UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended June 30, 1997
Commission file number 0-19674
SYQUEST TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter.)
DELAWARE 94-2793941
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
47071 Bayside Parkway Fremont, CA 94538
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(510) 226-4000
Indicate by check mark whether the registrant(1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
As of June 30, 1997, 48,006,170 shares of the Registrant's common stock
$0.001 par value, were issued and outstanding.
<PAGE>
Part 1. Financial Information
Item 1. Financial Statements
SYQUEST TECHNOLOGY, INC.
CONSOLIDATED CONDENSED INCOME STATEMENT
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three months ende
June 30,
---------------------
1997 1996
---------- ---------
<S> <C> <C>
Net revenue $31,709 $29,459
Cost of revenue 30,829 46,635
Provision for losses on purchase commitments - 6,523
---------- ---------
Gross Profit (loss) 880 (23,699)
Operating Expenses:
Selling, general and administrative 6,941 10,113
Research and development 3,712 5,932
Restructuring costs - 1,860
---------- ---------
Total operating expenses 10,653 17,905
(Loss) from operations (9,773) (41,604
Net interest expense (899) (425
Other income 0 712
---------- ---------
(Loss) before income taxes (10,672) (41,317
Provision for income taxes - -
---------- ---------
Net (loss) ($10,672) ($41,317
========== =========
Net (loss) per share ($0.80) ($3.61
========== =========
Common and common equivalent shares
used in computing per share amounts 44,054 11,450
========== =========
The computation of loss per share for the quarter ended June 30, 1997,
includes adjustments which increase the loss applicable to
common stockholders by $0.4 million representing preferred
stock dividends and $24.0 million representing value assigned
to warrants issued in conjunction with the Series 3 and Series 4
Convertible Preferred Stock, respectively. The computation of loss per
share for the nine months ended June 30, 1997, also includes
adjustments of $1.3 million representing preferred stock dividends, a
one-time adjustment of $5.3 million for the "embedded yield"
representing the discount on the assumed potential conversion of the
7% Cumulative Convertible Preferred Stock, Series 1, and $4.9 million
representing value assigned to warrants issued in conjunction
with the Convertible Preferred Stock, Series 1, and the 5% Cumulative
Convertible Preferred Stock, Series 2.
<FN>
See notes to consolidated condensed financial statements
</TABLE>
<PAGE>
SYQUEST TECHNOLOGY, INC.
CONSOLIDATED CONDENSED BALANCE SHEET
(In thousands)
<TABLE>
<CAPTION>
June
19
------
(Unau
<S> <C>
Assets
Current assets:
Cash, cash equivalents and short-term investments
Accounts receivable, net
Inventories, net
Prepaid expenses and deferred income taxes
------
Total current assets
Net plant, property and equipment
Other assets
------
$
======
Liabilities and Stockholders' (Deficit)
Current liabilities:
Bank borrowings $
Accounts payable
Accrued compensation and other liabilities
Provision for losses on purchase commitments
Current portion of long-term debt
------
Total current liabilities
Long-term debt and other long-term liabilities
Stockholders' equity (deficit):
Preferred stock
Common stock
Additional paid in capital 1
Treasury stock (
Retained earnings (deficit) (1
------
Total stockholders' equity (deficit)
------
$
======
<FN>
Note: The consolidated condensed balance sheet at September 30, 1996
the audited financial statements at that date.
See notes to consolidated condensed financial statements
</TABLE>
<PAGE>
SYQUEST TECHNOLOGY, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
<S>
<S>
Operating Activities:
Net (loss)
Adjustments to reconcile net (loss) to cash used in
operating activities:
Depreciation
Deferred income taxes
Provision for bad debts
Capital asset adjustment
Other
Net changes in current assets and current liabilities:
Accounts receivable
Inventories
Accounts payable
Accrued expenses and other liabilities
Other
Net cash used in operating activities
Investing activities:
Purchase of equipment and leasehold improvements
Other assets
Net cash used in investing activities
Financing activities:
Proceeds from issuance of common stock
Proceeds from issuance of preferred stock
Net proceeds from bank borrowings
Repayments on long term debt
Net cash provided by financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of the period
Cash and cash equivalents at end of the period
Non-Cash Financing Activities
(ALL AMOUNTS ARE IN THOUSANDS)
During the second quarter ended March 31, 1997, three
of the Company's vendors converted $12,871 in notes
payable to common shares. During the first fiscal
quarter ended December 31, 1996, the Company
exchanged $9,179 in accounts payable to vendor notes
and subsequently to equity.
