedly brought for all persons
who purchased SyQuest common stock during that period and seeks an unspecified
amount of damages. This action has been consolidated with Kaufman, et al.
(discussed above) and with Bellezza, et al. (discussed below).
Bellezza, et al. vs. Iftikar, et al. United States District Court for the
Northern District of California
This purported securities class action complaint, filed on May 24, 1996
makes substantially the same allegations as the Ravens complaint (discussed
above) although different counsel represents the plaintiff. This action is
also allegedly brought for all persons who purchased SyQuest common stock and
seeks an unspecified amount of damages. This action has been consolidated with
Kaufman, et al. (discussed above) and with Ravens, et al.
50
<PAGE>
SYQUEST TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997
Managements Discussion of the Kaufman, Ravens and Bellezza Matters
In the Ravens and Bellezza matters, the Court held a case management
conference on July 18, 1996 to decide such matters as consolidation of the
complaints and appointment of lead counsel. On January 7, 1997, the Court
denied plaintiffs' request for appointment of lead counsel and plaintiff's
submitted a motion for reconsideration of the Court's order. A further case
management conference was held on February 7, 1997 and the Court gave the
parties a tentative order denying plaintiff's motion for reconsideration and
ordered that additional notice be sent concerning appointment of lead-
plaintiff. On July 16, 1997, the Court issued a final order denying
plaintiff's motion for reconsideration and again ordered that additional
notice concerning appointment of lead-plaintiff be sent. The Company intends
to submit a motion to dismiss this case.
On December 3, 1997, SPARC International, Inc. filed a lawsuit in the United
States District Court in and for the Northern District of California against
the Company. The lawsuit alleges that the Company's use of the trademark SparQ
in connection with its recently--introduced SparQ removable cartridge hard
drive product constitutes an infringement of the SPARC trademark owned by
SPARC International, Inc. The complaint requests money damages and a
preliminary and permanent injunction enjoining the Company from further
infringement. On December 19, 1997, SPARC International, Inc. filed a motion
seeking a preliminary injunction enjoining the Company from using the SparQ
trademark on its removable cartridge hard drive products and requesting a
hearing on January 26, 1998. The Company believes that it does not infringe
any valid trademarks of SPARC International, Inc. and intends to defend itself
against this action.
On July 23, 1997, Iomega Corporation ("Iomega") filed civil action No. 97-
466 in the United States District Court in and for the District of Delaware
against SyQuest Technology Inc. The law suit alleges that SyQuest has
infringed Iomega's Design Patent No. D378,518 and U.S. Patent No. 5,644,444 by
making and selling computer disk cartridges and drives which embody alleged
inventions of those patents and that SyQuest has willfully infringed Iomega's
alleged trademark "JET". The complaint requests money damages and a
preliminary and permanent injunction enjoining SyQuest from further
infringement. The Company believes that it does not infringe any valid patent
claims or trademarks of Iomega and intends to vigorously defend against this
action.
On or about June 10, 1997, the Company initiated litigation against
Castlewood Systems, Inc. and eleven (11) former Company employees in Santa
Clara Superior Court, No. 766757 asserting ten (10) causes of action,
including claims for misappropriation of trade secrets, unfair competition,
and breach of fiduciary duty. On or about July 16, 1997, Castlewood filed a
Cross-Complaint against the Company, alleging three (3) causes of action
(interference with prospective economic advantage; unfair competition; trade
libel). Since that time, the parties have engaged exclusively in hearings
before Thomas E. Schatzel, Esq., the Court-appointed Discovery Referee, to
finalize the Company's Civil Procedure (S) 2019 (d). The Company's Seconded
Amended Identification of Trade Secrets was deemed acceptable by the Discovery
Referee on October 20, 1997. Discovery has only recently begun, and there can
be no assurance as to what financial effect this litigation may have on the
Company.
In 1996, the Company filed suit against Nomai, S.A. (Nomai) and Maxell in
France for copyright and patent infringement. The Company initiated an
arbitration proceeding against Nomai seeking payment of outstanding royalties
of approximately $1 million. On January 27, 1997, the Company filed a
Complaint in the United States District Court in Northern District of
California against Nomai, S.A., Nomus, Inc., Marc Frouin, Herve Frouin,
Electronique d2, and La Cie Ltd., entitled SyQuest Technology, Inc. v. Nomai,
S.A. et al. (Case No. C97-0271 FMS) (the "Nomai Action") alleging patent and
trademark infringement, misrepresentation, breach of contract and other
claims. During April through June, Nomus, Inc., Marc Frouin and Herve Frouin
(collectively the "Nomai Parties") filed certain Cross-Complaints against the
Company. The parties have engaged in discussions concerning the terms of a
potential resolution to the Nomai Action, and the Nomai Parties and Defendants
Electronique d2 and La Cie
51
<PAGE>
SYQUEST TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997
Ltd. and the Company have agreed to certain material terms of settlement in
principle and final documentation remains outstanding. The Nomai Action
remains pending.
Due to the inherent uncertainty of litigation, management is unable to
predict the outcome of the above litigation. A materially unfavorable outcome
of the above litigation could have an adverse effect on the Company's
financial condition, results of operations and cash flows.
From time to time, the Company is involved in litigation that it considers
to be in normal course of business. Other than set forth above, the Company is
not engaged in any legal proceedings as of September 30, 1997, which the
Company expects individually or in the aggregate to have a material adverse
effect on the Company's financial condition or results of operation.
14. SUBSEQUENT EVENTS
On November 5, 1997, at a special shareholder meeting, the shareholders of
the Company approved a proposal amending the existing articles of
incorporation to increase the authorized shares of the Company from 120
million to 240 million. On November 28, 1997, assuming the conversion of all
outstanding preferred stock and the exercise of all outstanding warrants and
other stock commitments, the Company has outstanding and committed
approximately 150 million shares of the Company's common stock.
During October and November, 1997, the Company issued Series 5 convertible
preferred stock for approximately $10 million in proceeds and approximately 7
million of outstanding warrants were exercised resulting in approximately $26
million in proceeds to the Company. Further, The Company committed to issue
4.5 million new warrants to warrantholders to exercise outstanding warrants
with terms and conditions substantially the same as other outstanding Series 5
warrants.
52
<PAGE>
Open For Warrant Valuation Issue and December Financing Deal
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.
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 Price Waterhouse LLP, Independent Accountants................ 30
Report of Ernst & Young LLP, Independent Auditors...................... 31
Consolidated Statement of Financial Condition--September 30 1997 and
1996.................................................................. 32
Consolidated Statement of Results of Operations--Years Ended September
30, 1997,
1996, and 1995........................................................ 33
Consolidated Statement of Stockholders' Equity (Deficit)--Years Ended
September 30, 1997,
1996, and 1995........................................................ 34
Consolidated Statement of Cash Flows--Years Ended September 30, 1997,
1996 and 1995......................................................... 35
Notes to Consolidated Financial Statements............................. 37
</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>
II--Valuation and Qualifying Accounts.................................. 60
</TABLE>
53
<PAGE>
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.
EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
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.
3.4 Certificate of Amendment of Restated Certificate of Incorporation of
the Company filed May 20, 1997.
3.5 Certificate of Amendment of Restated Certificate of Incorporation of
the Company filed November 26, 1997.
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.
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.
</TABLE>
54
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
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. Incorporated by
Reference to Exhibit 4.18 to the Company's Annual Report on Form 10-
K/A for the fiscal period ending September 30, 1996.
4.19 Securities Purchase Agreement dated as of February 28, 1997, between
the Company and A-Corn Enterprises Company, Ltd., including the
exhibit form of Registration Rights Agreement. Incorporated by
Reference to Exhibit 10.2 to the Company's Current Report of Form 8-K
dated February 28, 1997.