During the second quarter ended March 31, 1997, the
Company accrued $328 to additional paid in capital,
for the performance of professional consulting
services and to secure an additional bank line.
Consideration for these services will be met by the
issuance of common stock purchase warrants, entitling
the buyer to purchase shares of newly issued common
stock of the Company.
During the second fiscal quarter ended March 31,
1997, the Company satisfied outstanding vacation
liabilities of $352 with common stock.
During the second quarter ended March 31, 1997, the
Company declared $385 of accrued preferred dividends
paid with 164 common shares.
During the third quarter ended June 30, 1997, two of
the Company's vendors converted $2,770 in notes
payable to common shares.
During the third fiscal quarter ended June 30, 1997,
the Company satisfied outstanding development bonus
liabilities of $178 with common stock.
During the third quarter ended June 30, 1997, the
Company declared $394 of accrued preferred dividends
paid with 62 common shares and 3 series 3 and series
4 preferred shares.
<FN>
See notes to consolidated condensed financial statements
</TABLE>
<PAGE>
SYQUEST TECHNOLOGY, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
June 30, 1997
(Unaudited)
NOTE: 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed
financial statements have been prepared in accordance
with generally accepted accounting principles for
interim financial information and with instructions to
Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the
information and footnotes required by generally
accepted accounting principles for complete
consolidated financial statements. In the opinion of
management, all adjustments (consisting of normal
recurring adjustments) considered necessary for fair
presentation have been included.
Operating results for the three and nine month period
ended June 30, 1997 are not necessarily indicative of
the results that may be expected for the year ending
September 30, 1997. For further information, refer to
the consolidated financial statements and footnotes
thereto included in the Company's annual report on
Form 10-K, as amended, for the year ended September
30, 1996.
NOTE: 2 - INVENTORIES
Inventories are comprised of the following:
June 30, September 30,
1997 1996
--------- -------------
(In thousands)
Raw materials $14,213 $ 5,005
Work in process 5,040 4,481
Finished goods 5,678 1,052
--------- -------------
$24,931 $10,538
========= =============
NOTE: 3 - NET LOSS PER SHARE
The computation of net loss per share for the quarter
ended June 30, 1997, includes adjustments related to
the computation of earnings per share applicable to
common stockholders by $0.4 million, representing
preferred stock dividends, and $24.0 million
representing value assigned to warrants issued in
conjunction with the Series 3 and Series 4 Convertible
Preferred Stock, respectively. Absent these financing
adjustments, the net loss per share applicable to the
operation of the business was $0.24. The computation
of net loss per share for the nine months ended June
30, 1997, also includes adjustments of $1.3 million,
representing preferred stock dividends, a one-time
adjustment of $5.3 million for the "embedded yield"
representing the discount on the assumed potential
conversion of the 7% Cumulative Convertible Preferred
Stock, Series 1, and $4.9 million representing value
assigned to warrants issued in conjunction with the
Convertible Preferred Stock, Series 1 and the 5%
Cumulative Convertible Preferred Stock, Series 2,
respectively. Absent these financing adjustments, the
net loss per share applicable to the operation of the
business for the nine months ended June 30, 1997, was
$1.80.
The net loss per share for the three month and nine
month periods ended June 30, 1997, respectively, is
based on the weighted average number of shares of
common stock and common stock equivalents, when
appropriate, outstanding during the period.
See Dilution of Common Stock section in MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
NOTE: 4 - LINES OF CREDIT
On June 30, 1997, the Company had a line of credit
agreement (the "Agreement") with a financial
institution, expiring January 31, 1998. The Agreement
provides for borrowings of the lesser of $30 million
or a combination of 80 percent of the Company's
eligible accounts receivable and 40% of the Company's
eligible finished goods inventories. As of June 30,
1997, approximately $16.8 million of borrowings were
outstanding against the line.