4.20 Securities Purchase Agreement dated as of March 19, 1997, between the
Company and Seksun Precision Engineering Limited, including the
exhibit form of Registration Rights Agreement. Incorporated by
Reference to Exhibit 10.3 to the Company's Current Report of Form 8-K
dated February 28, 1997.
4.21 Securities Purchase Agreement dated as of March 26, 1997, between the
Company and Tongkah SDN.BHD., including the exhibit form of
Registration Rights Agreement. Incorporated by Reference to Exhibit
10.4 to the Company's Current Report of Form 8-K dated February 28,
1997.
4.22 Securities Purchase Agreement dated as of March 26, 1997, between the
Company and Silicon Systems, Inc., including the exhibit form of
Registration Rights Agreement. Incorporated by Reference to Exhibit
10.5 to the Company's Current Report of Form 8-K dated February 28,
1997.
4.23 Subscription Agreement dated March 31, 1997, between the Company and
Fletcher International Limited, including as Annex B thereto the form
of Warrant Certificate issued pursuant thereto. Incorporated by
Reference to Exhibit 10.1 to the Company's Current Report of Form 8-K
dated February 28, 1997.
</TABLE>
55
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
4.24 Certificate of Designations, Preferences and Rights of 5% Cumulative
Convertible Preferred Stock, Series 3.
4.25 Securities Purchase Agreement dated as of April 15, 1997, between the
Company and Jardine Matheson & Company, Ltd., including the exhibit
form of Registration Rights Agreement. Incorporated by Reference to
Exhibit 10.1 to the Company's Current Report of Form 8-K dated May 30,
1997.
4.26 Securities Purchase Agreement dated May 1, 1997, between the Company
and New Enterprises Associates VII, L.P., which agreement is
representative of similar agreements reached with Combination, Inc.,
Olympus Securities, Ltd., Nelson Partners, RGL International
Investors, LDC, CC Investments, LDC, Gross Foundation, Inc., Capital
Ventures International, Tail Wind Fund, Southbrook International
Investments, Ltd. and Millenco, LP, including as Annex B the form of
warrant certificate. Incorporated by Reference to Exhibit 10.2 to the
Company's Current Report of Form 8-K dated May 30, 1997.
4.27 Certificate of Designations, Preferences and Rights of 5% Cumulative
Convertible Preferred Stock, Series 4.
4.28 Certificate of Correction to Certificate of Designations, Preferences
and Rights of 5% Cumulative Convertible Preferred Stock, Series 4.
4.29 Securities Purchase Agreement dated August 4, 1997, between the
Company and Jayhawk Investments, L.P., which agreement is
representative of similar agreements reached with Jayhawk
Institutional Partners, L.P., including as Annex A the form of warrant
certificate. Incorporated by Reference to Exhibit 10.1 to the
Company's Current Report of Form 8-K dated August 4, 1997.
4.30 Securities Purchase Agreement dated September 3, 1997, between the
Company and Olympus Securities, Ltd., which agreement is
representative of similar agreements reached with Nelson Partners, RGL
International Investors, LDC, CC Investments, LDC, and Capital
Ventures International, including as Exhibit A the Certificate of
Designations, Preferences and Rights of Convertible Preferred Stock,
Series 5, and as Exhibit B the form of warrant certificate.
Incorporated by Reference to Exhibit 10.2 to the Company's Current
Report of Form 8-K dated August 4, 1997.
4.31 Securities Purchase Agreement dated October 3, 1997, between the
Company and Olympus Securities, Ltd., which agreement is
representative of similar agreements reached with Nelson Partners, and
Multiple Import Export, Ltd., including as Exhibit A the Certificate
of Designations, Preferences and Rights of Convertible Preferred
Stock, Series 5, and as Exhibit B the form of warrant certificate.
Incorporated by Reference to Exhibit 10.1 to the Company's Current
Report of Form 8-K dated October 4, 1997.
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.
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.
</TABLE>
56
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
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.
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.
10.21 Loan and Security Agreement dated January 17, 1996, by and between the
Company and Greyrock Business Credit, a division of NationsCredit
Commercial Corporation.
10.22 Amendment No. 1 dated February 2, 1996, by and between the Company and
Greyrock Business Credit, a division of NationsCredit Commercial
Corporation.
10.23 Amendment No. 2 dated March 15, 1996, by and between the Company and
Greyrock Business Credit, a division of NationsCredit Commercial
Corporation.
10.24 Amendment No. 3 dated December 10, 1996, together with Letter of
Credit Agreement dated March 15, 1996, by and between the Company and
Greyrock Business Credit, a division of NationsCredit Commercial
Corporation.
10.25 Amended and Restated Loan and Security Agreement dated March 3, 1997,
by and between the Company and Greyrock Business Credit, a division of
NationsCredit Commercial Corporation.
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.
</TABLE>
57
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
23.1 Consent of Price Waterhouse LLP.
23.2 Consent of Ernst & Young LLP.
27 Financial Data Schedule.
</TABLE>
- --------
* 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 October 4, 1997, was filed by the
Company reporting under Item 5 the sale of certain equity securities pursuant
to regulation D.
A current report on Form 8-K, dated November 11, 1997, was filed by the
Company reporting under Item 5 certain warrant transactions pursuant to
regulation D.
A current report on Form 8-K, dated November 11, 1997, was filed by the
Company reporting under Item 5 the filing of a Registration Statement on Form
S-3.
58
<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.
/s/ Edwin L. Harper
By: _________________________________
Edwin L. Harper
President and Chief Executive
Officer
Dated: December 30, 1997
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.
SIGNATURE TITLE DATE
/s/ Edwin L. Harper President, Chief December 30, 1997
- ----------------------------- Executive Officer and
EDWIN L. HARPER Director (Principal
Executive Officer)
/s/ Bob L. Corey Executive Vice December 30, 1997
- ----------------------------- President, Finance and
BOB L. COREY Chief Financial Officer
/s/ Edward L. Marinaro Director and Chairman of December 30, 1997
- ----------------------------- the Board
EDWARD L. MARINARO
/s/ Joseph Baia Director December 30, 1997
- -----------------------------
JOSEPH BAIA
/s/ C. Richard Kramlich Director December 30, 1997
- -----------------------------
C. RICHARD KRAMLICH
59
<PAGE>
SYQUEST TECHNOLOGY, INC.
SCHEDULE II--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,
1997:
Allowance for doubtful
accounts................ $5,694 $1,320 $(3,794)(1) $3,220
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
</TABLE>
- --------
(1) Represents uncollectable accounts written off.
60
<PAGE>
Exhibit 3.3
CERTIFICATE OF AMENDMENT
OF
RESTATED CERTIFICATE OF INCORPORATION
OF
SYQUEST TECHNOLOGY, INC.
SyQuest Technology, Inc., a corporation organized and existing under and by
virtue of the General Corporation Law of the State of Delaware,
DOES HEREBY CERTIFY:
FIRST: That at a meeting of the Board of Directors of SyQuest Technology,
Inc., resolutions were duly adopted setting forth a proposed amendment of the
Restated Certificate of Incorporation of said corporation, declaring said
amendment to be advisable and recommending such resolution at the 1997 annual
meeting of the stockholders of said corporation for consideration thereof. The
resolution setting forth the proposed amendment is as follows:
RESOLVED, that Paragraph (A) of Article IV of the Restated Certificate of
Incorporation of this corporation be amended to read in its entirety as follows:
Classes of Stock. This corporation is authorized to issue the
----------------
following classes of stock: Common Stock ("Common Stock" or "Common") and
Preferred Stock ("Preferred Stock" or "Preferred"). The total number of
shares which the corporation is authorized to issue is One Hundred Twenty
Four Million (124,000,000). One Hundred Twenty Million (120,000,000) shares
shall be Common Stock and Four Million (4,000,000) shares shall be
Preferred Stock. Each share of Common and Preferred Stock shall have a par
value of $0.0001.