On June 30, 1997, the Company's manufacturing
subsidiary in Penang, Malaysia, SyQuest Technology Sdn
Bhd (M), had a banking facility (the "facility") with
a Malaysian financial institution expiring January
1998 and consisting of a line of credit for (RM) 17.5
million (approximately $7.0 million) and a term loan
for (RM) 12.5 million (approximately $5.0 million).
The facility is secured by the subsidiary's building,
equipment, inventory, and eligible receivables. As of
June 30, 1997, approximately 5.4 million of borrowings
were outstanding against the facility.
For further information, refer to the consolidated
financial statements and footnotes thereto included in
the Company's annual report on Form 10-K, as amended,
for the year ended September 30, 1996.
NOTE: 5 - CONVERTIBLE PREFERRED STOCK
At June 30, 1997, the Company had 5,051 shares of 7%
Cumulative Convertible Preferred Stock, Series 1
(Series 1), 25,606 shares of 5% Convertible Preferred
Stock, Series 3 (Series 3), and 257,060 shares of 5%
Convertible Preferred Stock, Series 4 (Series 4)
issued and outstanding. Each of the holders of Series
1 Preferred Stock is entitled to a 7% per share
dividend, while the Series 3, and Series 4 Preferred
Stock holders are entitled to a 5% per share
dividend, respectively. Subsequent to June 30, 1997,
the remaining 5,051 shares of 7% Cumulative
Convertible Preferred Stock, Series 1 have converted
into 2,812,627 shares of Common Stock.
See Dilution of Common Stock section in MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
NOTE: 6 - COMMON STOCK
During the third fiscal quarter which ended June 30,
1997, the Company converted $2.8 million of notes
payable to vendors into approximately 1,164,583
million shares of common stock. For the nine months
ended June 30, 1997, a total of $28.5 million of such
notes had been converted.
On August 8, 1997, the Company raised an additional
$3.5 million in equity financing in exchange for
1,382,716 shares of common stock.
See Dilution of Common Stock section in MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
During the third fiscal quarter ended June 30, 1997,
certain holders of the Company's then outstanding
preferred stock issues converted preferred stock into
common stock. The conversions resulted in the
issuance of 1,313,763, 1,386,500, and 1,386,500 shares
of common stock for a total of 4,857,370 shares of
common stock in exchange for 1,962 shares of the
Company's Series 1 Preferred Stock, 25,000 shares of
the Company's Series 3 Preferred Stock, and 25,000
shares of the Company's Series 4 Preferred Stock,
respectively.
See exhibit 11.1 for the calculation of earnings per
share and the weighted average common shares
outstanding.
NOTE: 7 - INCOME TAXES
No provision for income taxes has been recorded as the
Company has incurred net losses. Deferred tax assets
consisting primarily of the tax effects of net
operating loss carryforwards are fully reserved due to
the uncertainty of their realization. The use of the
net operating loss carryforwards may be limited by
change in ownership provisions under section 382 of
the income tax act as a result of the substantial
number of shares issued during the second fiscal
quarter ended March 31, 1997.
See Dilution of Common Stock section in MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
NOTE: 8 - LITIGATION
On July 29, 1997, a competitor filed lawsuit against
the Company alleging infringement of two patents and a
trademark. The Company believes that it does not
infringe any valid patent claims or trademarks of its
competitor and intends to vigorously defend its
position.
See Part II, item 1, of this Form 10-Q for a
description of pending legal proceedings.
NOTE: 9 - RECENT ACCOUNTING PRONOUNCEMENT
In February 1997, the Financial Accounting Standards
Board issued Financial Accounting Standard (SFAS) No.
128, "Earnings per Share". This statement is
effective for the Company's fiscal year ending
September 30, 1998. 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.
In June 1997, the Financial Accounting Standards Board
issued SFAS No. 130, "Comprehensive Income", and SFAS
No. 131, "Segment Reporting". These statements are
effective for the Company's fiscal year ending
September 30, 1999. SFAS 130 defines the items to be
included in the determination of comprehensive income,
and SFAS 131 defines the "management approach" and the
impact on segment reporting. Management believes the
adoption of SFAS 128, 130 and 131 would not have a
material impact on the net loss per share for the
three or nine months ended June 30, 1997.
SYQUEST TECHNOLOGY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations:
The Company continues to face significant risks
associated with strong competition in the marketplace
and acceptance of new products. The Company faces
additional risks associated with technology and
product development, risks relating to new product
introduction, changes in the Company's marketplace,
and liquidity issues. 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.
During the quarter ended, June 30, 1997, the Company
experienced a significant increase in sales of the
Company's award winning SyJet product and sustained
sales volumes of the Company's award winning EZflyer
products. Quarterly financial results were also
favorably impacted by the realization of improved
gross profit and reduced operating expenses.
Consequently, the Company reported revenue for the
quarter ended June 30, 1997 of $31.7 million, compared
to $29.5 million in the same period a year ago and
$16.8 million in the immediately preceding quarter.
The increase represented an improvement of $14.9
million, or 90% over the immediately preceding quarter
ended March 31, 1997.
During the quarter ended June 30, 1997, the Company
successfully raised additional financing through
$33.0 million in private stock offerings and
successfully converted $2.8 million of Vendor Notes
Payable.
See Dilution of Common Stock section in MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The Company has ramped production volumes of the SyJet
product to meet existing backlog. However, the
Company faces significant competitive pressures and
there can be no assurance that the Company will be
successful in competing against the product offerings
of companies with greater cash and operating
resources, or in securing the resources to
aggressively develop and produce new products. The
Company will require additional cash resources in the
future to fund working capital requirements, meet its
debt obligations and to fund incurred losses.
Management's plans with respect to meeting these cash
needs include additional equity funding and further
restructuring of notes payable to equity. The ability
to raise cash through further equity funding will
require shareholder approval of an increase in the
authorized Common Stock. There can be no assurance
that the Company will be able to secure additional
cash resources when needed, if at all, or on favorable
terms or to successfully complete further debt to
equity conversions. An inability to overcome these
risk factors would have a material adverse effect on
the Company's financial performance and on its
liquidity.
Net Revenue
Net revenue for the quarter ended June 30, 1997 was
$31.7 million, compared to $29.4 million reported for
the comparable prior year quarter. Revenue was
favorably affected by increased volumes on the
Company's award winning SyJet product.
For the nine months ended June 30, 1997, net revenue
totaled $98.8 million compared to $155.6 million in
the comparable prior year period. The decline in
revenue over the prior year nine month period is
principally attributable to: (i) industry wide
shortages of critical components and other production
shortfalls in the second fiscal quarter of fiscal 1997
which affected the Company's ability to produce
product commensurate with demand, (ii) the
discontinuation of certain product lines during the
second fiscal quarter of fiscal 1997.
Absent a substantial increase in sales of the
Company's products prior to the end of the fourth
fiscal quarter, the Company will continue to incur
losses. Factors such as slow sell through rates in
the channels, price pressures on the Company's
products, and competitive product introductions would
have adverse impact on revenue.
Gross Profit (Loss)
The Company recorded a gross profit for the quarter
ended June 30, 1997, of $.8 million compared to a
gross loss of $23.7 million in the comparable prior
year quarter. The reduction in the gross loss of $24.5
million is principally attributable to an increase in
the mix toward the Company's new higher margin
products, manufacturing cost reductions, and
efficiencies realized as a result of increased
utilization of the Company's production facilities.
For the nine months ended June 30, 1997, the gross
loss totaled $1.3 million compared to a gross loss of
$58.3 million for the comparable prior year period.
The decrease in the gross loss of $57 million over the
comparable prior year period is principally
attributable to very high losses incurred on
production costs for the EZ 135 system products and EZ
135 cartridge manufacturing yields during the nine
months ended June 30, 1996 and the establishment by
the Company of a $18.1 million reserve for excess and
obsolete inventory and non-cancelable purchase
commitments during the same period.
Factors such as volatility in the drive and cartridge
markets, unexpected production delays and costs, and
an inability to meet production schedules and sales
demand may continue to have an adverse effect on gross
profits. Consequently, there can be no assurances that
the Company will achieve necessary improvements in
gross profit in the future.