SECOND: That thereafter, pursuant to resolution of its Board of Directors,
a special meeting of the stockholders of said corporation was duly called and
held, upon notice in accordance with Section 222 of the General Corporation Law
of the State of Delaware at which meeting the necessary number of shares as
required by statute were voted in favor of the amendment.
THIRD: That said amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
<PAGE>
IN WITNESS THEREOF, said SyQuest Technology, Inc. has caused this
certificate to be signed by Edward L. Marinaro, its authorized officer, this 6th
day of May, 1997.
SYQUEST TECHNOLOGY, INC.
By /Edward L. Marinaro/
--------------------
Title Chairman of the Board
---------------------
2
<PAGE>
Exhibit 3.4
CERTIFICATE OF AMENDMENT
OF
RESTATED CERTIFICATE OF INCORPORATION
OF
SYQUEST TECHNOLOGY, INC.
SyQuest Technology, Inc., a corporation organized and existing under and by
virtue of the General Corporation Law of the State of Delaware,
DOES HEREBY CERTIFY:
FIRST: That at a meeting of the Board of Directors of SyQuest Technology,
Inc., resolutions were duly adopted setting forth a proposed amendment of the
Restated Certificate of Incorporation of said corporation, declaring said
amendment to be advisable and recommending such resolution at the NOvember 5,
1997, special meetig of the stockholders of said corporation for consideration
thereof. The resolution setting forth the proposed amendment is as follows:
RESOLVED, that Paragraph (A) of Article IV of the Restated Certificate of
Incorporation of this corporation be amended to read in its entirety as follows:
Classes of Stock. This corporation is authorized to issue the following
----------------
classes of stock: Common Stock ("Common Stock" or "Common") and Preferred Stock
("Preferred Stock" or "Preferred"). The total number of shares which the
corporation is authorized to issue is One Hundred Twenty Four Million
(224,000,000). One Hundred Twenty Million (240,000,000) shares shall be Common
Stock and Four Million (4,000,000) shares shall be Preferred Stock. Each share
of Common and Preferred Stock shall have a par value of $0.0001.
SECOND: That thereafter, pursuant to resolution of its Board of Directors,
a special meeting of the stockholders of said corporation was duly called and
held, upon notice in accordance with Section 222 of the General Corporation Law
of the State of Delaware at which meeting the necessary number of shares as
required by statute were voted in favor of the amendment.
THIRD: That said amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
<PAGE>
IN WITNESS THEREOF, said SyQuest Technology, Inc. has caused this
certificate to be signed by Edward L. Marinaro, its authorized officer, this
26th day of November, 1997.
SYQUEST TECHNOLOGY, INC.
By /Edward L. Marinaro/
--------------------
Title Chairman of the Board
---------------------
2
<PAGE>
Exhibit 4.24
CERTIFICATE OF DESIGNATIONS, PREFERENCES
AND RIGHTS OF 5% CUMULATIVE CONVERTIBLE
PREFERRED STOCK, SERIES 3
OF
SYQUEST TECHNOLOGY, INC.
SyQuest Technology, Inc. (the "Company"), a corporation organized and
existing under the General Corporation Law of the State of Delaware, does hereby
certify that, pursuant to authority conferred on the Board of Directors of the
Company by the Certificate of Incorporation, as amended, of the Company, and
pursuant to Section 151 of the General Corporation Law of the State of Delaware,
the Board of Directors of the Company at a meeting duly held, adopted
resolutions providing for the designations, preferences and relative,
participating, optional or other rights, and the qualifications, limitations or
restrictions thereof, of one hundred thousand (100,000) shares of 5% Cumulative
Convertible Preferred Stock, Series 3, of the Company, as follows:
RESOLVED, that the Company is authorized to issue 100,000 shares of 5%
Cumulative Convertible Preferred Stock, Series 3, $.001 par value (the "Series 3
Preferred Shares"), which shall have the following powers, designations,
preferences and other special rights:
(1) Dividends. The holders of the Series 3 Preferred Shares shall be
---------
entitled to a cash dividend of five percent per annum of the Stated Value (as
defined below), on a cumulative basis (prorated for any portion of the
applicable period during which the Series 3 Preferred Shares are outstanding).
Dividends shall accrue from the date of issuance of the Series 3 Preferred
Shares and shall be payable on the last day of each calendar quarter, commencing
June 30, 1997, through and including the date on which the Series 3 Preferred
Shares are converted. Dividends may be paid at the Company's option in cash or,
on not less than ninety days' notice from the Company to each holder of Series 3
Preferred Shares, in additional Series 3 Preferred Shares; provided that the
Company may not elect to pay dividends in additional Series 3 Preferred Shares
to the extent that (a) the number of authorized and unissued Series 3 Preferred
Shares is
<PAGE>
insufficient to make such payment, or (b) the ability of the holders of Series 3
Preferred Shares to convert Series 3 Preferred Shares or to exercise the Warrant
(as hereinafter defined) is restricted by section 2(h), below. If the Company
elects to pay to any holder of Series 3 Preferred Shares any such dividend in
additional Series 3 Preferred Shares, the number of such additional Series 3
Preferred Shares shall be determined by dividing the aggregate amount of such
dividend payable to such holder by 100; provided that no fraction of a Series 3
Preferred Share shall be issued, but in lieu thereof, the Company shall pay in
cash an amount equal to such fraction multiplied by $100.
(2) Conversion of Series 3 Preferred Shares. The holders of the Series 3
---------------------------------------
Preferred Shares shall have the right, at their option, but subject to the
Subscription Agreement dated March 31, 1997 (the "Subscription Agreement"),
between the Company and Fletcher International Limited ("Fletcher"), to convert
the Series 3 Preferred Shares into shares of the common stock of the Company,
$.001 par value, as such stock now exists or may be changed from time to time
hereafter ("Common Stock"), on the following terms and conditions:
(a) Conversion Right. Any or all of the Series 3 Preferred Shares shall
----------------
be convertible at any time into whole, fully paid and nonassessable shares of
Common Stock, at the conversion price (the "Conversion Price") in effect at the
time of conversion determined as hereinafter provided. Each Series 3 Preferred
Share shall have a stated value of $100 (the "Stated Value") for the purpose of
such conversion and the number of shares of Common Stock issuable on conversion
of each Series 3 Preferred Share shall be determined by dividing the Stated
Value thereof by the Conversion Price then in effect. In the event of a
conversion of Series 3 Preferred Shares for which there are accrued and unpaid
dividends, the amount of the accrued and unpaid dividends shall be paid at the
time and in the manner provided in section (1).
(b) Conversion Price. The Conversion Price shall be the greater of (1)
----------------
the arithmetical average of the closing sale prices per share of Common Stock on
the five consecutive trading days preceding the delivery of any Conversion
Notice (as that term is hereinafter defined), as reported by the Nasdaq National
Market (the "NMS"), or, if the NMS is not then the principal trading market for
the Common Stock, on the principal trading market for the Common Stock at that
time, or, if there is then no such principal trading market, the fair market
value per share of Common Stock during such period as determined in good faith
by the Board of Directors of the Company, and (2) ninety percent of such closing
sale price on the day immediately preceding the delivery of the Conversion
Notice (as that term is hereinafter defined); provided that the Conversion Price
shall not be greater than the closing sale price per share of Common Stock as
reported by the NMS on the first day that any Series 3 Preferred Shares are
issued. If the value of the Common Stock is so to be determined by the Board of
Directors of the Company and the holders of the Series 3 Preferred Shares
disagree with said valuation, the value of the Common Stock will be determined
by binding arbitration in accordance with the Commercial Arbitration Rules then
prevailing of the American Arbitration
2
<PAGE>
Association, and such arbitration shall proceed in Chicago, Illinois, or at such
other place as agreed to in writing by the Company and the holders of the Series
3 Preferred Stock.
(c) Adjustment to Conversion Price. In the event that the Company shall
------------------------------
declare a dividend or make a distribution on or with respect to the outstanding
shares of its Common Stock in shares of its Common Stock, subdivide its
outstanding shares of Common Stock into a greater number of shares, or combine
its outstanding shares of Common Stock into a smaller number of shares, then, in
each such event, the Conversion Price in effect at the time of the record date
for such dividend or distribution or the effective date of such subdivision or
combination shall be proportionately adjusted, if necessary, as determined in
good faith by the Board of Directors of the Company, so that the holder of any
Series 3 Preferred Shares surrendered for conversion after such time shall be
entitled to receive the aggregate number of shares of Common Stock that the
holder would have owned or been entitled to receive had such Series 3 Preferred
Shares been converted immediately prior to such record date or effective date
and the resulting Common Stock had been subject to such dividend, distribution,
subdivision or combination. Such adjustment shall be made successively whenever
any event specified above shall occur.
(d) Conversion Notice. On presentation and surrender to the Company (or
-----------------
at any office or agency maintained for the transfer of the Series 3 Preferred
Shares) of the certificate(s) ("Preferred Stock Certificate(s)") for Series 3
Preferred Shares so to be converted, duly endorsed in blank for transfer or
accompanied by proper instruments of assignment or transfer in blank and written
notice of conversion (a "Conversion Notice"), the holder of such Series 3
Preferred Shares shall be entitled, subject to the limitations herein contained,
to receive in exchange therefor a certificate or certificates for whole, fully
paid and nonassessable shares of Common Stock, which certificates shall be
delivered by the fourth trading day after the date of delivery of the Conversion
Notice and Preferred Stock Certificates for the Series 3 Preferred Shares being
converted, and cash for any fractional share of Common Stock on the foregoing
basis. If the Common Stock can be issued without such restrictive legend
pursuant to the Subscription Agreement, upon request made by the holders of the
Series 3 Preferred Shares in the Conversion Notice, the Company will authorize
and instruct its transfer agent to issue the Common Stock electronically. The
Conversion Notice shall be deemed delivered and received on the business day
when it is transmitted by facsimile if so transmitted by 5:00 p.m. California
time and the Company receives the Preferred Stock Certificate(s) by 10:00 a.m.
California time the following business day, or on the next business day after it
is deposited for next-day delivery with a nationally recognized overnight
delivery service. The Series 3 Preferred Shares shall be deemed to have been
converted, and the person converting the same to have become the holder of
record of Common Stock, for all purposes as of the date of delivery of the
Conversion Notice.
(e) Reservation of Shares. The Company shall, as soon as practicable
---------------------
hereafter and then for so long as any of the Series 3 Preferred Shares are
outstanding,
3
<PAGE>
reserve and keep available out of its authorized and unissued Common Stock,
solely for the purpose of effecting the conversion of the Series 3 Preferred
Shares, such number of shares of Common Stock as shall from time to time be
sufficient to effect the conversion of all of the Series 3 Preferred Shares then
outstanding.
(f) Fractional Shares. The Company shall not issue any fraction of a
-----------------
share of Common Stock on any conversion, but shall pay in cash therefor at the
Conversion Price then in effect multiplied by such fraction.
(g) Taxes. The Company shall pay any and all taxes that may be imposed
-----
on it with respect to the issuance and delivery of Common Stock on the
conversion of Series 3 Preferred Shares as herein provided. The Company shall
not be required in any event to pay any transfer or other taxes by reason of the
issuance of such Common Stock in names other than those in which the Series 3
Preferred Shares surrendered for conversion are registered on the Company's
records, and no such conversion or issuance of Common Stock shall be made unless
and until the person requesting such issuance shall have paid to the Company the
amount of any such tax, or shall have established to the satisfaction of the
Company and its transfer agent, if any, that such tax has been paid.
(h) The 19.9% Limit. If at the time that the Company receives a
---------------
Conversion Notice, the aggregate number of shares of Common Stock issuable
pursuant to such Conversion Notice and all other Conversion Notices received at
that time (the "Subject Conversion Notices"), when added to the aggregate number
of shares of Common Stock (1) previously issued on conversion of Series 3
Preferred Shares and the exercise of that certain Warrant to purchase Common
Stock (the "Warrant") issued by the Company to Fletcher pursuant to the
Subscription Agreement on the date of initial issuance of the Series 3 Preferred
Shares and (2) issuable on conversion of all remaining outstanding Series 3
Preferred Shares (determining such number as if such Series 3 Preferred Shares
were converted as of the Conversion Date relating to such Conversion Notice) and
(3) issuable on exercise of the Warrant (determined based on the Exercise Price
then in effect, as defined in the Warrant) would exceed nineteen and nine-tenths
percent of the total number of shares of Common Stock outstanding (adjusted to
reflect any split, subdivision, combination or consolidation of the Common
Stock, whether by reclassification, distribution of a dividend with respect to
the outstanding Common Stock payable in shares of Common Stock, or otherwise, or
any recapitalization of the Common Stock) on the date of the first issuance of
Series 3 Preferred Shares (the "19.9% Limit") and such circumstance would
require the approval of the holders of the Common Stock pursuant to the listing
requirements of the Nasdaq Stock Market or the rules of the National Association
of Securities Dealers, Inc. (or such stock exchange or other interdealer
quotation system that is then the Principal Market), the number of Series 3
Preferred Shares identified in the Subject Conversion Notices that, if converted
into shares of Common Stock, would equal or exceed the 19.9% Limit (the "Excess
Preferred Shares"), shall not be converted unless and until the stockholder
approval
4
<PAGE>
referred to in section (2)(j) (the "Stockholder Consent") is obtained or is no
longer required. The Excess Preferred Shares will be allocated among the holders
delivering Subject Conversion Notices on a pro rata basis based on the relative
number of Series 3 Preferred Shares identified in each such Subject Conversion
Notice. Any Excess Preferred shares shall not be converted into shares of Common
Stock until the later of the date on which the Stockholder Consent is obtained
and the Company receives a subsequent Conversion Notice with respect thereto. If
the Company is not otherwise notified by the Nasdaq Stock Market or the National
Association of Securities Dealers, Inc. that Stockholder Consent is necessary,
the Company will issue Common Stock to the holders of the Series 3 Preferred
Shares in excess of the 19.9% Limit.
(i) Maximum Number. Series 3 Preferred Shares shall be convertible only
--------------
into the Maximum Number of shares of Common Stock. The "Maximum Number" is equal
to the sum of the 9% Number and the Convertible Number. The "9% Number" is nine
percent of the outstanding shares of Common Stock as of the date of filing of
this Certificate with the Delaware Secretary of State, minus 1,500,000. The
"Convertible Number" is initially zero and thereafter may be increased on
expiration of a sixty-five day period (the "Notice Period") after the holder of
Series 3 Preferred Shares delivers a notice (a"65-Day Notice") to the Company
designating an aggregate number of shares of Common Stock in excess of the 9%
Number that will become convertible. A 65-Day Notice may be given at any time.