Selling, General and Administrative Expenses
For the quarter ended June 30, 1997, selling, general
and administrative expenses totaled $6.9 million, or
22 percent of net revenue compared to $10.1 million,
or 34 percent of net revenue, for the comparable prior
year quarter. The decrease in aggregate spending of
$3.2 million or 32 percent over the comparable prior
year quarter is primarily attributable to the
Company's ongoing attempts to control costs and
simplify its operation. The Company is initiating a
new sales and marketing campaign which includes
programs aimed at stimulating sales demand. This
campaign will increase future Selling, General and
Administrative expenses significantly above the
amounts incurred during the third fiscal quarter ended
June 30, 1997.
For the nine months ended June 30, 1997, selling,
general and administrative expenses totaled $30.9
million compared to $38.9 million for the comparable
prior year period. The decrease in expenses is
primarily driven by the Company's ongoing cost
reduction and business simplification efforts.
Research and Development Expenses
Research and development expenses for the quarter
ended June 30, 1997, were $3.7 million, or 12 percent
of net revenue, compared to $5.9 million, or 20
percent of net revenue, for the comparable prior year
quarter. The decrease in spending of $2.2 million or
37 percent is principally the result of the Company's
ongoing efforts to focus engineering on its primary
core products. The Company believes that it must
continue to make significant investments in R&D in
order to effectively implement its product strategy.
For the nine months ended June 30, 1997, research and
development expenses were $15.4 million compared to
$20.4 million for the comparable prior year period.
The decrease in expenses is primarily the result of a
focused engineering effort on the Company's core
products and cost reduction efforts.
Interest Expense
Net interest expense was $.9 million for the quarter
ended June 30, 1997 compared to $0.4 million for the
comparable prior year quarter. For the nine months
ended June 30, 1997, net interest expense was $3.4
million compared to $0.7 million for the comparable
prior year period. The increase in interest expense is
principally the result of interest incurred on the
Company's bank borrowings and vendor debt obligations.
Although the conversion of certain vendor notes to
equity will reduce interest expense, interest on
increased bank borrowings is expected to offset the
decrease in vendor note interest expense.
Net Loss
The loss for the quarter ended June 30, 1997 was $10.7
million compared to $41.3 million for the comparable
prior year quarter. For the nine months ended June
30, 1997, the net loss was $51.2 million compared to
$126.2 million for the comparable prior year period.
The reduction in the loss from the prior periods is
primarily attributable to the matters discussed in the
preceding paragraphs.
Liquidity and Capital Resources:
The Company is in a turnaround situation which
necessitates certain actions on behalf of the Company
which affect the business environment in which the
Company operates. 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 the current
fiscal year, the Company has experienced a return to
regular business terms with key suppliers, although
some vendors still require C. O. D. terms or security
deposits. The Company has aggressively pursued a
program to convert accounts payable and vendor notes
into common stock. During the quarter ended June 30,
1997, $2.8 million of vendor notes were converted to
1,164,583 shares of common stock. The Company intends
to continue its efforts to convert additional vendor
notes to equity. During the quarter ended June 30,
1997, the Company raised $33.0 million of additional
capital to fund operations.
There can be no assurance that the Company will be
successful in its attempts to convert the remaining
notes or in raising additional capital as needed. The
Company's inability to convert those notes or to raise
additional capital would have an adverse effect on the
Company's liquidity.
At June 30, 1997, the Company had cash and short-term
investments of $7.5 million, comparable to the $3.7
million at September 30, 1996. Borrowings under the
Company's credit facilities amounted to $22.2 million
at June 30, 1997 compared to $19.3 million at
September 30, 1996. The Company improved its net
worth from a deficit position of $30.4 million at
September 30, 1996 to an equity position of $13.5
million at June 30, 1997. Working capital also
increased from a negative position of $37.4 million at
September 30, 1996 to $2.2 million at June 30, 1997.
The improvements in net worth and working capital
over the comparable prior year quarter are primarily
attributable to a significant increase in equity
investments coupled with a reduction in operating
losses.
The Company has financed its working capital needs
through a combination of existing cash resources,
asset-based borrowings, and a series of capital financing
transactions.
The Company's liquidity may be impacted in the future by
factors such as higher interest rates, inability to
borrow without collateral and higher financing costs with
regard to capital, and limitations to further equity
funding without shareholder approval.
Accounts receivable totaled $24.1 million at June 30,
1997 compared to $30.3 million at September 30, 1996. The
decrease of $6.2 million is primarily attributable to
significantly improved collection efforts and aggressive
management of the accounts receivable agings.