If the initial 65-Day Notice does not designate all of the shares of Common
Stock then issuable on conversion of such holder's Series 3 Preferred Shares,
additional Series 3 Preferred Shares will become convertible into some or all of
the remaining shares of Common Stock on delivery of one or more 65-Day Notices
increasing the Convertible Number after a further Notice Period. From time to
time following the Notice Period, the Series 3 Preferred Shares may be converted
on any business day for any number of shares of Common Stock, such that the
aggregate number of shares of Common Stock issued hereunder is less than or
equal to the Maximum Number.
(j) Stockholder Approval. If there are Excess Preferred Shares as
--------------------
described in section (2)(h), the Company shall promptly use its best efforts to
obtain the Stockholder Consent, including, without limitation, causing its Board
of Directors to call a special meeting of stockholders and recommend such
approval.
(3) Voting Rights. Holders of Series 3 Preferred Shares shall have no
-------------
voting rights, except as required by law.
(4) Liquidation, Dissolution, Winding Up. In the event of any voluntary or
------------------------------------
involuntary liquidation, dissolution or winding up of the Company, the holders
of the Series 3 Preferred Shares shall be entitled to receive in cash out of the
assets of the Company, whether from capital or from earnings available for
distribution to its stockholders (the "Preferred Funds"), before any amount
shall be paid to the holders of the Common Stock, an amount equal to the Stated
Value per Preferred Share plus any
5
<PAGE>
accrued and unpaid dividends; provided that, if the Preferred Funds are
insufficient to pay the full amount due to the holders of Series 3 Preferred
Shares and holders of shares of other classes or series of preferred stock of
the Company that are of equal rank with the Series 3 Preferred Shares as to
payments of Preferred Funds (the "Pari Passu Shares"), then each holder of
Series 3 Preferred Shares and Pari Passu Shares shall receive a percentage of
the Preferred Funds equal to the full amount of Preferred Funds payable to such
holder as a percentage of the full amount of Preferred Funds payable to all
holders of Series 3 Preferred Shares and Pari Passu Shares. The purchase or
redemption by the Company of stock of any class, in any manner permitted by law,
shall not, for the purposes hereof, be regarded as a liquidation, dissolution or
winding up of the Company. Neither the consolidation or merger of the Company
with or into any other corporation or corporations, nor the sale or transfer by
the Company of less than substantially all of its assets, shall, for the
purposes hereof, be deemed to be a liquidation, dissolution or winding up of the
Company. No holder of Series 3 Preferred Shares shall be entitled to receive any
amounts with respect thereto on any liquidation, dissolution or winding up of
the Company other than the amounts provided for herein.
(5) Preferred Rank. With respect to preferences as to dividends and
--------------
distributions and payments on the liquidation, dissolution or winding up of the
Company, the Series 3 Preferred Shares shall rank (1) senior to the Common
Stock, (2) with respect to all other existing capital stock of the Company,
senior to such capital stock if permitted by the terms of such capital stock or,
if not so permitted, on a parity with such capital stock if permitted by the
terms of such capital stock or, if not so permitted, junior to such capital
stock, and (3) senior to all series of any class of the Company's capital stock
issued after the date of the filing of this Certificate. So long as any of the
Series 3 Preferred Shares are outstanding, no Common Stock nor any other capital
stock of the Company ranking junior to the Series 3 Preferred Shares will be
redeemed, purchased or otherwise acquired for any consideration by the Company
(except by conversion into or exchange for stock of the Company ranking junior
to the Series 3 Preferred Shares) unless in each case the Company offers to
redeem the Series 3 Preferred Shares on substantially the same terms (provided
that the redemption price shall not be less than $100 per share). The Company
may hereafter authorize additional or other capital stock for issuance in the
BLC Transaction (as that term is defined in the Subscription Agreement) that
is senior, equal or junior to the Series 3 Preferred Shares, in respect of the
preferences as to dividends and distributions and payments on the liquidation,
dissolution and winding up of the Company, but the Company may not otherwise
hereafter, for so long as any Series 3 Preferred Shares are outstanding,
authorize additional or other capital stock that is of senior or equal rank to
the Series 3 Preferred Shares, in respect of the preferences as to dividends and
distributions and payments on the liquidation, dissolution and winding up of the
Company. In the event of the merger or consolidation of the Company with or
into another corporation, the Series 3 Preferred Shares shall maintain their
relative powers, designations and preferences provided herein.
6
<PAGE>
(6) Lost or Stolen Certificates. On receipt by the Company of evidence of
---------------------------
the loss, theft, destruction or mutilation of any Preferred Stock Certificate
representing Series 3 Preferred Shares, and (in the case of loss, theft or
destruction) of any indemnification undertaking by the holder to the Company
that is reasonably satisfactory to the Company, and on surrender and
cancellation of such Preferred Stock Certificate, if mutilated, the Company
shall execute and deliver a new Preferred Stock Certificate of like tenor and
date; provided that the Company shall not be obligated to re-issue any lost or
stolen Preferred Stock Certificate if the holder thereof contemporaneously
requests the Company to convert such Series 3 Preferred Shares into Common
Stock.
(7) Amendment. So long as any Series 3 Preferred Shares are outstanding,
---------
the Company shall not, without first obtaining the approval by vote or written
consent, in the manner provided by law, of the holders of at least a majority of
the total number of Series 3 Preferred shares outstanding, voting separately as
a class, amend or repeal any provision of, or add any provision to, the
Company's Certificate of Incorporation, if such action would alter or change the
preferences, rights, privileges or powers of, or the restrictions provided for
the benefit of, the Series 3 Preferred Shares.
IN WITNESS WHEREOF, the Company has caused this certificate to be signed by
Henry C. Montgomery, its Chief Financial Officer, as of April 1, 1997.
- ------------------- ----------------------- --------
SYQUEST TECHNOLOGY, INC.
By:/Henry C. Montgomery/
---------------------
Title: Chief Financial Officer
7
<PAGE>
Exhibit 4.27
CERTIFICATE OF DESIGNATIONS, PREFERENCES
AND RIGHTS OF 5% CUMULATIVE CONVERTIBLE
PREFERRED STOCK, SERIES 4
OF
SYQUEST TECHNOLOGY, INC.
SyQuest Technology, Inc. (the "Company"), a corporation organized and
existing under the General Corporation Law of the State of Delaware, does hereby
certify that, pursuant to authority conferred on the Board of Directors of the
Company by the Certificate of Incorporation, as amended, of the Company, and
pursuant to Section 151 of the General Corporation Law of the State of Delaware,
the Board of Directors of the Company at a meeting duly held, adopted
resolutions providing for the designations, preferences and relative,
participating, optional or other rights, and the qualifications, limitations or
restrictions thereof, of four hundred thousand (400,000) shares of 5% Cumulative
Convertible Preferred Stock, Series 4, of the Company, as follows:
RESOLVED, that the Company is authorized to issue 400,000 shares of 5%
Cumulative Convertible Preferred Stock, Series 4, $.001 par value (the "Series 4
Preferred Shares"), which shall have the following powers, designations,
preferences and other special rights:
1. Dividends. The holders of the Series 4 Preferred Shares shall be
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entitled to a cash dividend of five percent per annum of the Stated Value (as
defined below), on a cumulative basis (prorated for any portion of the
applicable period during which the Series 4 Preferred Shares are outstanding).