Inventory, net of reserves, was $24.9 million at June 30,
1997, an increase of $14.4 million, compared to the $10.5
million at September 30, 1996. The increase in
inventories is primarily attributable to production of
the SyJet and EZflyer products to levels commensurate
with expected demand. Inventory turnover has remained
consistent at approximately 5 turns per year.
On January 17, 1997, the Company renegotiated its
domestic line of credit with a financial institution,
continuing the existing terms and extending the line
through January 31, 1998. The new line provides for a
limit on borrowings of the lesser of $30 million or a
combination of 80 percent of the Company's eligible
accounts receivable and 40% of the Company's eligible
finished goods inventory. As of June 30, 1997,
approximately $16.8 million of borrowings were
outstanding against the line.
On June 30, 1997, the Company's manufacturing
subsidiary in Penang, Malaysia, SyQuest Technology Sdn
Bhd (M), had a banking facility (the "facility") with
a Malaysian financial institution expiring January
1998 and consisting of a line of credit for (RM) 17.5
million (approximately $7.0 million) and a term loan
for (RM) 12.5 million (approximately $5.0 million).
The facility is secured by the subsidiary's building,
equipment, inventory, and eligible receivables. As of
June 30, 1997, approximately 5.4 million of borrowings
were outstanding against the facility.
For further information on bank borrowings, refer to
the consolidated financial statements and footnotes
thereto included in the Company's annual report on
Form 10-K, as amended, for the year ended September
30, 1996.
The Company raised significant financing during the
quarter ended June 30, 1997. See Part II, item 2 of this
Form 10-Q. The Company will require additional equity
funding which, if successful, will cause further dilution
of the common stock. The ability to raise cash through
further equity funding will require shareholder approval
of an increase in the Company's authorized common stock.
See Dilution of Common Stock section in MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The Company has deferred negotiation of an equity
investment by the Legend group as further documented in
the Company's annual report on Form 10-K, as amended,
for the year ended September 30, 1996.
For the nine months ended June 30, 1997, the Company used
$53.4 million in cash for operating activities and $4.0
million in capital expenditures.
The Company believes that, based on its ability to raise
additional capital and obtaining shareholder approval to
do so, the sources of financing available to the Company
will be sufficient to fund the Company's operations into
the near future. There can be no assurance, however,
that additional financing will be available when needed,
if at all, or on favorable terms.
Notice Concerning Forward Looking Statements and
Factors That May Affect Future Results, Financial
Condition and Liquidity:
Some of the statements made in this Form 10-Q are
forward-looking in nature, including but not limited
to the Company's product introduction and financing
plans and other statements that are not historical
facts. Forward-looking statements in this Form 10-Q
include, without limitation, language in the form of
one or more of the following words: "intend",
"believe", "will", "may", "anticipate", "plan", and
"expect." The occurrence of the events described, and
the achievement of the intended results, are subject
to the future occurrence of many events, some or all
of which are not predictable or within the Company's
control; therefore, actual results may differ
materially from those anticipated in any forward-
looking statements. Many risks and uncertainties
which could affect the possible results described in
forward-looking statements are inherent in the
Company's industry; others are more specific to the
Company's business. Risks related to the Company's
business are described in the Company's Form 10-K, as
amended, including risks associated with technology
and product development, risks relating to new product
introduction and acceptance of new products, changes
in the Company's marketplace, preferred stock
issuances and dilution, intellectual property matters,
regulatory and manufacturing issues, liquidity issues,
and risks associated with competition from other
companies, as well as the following:
ONGOING RISK ISSUES
Market acceptability of the Company's product and
access to capital continue to be paramount in ensuring
a successful turnaround strategy. The Company's
products are subject to increasing competition from
several other removable-media data storage devices.
In order to secure adequate market share, the Company
must ensure that the functionality and quality of the
product is effectively communicated to the
marketplace. As a result, the Company needs
sufficient capital to implement a marketing strategy
that will adequately address the appropriate markets.
The Company is also dependent on the successful
production and sale of the SyJet product line.
Additionally, the decline in volumes and pricing on
mature products will continue to have a negative
impact on the Company's revenue. 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. Critical to
each of these factors is the Company's ability to
attract additional investment capital. The ability to
raise cash through further equity funding will require
shareholder approval to increase the number of
authorized common shares. There can be no assurances
that the Company will successfully achieve these
objectives.