Dividends shall accrue from the date of issuance of the Series 4 Preferred
Shares and shall be payable on the last day of each calendar quarter, commencing
June 30, 1997, through and including the date on which the Series 4 Preferred
Shares are converted. Dividends may be paid at the Company's option in cash or,
on not less than ninety days' notice from the Company to each holder of Series 4
Preferred Shares; in additional Series 4 Preferred Shares, provided that the
Company may not elect to pay dividends in additional Series 4 Preferred Shares
to the extent that the number of authorized and unissued Series 4 Preferred
Shares is insufficient to make such payment or the ability of the holders of the
Series 4 Preferred
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Shares to convert Series 4 Preferred Shares or to exercise the Warrant (as
hereinafter defined) is restricted by Section 2(h) below. If the Company elects
to pay to any holder of Series 4 Preferred Shares any such dividend in
additional Series 4 Preferred Shares, the number of such additional Series 4
Preferred Shares shall be determined by dividing the aggregate amount of such
dividend payable to such holder by 100; provided that no fraction of a Series 4
Preferred Share shall be issued, but in lieu thereof, the Company shall pay in
cash an amount equal to such fraction multiplied by $100.
2. Conversion of Series 4 Preferred Shares. The holders of the Series 4
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Preferred Shares shall have the right, at their option, but subject to the terms
of any purchase agreement which the Company may enter into (the "Purchase
Agreement"), to convert the Series 4 Preferred Shares into shares of the common
stock of the Company, $.001 par value, as such stock now exists or may be
changed from time to time hereafter ("Common Stock"), on the following terms and
conditions:
(a) Conversion Right. Any or all of the Series 4 Preferred Shares
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shall be convertible at any time into whole, fully paid and nonassessable shares
of Common Stock, at the conversion price (the "Conversion Price") in effect at
the time of conversion determined as hereinafter provided. Each Series 4
Preferred Share shall have a stated value of $100 (the "Stated Value") for the
purpose of such conversion and the number of shares of Common Stock issuable on
conversion of each Series 4 Preferred Share shall be determined by dividing the
Stated Value thereof by the Conversion Price then in effect. In the event of a
conversion of Series 4 Preferred Shares for which there are accrued and unpaid
dividends, the amount of the accrued and unpaid dividends shall be paid at the
time and in the manner provided in section 1.
(b) Conversion Price. The Conversion Price shall be the greater of (1)
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the arithmetical average of the closing sale prices per share of Common Stock on
the five consecutive trading days preceding the delivery of any Conversion
Notice (as that term is hereinafter defined), as reported by the Nasdaq National
Market (the "NNM"), or, if the NNM is not then the principal trading market for
the Common Stock, on the principal trading market for the Common Stock at that
time, or, if there is then no such principal trading market, the fair market
value per share of Common Stock during such period as determined in good faith
by the Board of Directors of the Company, and (2) ninety percent of such closing
sale price on the day immediately preceding the delivery of the Conversion
Notice (as that term is hereinafter defined); provided that the Conversion Price
shall not be greater than the closing sale price per share of Common Stock as
reported by the NNM on the first day that any Series 4 Preferred Shares are
issued. If the value of the Common Stock is so to be determined by the Board of
Directors of the Company and the holders of the Series 4 Preferred Shares
disagree with said valuation, the value of the Common Stock will be determined
by binding arbitration in accordance with the Commercial Arbitration Rules then
prevailing of the American Arbitration Association, and such arbitration shall
proceed in San Francisco, California,
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or at such other place as agreed to in writing by the Company and the holders of
the Series 4 Preferred Shares.
(c) Adjustment to Conversion Price. In the event that the Company
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shall declare a dividend or make a distribution on or with respect to the
outstanding shares of its Common Stock in shares of its Common Stock, subdivide
its outstanding shares of Common Stock into a greater number of shares, or
combine its outstanding shares of Common Stock into a smaller number of shares,
then, in each such event, the Conversion Price in effect at the time of the
record date for such dividend or distribution or the effective date of such
subdivision or combination shall be proportionately adjusted, if necessary, as
determined in good faith by the Board of Directors of the Company, so that the
holder of any Series 4 Preferred Shares surrendered for conversion after such
time shall be entitled to receive the aggregate number of shares of Common Stock
that the holder would have owned or been entitled to receive had such Series 4
Preferred Shares been converted immediately prior to such record date or
effective date and the resulting Common Stock had been subject to such dividend,
distribution, subdivision or combination. Such adjustment shall be made
successively whenever any event specified above shall occur.
(d) Conversion Notice. On presentation and surrender to the Company
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(or at any office or agency maintained for the transfer of the Series 4
Preferred Shares) of the certificate(s) ("Preferred Stock Certificate(s)") for
Series 4 Preferred Shares so to be converted, duly endorsed in blank for
transfer or accompanied by proper instruments of assignment or transfer in blank
and written notice of conversion (a "Conversion Notice"), the holder of such
Series 4 Preferred Shares shall be entitled, subject to the limitations herein
contained, to receive in exchange therefor a certificate or certificates for
whole, fully paid and nonassessable shares of Common Stock, which certificates
shall be delivered by the fourth trading day after the date of delivery of the
Conversion Notice and Preferred Stock Certificates for the Series 4 Preferred
Shares being converted, and cash for any fractional share of Common Stock on the
foregoing basis. If the Common Stock can be issued without a restrictive legend
pursuant to the Purchase Agreement, on request made by the holders of the Series
4 Preferred Shares in the Conversion Notice, the Company will authorize and
instruct its transfer agent to issue the Common Stock electronically. The
Conversion Notice shall be deemed delivered and received on the business day
when it is transmitted by facsimile if so transmitted by 5:00 p.m. California
time and the Company receives the Preferred Stock Certificate(s) by 10:00 a.m.
California time the following business day, or on the next business day after it
is deposited for next day delivery with a nationally recognized overnight
delivery service. The Series 4 Preferred Shares shall be deemed to have been
converted, and the person converting the same to have become the holder of
record of Common Stock, for all purposes as of the date of delivery of the
Conversion Notice.
(e) Reservation of Shares. The Company shall, as soon as practicable
---------------------
hereafter and then for so long as any of the Series 4 Preferred Shares are
outstanding,
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reserve and keep available out of its authorized and unissued
Common Stock, solely for the purpose of effecting the conversion of the Series 4
Preferred Shares, such number of shares of Common Stock as shall from time to
time be sufficient to effect the conversion of all of the Series 4 Preferred
Shares then outstanding.
(f) Fractional Shares. The Company shall not issue any fraction of a
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share of Common Stock on any conversion, but shall pay in cash therefor at the
Conversion Price then in effect multiplied by such fraction.
(g) Taxes. The Company shall pay any and all taxes that may be imposed
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on it with respect to the issuance and delivery of Common Stock on the
conversion of Series 4 Preferred Shares as herein provided. The Company shall
not be required in any event to pay any transfer or other taxes by reason of the
issuance of such Common Stock in names other than those in which the Series 4
Preferred Shares surrendered for conversion are registered on the Company's
records, and no such conversion or issuance of Common Stock shall be made unless
and until the person requesting such issuance shall have paid to the Company the
amount of any such tax, or shall have established to the satisfaction of the
Company and its transfer agent, if any, that such tax has been paid.
(h) The 19.9% Limit. If at the time that the Company receives a
---------------
Conversion Notice, the aggregate number of shares of Common Stock issuable
pursuant to such Conversion Notice and all other Conversion Notices received at
that time (the "Subject Conversion Notices"), when added to the aggregate number
of shares of Common Stock (1) previously issued on conversion of Series 4
Preferred Shares and the exercise of that certain Warrant to purchase Common
Stock (the "Warrant") issued by the Company to Fletcher pursuant to the
Subscription Agreement on the date of initial issuance of the Series 4 Preferred
Shares and (2) issuable on conversion of all remaining outstanding Series 4
Preferred Shares (determining such number as if such Series 4 Preferred Shares
were converted as of the Conversion Date relating to such Conversion Notice) and
(3) issuable on exercise of the Warrant (determined based on the Exercise Price
then in effect, as defined in the Warrant) would exceed nineteen and nine-tenths
percent of the total number of shares of Common Stock outstanding (adjusted to
reflect any split, subdivision, combination or consolidation of the Common
Stock, whether by reclassification, distribution of a dividend with respect to
the outstanding Common Stock payable in shares of Common Stock, or otherwise, or
any recapitalization of the Common Stock) on the date of the first issuance of
Series 4 Preferred Shares (the "19.9% Limit") and such circumstance would
require the approval of the holders of the Common Stock pursuant to the listing
requirements of the Nasdaq Stock Market or the rules of the National Association
of Securities Dealers, Inc. (or such stock exchange or other interdealer
quotation system that is then the Principal Market), the number of Series 4
Preferred Shares identified in the Subject Conversion Notices that, if converted
into shares of Common Stock, would equal or exceed the 19.9% Limit (the "Excess
Preferred Shares"), shall not be converted unless and until the stockholder
approval
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referred to in section (2)(j) (the "Stockholder Consent") is obtained or is no
longer required. The Excess Preferred Shares will be allocated among the holders
delivering Subject Conversion Notices on a pro rata basis based on the relative
number of Series 4 Preferred Shares identified in each such Subject Conversion
Notice. Any Excess Preferred shares shall not be converted into shares of Common
Stock until the later of the date on which the Stockholder Consent is obtained
and the Company receives a subsequent Conversion Notice with respect thereto. If
the Company is not otherwise notified by the Nasdaq Stock Market or the National
Association of Securities Dealers, Inc. that Stockholder Consent is necessary,
the Company will issue Common Stock to the holders of the Series 4 Preferred
Shares in excess of the 19.9% Limit.
(i) Stockholder Approval. If there are Excess Preferred Shares as
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described in section (2)(i), the Company shall promptly use its best efforts to
obtain the Stockholder Consent, including, without limitation, causing its Board
of Directors to call a special meeting of stockholders and recommend such
approval.
3. Voting Rights. Holders of Series 4 Preferred Shares shall have no
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voting rights, except as required by law.
4. Liquidation, Dissolution, Winding Up. In the event of any voluntary or
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involuntary liquidation, dissolution or winding up of the Company, the holders
of the Series 4 Preferred Shares shall be entitled to receive in cash out of the
assets of the Company, whether from capital or from earnings available for
distribution to its stockholders (the "Preferred Funds"), before any amount
shall be paid to the holders of the Common Stock, an amount equal to the Stated
Value per Preferred Share plus any accrued and unpaid dividends; provided that,
if the Preferred Funds are insufficient to pay the full amount due to the
holders of Series 4 Preferred Shares and holders of shares of other classes or
series of preferred stock of the Company that are of equal rank with the Series
4 Preferred Shares as to payments of Preferred Funds (the "Pari Passu Shares"),
then each holder of Series 4 Preferred Shares and Pari Passu Shares shall
receive a percentage of the Preferred Funds equal to the full amount of
Preferred Funds payable to such holder as a percentage of the full amount of
Preferred Funds payable to all holders of Series 4 Preferred Shares and Pari
Passu Shares. The purchase or redemption by the Company of stock of any class,
in any manner permitted by law, shall not, for the purposes hereof, be regarded
as a liquidation, dissolution or winding up of the Company. Neither the
consolidation or merger of the Company with or into any other corporation or
corporations, nor the sale or transfer by the Company of less than substantially
all of its assets, shall, for the purposes hereof, be deemed to be a
liquidation, dissolution or winding up of the Company. No holder of Series 4
Preferred Shares shall be entitled to receive any amounts with respect thereto
on any liquidation, dissolution or winding up of the Company other than the
amounts provided for herein.
5. Preferred Rank. With respect to preferences as to dividends and
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distributions and payments on the liquidation, dissolution or winding up of the
Company,
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<PAGE>
the Series 4 Preferred Shares shall rank (1) senior to the Common Stock, (2)
with respect to all other existing capital stock of the Company, senior to such
capital stock if permitted by the terms of such capital stock or, if not so
permitted, on a parity with such capital stock if permitted by the terms of such
capital stock or, if not so permitted, junior to such capital stock, and (3)
senior to all series of any class of the Company's capital stock issued after
the date of the filing of this Certificate. So long as any of the Series 4
Preferred Shares are outstanding, no Common Stock and no other capital stock of
the Company ranking junior to the Series 4 Preferred Shares will be redeemed,
purchased or otherwise acquired for any consideration by the Company (except by
conversion into or exchange for stock of the Company ranking junior to the
Series 4 Preferred Shares) unless in each case the Company offers to redeem the
Series 4 Preferred Shares on substantially the same terms (provided that the
redemption price shall not be less than $100 per share). Notwithstanding any
provision hereof to the contrary, the Company may hereafter authorize additional
or other capital stock for issuance to Beijing Legend Group Ltd. and its
affiliates that is senior, equal or junior to the Series 4 Preferred Shares, in
respect of the preferences as to dividends and distributions and payments on the
liquidation, dissolution and winding up of the Company, but the Company may not
otherwise hereafter, for so long as any Series 4 Preferred Shares are
outstanding, authorize additional or other capital stock that is of senior or
equal rank to the Series 4 Preferred Shares, in respect of the preferences as to
dividends and distributions and payments on the liquidation, dissolution and
winding up of the Company. In the event of the merger or consolidation of the
Company with or into another corporation, the Series 4 Preferred Shares shall
maintain their relative powers, designations and preferences provided herein.
6. Lost or Stolen Certificates. On receipt by the Company of evidence of
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the loss, theft, destruction or mutilation of any Preferred Stock Certificate,
and (in the case of loss, theft or destruction) of any indemnification
undertaking by the holder to the Company that is reasonably satisfactory to the
Company, and on surrender and cancellation of such Preferred Stock Certificate,
if mutilated, the Company shall execute and deliver a new Preferred Stock
Certificate of like tenor and date; provided that the
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<PAGE>
Company shall not be obligated to re-issue any lost, stolen or destroyed
Preferred Stock Certificate if the holder thereof contemporaneously requests the
Company to convert such Series 4 Preferred Shares into Common Stock.
7. Amendment. So long as any Series 4 Preferred Shares are outstanding,
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the Company shall not, without first obtaining the approval by vote or written
consent, in the manner provided by law, of the holders of at least a majority of
the total number of Series 4 Preferred shares outstanding, voting separately as
a class, amend or repeal any provision of, or add any provision to, the
Company's Certificate of Incorporation, if such action would alter or change the
preferences, rights, privileges or powers of, or the restrictions provided for
the benefit of, the Series 4 Preferred Shares.
IN WITNESS WHEREOF, the Company has caused this certificate to be signed by
Henry Montgomery, its Chief Financial Officer, as of April 28, 1997.
SYQUEST TECHNOLOGY, INC.
By:/Henry C. Montgomery/
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Title: Chief Financial Officer
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Exhibit 4.28
CERTIFICATE OF CORRECTIONS
TO CERTIFICATE OF DESIGNATIONS, PREFERENCES
AND RIGHTS OF 5% CUMULATIVE CONVERTIBLE PREFERRED STOCK, SERIES 4
OF
SYQUEST TECHNOLOGY, INC.