DILUTION OF COMMON STOCK
At June 30, 1997, the Company had 5,051 shares of
Series 1 Preferred Stock, 25,606 shares of Series 3
Preferred Stock, and 257,060 shares of Series 4
Preferred Stock issued and outstanding. The Series 1
Preferred Stock has conversion limitations which limit
the number of shares that may be converted in any
month. Additionally, several of the Company's
financings have included significant warrant coverage
which, when exercised, will result in significant
proceeds to the Company. Assuming the conversion of
all preferred stock, exercise of existing warrants
and, fulfillment of other existing commitments, a
substantial portion of the Company's 120 million
authorized common stock has been committed.
Consequently, the Company's ability to raise cash
through further equity funding will require
shareholder approval of an increase in the number of
authorized common shares. Should such funding occur,
further dilution of the common stock will result.
FUTURE PROFITABILITY
The Company continues to execute its turnaround plan
which includes adjusting operations to reduce losses
and simplification of the business to improve
efficiency. The Company believes that it will
ultimately be successful in its turnaround attempts,
and that the Company will return to profitability in
the future. However, there can be no assurances that
the Company will be successful or that it will have,
or be capable of obtaining, sufficient capital to
withstand prolonged operating losses.
SHORTAGES OF CRITICAL COMPONENTS; ABSENCE OF SUPPLY
CONTRACTS; SUPPLIER WORKOUTS
Many components incorporated in, or used in the
manufacture of, the Company's products are currently only
available from sole source suppliers. During the 1996
fiscal year, the Company experienced disruption in its
supply of certain components for a number of reasons
including worldwide shortages of key components as well
as the shortage of cash to pay suppliers. The Company
may continue to experience difficulty in the future in
obtaining a sufficient supply of many key components due
to the shortage of cash to pay suppliers and other
reasons. A disruption in the supply of key components
would have a material adverse affect on the Company's
ability to generate sales and the ability to successfully
produce the SyJet products.
QUARTERLY FLUCTUATIONS IN OPERATING RESULTS
The Company has experienced and in the future may
continue to experience significant fluctuations in its
quarterly operating results. Factors such as price
reductions, the introduction and market acceptance of new
products, product returns, the availability of critical
components and the lower gross profits associated with
the Company's products could contribute to this quarterly
fluctuation. 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 financial
performance. As a result of these and other factors,
including possible further dilution, it is likely that
the Company's operations may be affected.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
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 lawsuit 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
injunction enjoining SyQuest from further
infringement.
The Company believes that it does not infringe any
valid patents or trademarks of Iomega and intends to
vigorously defend against this action. However, if
Iomega were to prevail in its claims against the
Company, it would have a material adverse effect on
the Company. Refer to the Company's 8-K filed August
11, 1997 for further information.
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.
In 1996, the Company was named as a defendant in four
putative
class action lawsuits. Two of the actions were brought
in the United States District Court for the Northern
District of California. The two other actions were filed
in the Superior Court of the State of California for the
County of Alameda and have been consolidated into one
action. The Company intends to defend these three cases
vigorously. Refer to the Company's annual report on Form
10-K, as amended, for the year ended September 30, 1996,
for further information.
The Company has certain insurance coverage with respect
to the above claims. However, the amount of any ultimate
claims based on these actions and related insurance
coverage is not presently determinable.
In May of 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.
The Company is a nominal defendant in the action and
intends to defend this case vigorously. Refer to the
Company's annual report on Form 10-K, as amended, for the
year ended September 30, 1996, for further information.
The Company has filed suit against Nomai, S.A. (Nomai)
and Maxell in France for copyright and patent
infringement, and though it did not obtain the temporary
injunction sought against Nomai prohibiting the sale and
distribution of Nomai's 200 megabyte cartridges, the
underlying suit continues. The Company has also
initiated an arbitration proceeding against Nomai seeking
payment of outstanding royalties of approximately $1
million. The arbitration process began in May 1995, in
San Jose, California.
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 has filed a counter-claim for alleged breach of
contract and unfair competition. During the quarter
ended June 30, 1997, the suit against defendants
Electronique d2 and La Cie Ltd was settled.