SyQuest Technology, Inc. (the "Company"), a corporation organized and
existing under and by virtue of the General Corporation Law of the State of
Delaware, does hereby certify that, pursuant to authority conferred upon the
Board of Directors of the Company by the Certificate of Incorporation, as
amended, of the Company, and by action taken by pursuant to a regularly
scheduled meeting of the Board of Directors on May 6, 1997, and in accordance
with and pursuant to section 103 of the General Corporation Law of the State of
Delaware, the Board of Directors of the Company adopted the following
resolutions:
BE IT RESOLVED, that paragraph 1. of the Certificate of Designations,
Preferences and Rights of 5% Cumulative Convertible Preferred Stock, Series 4,
of the Company, filed with the Delaware Secretary of State on April 28, 1997, be
and it hereby is corrected to substitute a comma in place of the semicolon in
third sentence of Paragraph 1 so as to read as follows:
1. Dividends. The holders of the Series 4 Preferred Shares shall be
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entitled to a cash dividend of five percent per annum of the Stated Value (as
defined below), on a cumulative basis (prorated for any portion of the
applicable period during which the Series 4 Preferred Shares are outstanding).
Dividends shall accrue from the date of issuance of the Series 4 Preferred
Shares and shall be payable on the last day of each calendar quarter, commencing
June 30, 1997, through and including the date on which the Series 4 Preferred
Shares are converted. Dividends may be paid at the Company's option in cash or,
on not less than ninety days' notice from the Company to each holder of Series 4
Preferred Shares, in additional Series 4 Preferred Shares, provided that the
Company may not elect to pay dividends in additional Series 4 Preferred Shares
to the extent that the number of authorized and unissued Series 4 Preferred
Shares is insufficient to make such payment or the ability of the holders of the
Series 4 Preferred Shares to convert Series 4 Preferred Shares or to exercise
the Warrant (as hereinafter defined) is restricted by Section 2(h) below. If
the Company elects to pay to any holder of Series 4 Preferred Shares any such
dividend in additional Series 4 Preferred Shares, the number of such additional
Series 4 Preferred Shares shall be determined by dividing the aggregate amount
of such dividend payable to such holder by 100; provided that no fraction of a
Series 4 Preferred Share shall be issued, but in lieu thereof, the Company shall
pay in cash an amount equal to such fraction multiplied by $100.
<PAGE>
RESOLVED FURTHER, that the first six lines of paragraph 2. of the
Certificate of Designations, Preferences and Rights of 5% Cumulative Convertible
Preferred Stock, Series 4, of the Company, filed with the Delaware Secretary of
State on April 28, 1997, be and it hereby is corrected to make it clear that the
rights of holders of the Company's 5 % Cumulative Convertible Preferred Stock,
Series 4 will be subject to the terms of such holder's purchase agreement with
the Company, and not the purchase agreement of any other holder, and accordingly
it shall read as follows:
2. Conversion of Series 4 Preferred Shares. The holders of the Series
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4 Preferred Shares shall have the right, at their option, but subject to the
terms of the purchase agreement with the Company governing the terms of such
holder's purchase of Series 4 Preferred Shares (the "Purchase Agreement"), to
convert the Series 4 Preferred Shares into shares of the common stock of the
Company, $.001 par value, as such stock now exists or may be changed from time
to time hereafter ("Common Stock"), on the following terms and conditions:
RESOLVED FURTHER, that paragraph 2(h) of the Certificate of
Designations, Preferences and Rights of 5% Cumulative Convertible Preferred
Stock, Series 4, of the Company, filed with the Delaware Secretary of State on
April 28, 1997, is and it hereby is corrected to change the reference to the
singular "warrant" to the plural "warrants" and to delete the words "that
certain" with regard to the warrant, to substitute for the word "Fletcher" the
phrase "holders of Series 4 Preferred Shares", to substitute the word "Purchase"
for the word "Subscription" and to change the reference to paragraph 2(j) to
2(i) so that paragraph 2(h) shall read as follows:
(h) The 19.9% Limit. If at the time that the Company receives a Conversion
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Notice, the aggregate number of shares of Common Stock issuable pursuant to
such Conversion Notice and all other Conversion Notices received at that
time (the "Subject Conversion Notices"), when added to the aggregate number
of shares of Common Stock (1) previously issued on conversion of Series 4
Preferred Shares and the exercise of the Warrants to purchase Common Stock
(the "Warrants") issued by the Company to the holders of the Series 4
Preferred Shares pursuant to the Purchase Agreement on the date of initial
issuance of the Series 4 Preferred Shares and (2) issuable on conversion of
all remaining outstanding Series 4 Preferred Shares (determining such
number as if such Series 4 Preferred Shares were converted as of the
Conversion Date relating to such Conversion Notice) and (3) issuable on
exercise of the Warrants (determined based on the Exercise Price then in
effect, as defined in the Warrants) would exceed nineteen and nine-tenths
percent of the total number of shares of Common Stock outstanding (adjusted
to reflect any split, subdivision, combination or consolidation of the
Common Stock, whether by reclassification, distribution of a dividend with
respect to the outstanding Common Stock payable in shares of Common Stock,
or otherwise, or any recapitalization of the Common Stock) on the date of
the first issuance of Series 4 Preferred Shares (the "19.9% Limit") and
such circumstance would require the approval of the holders of the Common
Stock pursuant to the listing requirements of the Nasdaq Stock Market or
the rules of the National Association of Securities Dealers, Inc. (or such
stock exchange or other interdealer quotation system that is then the
Principal Market), the number of
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Series 4 Preferred Shares identified in the Subject Conversion Notices
that, if converted into shares of Common Stock, would equal or exceed the
19.9% Limit (the "Excess Preferred Shares"), shall not be converted unless
and until the stockholder approval referred to in section (2)(i) (the
"Stockholder Consent") is obtained or is no longer required. The Excess
Preferred Shares will be allocated among the holders delivering Subject
Conversion Notices on a pro rata basis based on the relative number of
Series 4 Preferred Shares identified in each such Subject Conversion
Notice. Any Excess Preferred shares shall not be converted into shares of
Common Stock until the later of the date on which the Stockholder Consent
is obtained and the Company receives a subsequent Conversion Notice with
respect thereto. If the Company is not otherwise notified by the Nasdaq
Stock Market or the National Association of Securities Dealers, Inc. that
Stockholder Consent is necessary, the Company will issue Common Stock to
the holders of the Series 4 Preferred Shares in excess of the 19.9% Limit.
IN WITNESS WHEREOF, the Company has caused this certificate to be
signed by Edward L. Marinaro, its Chairman of the Board, as of the seventh day
of May 1997.
SYQUEST TECHNOLOGY, INC.
By:/Edward L. Marinaro/
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Chairman of the Board
Edward L. Marinaro
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EXHIBIT 23.1
CONSENT OF PRICE WATERHOUSE LLP, INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectuses
constituting part of the Registration Statements on Forms S-3 (Nos. 33-28225,
33-17119, 33-7369) and the Registration Statements on Forms S-8 (Nos. 33-
20089, 33-48273, 33-99372, 33-20861) of SyQuest Technology, Inc. of our report
dated December 29, 1997 appearing on page 30 of this Form 10-K.
/s/ Price Waterhouse LLP
San Jose, California
December 29, 1997
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EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 33-20861, 33-48273, 33-20089, 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 Nos.
33-28225, 33-17119, 33-7369) of SyQuest Technology, Inc. of our report dated
December 11, 1996, except for Note 1, "Basis of Presentation", paragraph 3, as
to which the date is June 27, 1997, 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, 1997.
/s/ Ernst & Young, LLP
San Jose, California
December 29, 1997