One company has notified the Company that it believes the
Company's products infringe on 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 recently 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.
The Company, in the normal course of business, receives
and makes inquiries relating to other intellectual
property matters including alleged patent infringement.
The Company may negotiate licenses or other settlements
when it considers such action appropriate.
From time to time, the Company is involved in litigation
that it considers to be in the normal course of its
business. Other than set forth above, the Company is not
engaged in any legal proceedings as of the date hereof
which the Company expects individually or in the
aggregate to have a material adverse effect on the
Company's financial condition or results of operations.
Item 2. Changes in Securities; Potential Dilution and Adverse Impact on
Additional Financing
As of June 30, 1997, the holders of Series 1, Series 3,
and Series 4 Preferred Stock exercised their rights to
convert 2,704, 24,394, and 22,940 shares of Preferred
Stock into 1,313,763, 1,386,500, and 1,386,500 shares of
Common Stock, respectively. The holders of the Company's
Convertible Preferred Stock, Series 1 and 5% Cumulative
Convertible Preferred Stock, Series 2 fully exercised
their rights to convert their common stock into a total
of 15,730,428 shares of the Company's Common Stock during
the second fiscal quarter. The holders of those
preferred shares also received a total of 4,172,484
warrants for the purchase of additional shares of the
Company's Common Stock, and the holders of the 5%
Cumulative Convertible Preferred Stock, Series 2 received
an additional 54,827 shares of Common Stock representing
their final 5% dividend as holder of such preferred
stock. The Series 3 and Series 4 holders received
warrants to purchase an additional 5 million and 28
million shares of common stock, respectively.
The exact number of shares issuable upon conversion of
the preferred stock cannot be determined with certainty
as the conversion price fluctuates with the market price
of the Company's Common Stock. Generally, such issuance
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. Further, the Company anticipates
the issuance of additional shares of Common Stock in lieu
of cash dividends to the holders of such preferred stock.
During the quarter ending June 30, 1997, entities holding
claims totaling $2.8 million against the Company
exchanged those claims for a total of 1,164,583 shares of
the Company's Common Stock. These transactions are set
forth in greater detail in the Report on Form 8-K filed
in July 1997.
During the quarter ended June 30, 1997, the Company
entered into various financing transactions whereby an
aggregate of $5.0 million was raised through the sales of
the Company's 5% Cumulative Convertible Preferred Stock,
Series 3 (the "Series 3 Shares") and an additional $28.0
million through the sales of 5% Cumulative Convertible
Preferred Stock, Series 4 (the "Series 4 Shares"). The
holders of these preferred shares will be able to convert
them into shares of the Company's Common Stock pursuant
to a predetermined formula based on the market price of
the Common Stock at the time of conversion. As the
conversion price fluctuates with the market price of the
Company's Common Stock, the exact number of shares
issuable upon conversion of the Series 3 Shares and
Series 4 Shares cannot be determined with certainty.
Generally, such issuance 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.
Further, the Company anticipates the issuance of
additional Series 3 Shares or Series 4 Shares to the
respective holders of such preferred stock in lieu of
cash dividends. The holders of the Series 3 Shares and
Series 4 Shares also received warrants to purchase a
number of shares of the Company's Common Stock equal to
the amount invested. The terms of the sale of the Series
3 and Series 4 shares are more fully set forth in the
Company's Report on Form 8-K filed in May 1997.
During the quarter ended June 30, 1997, the Company
issued certain consulting firms warrants to purchase a
number of shares of the Company's Common Stock. The terms
of the warrants are substantially the same as the Series
4 warrants which are more fully disclosed in the
Company's Report on Form 8-K filed in May 1997.
Item 4. Submission of Matters to a vote of Security
Holders
On May 6, 1997, the Company held its annual
shareholder meeting at the Corporate
Headquarters in Fremont, California. The
following matters were submitted and approved
by the shareholders:
(I) the nomination and election of Edward
Marinaro, Edwin Harper, Joseph Baia, and Richard
Kramlich as directors of the Company,
(ii) the approval of an amendment to the
Certificate of Incorporation to increase the
authorized number of shares of the Company's Common
Stock by 60 million and to decrease the stated par
value of the Common Stock to 0.0001, by a tally of
27.7 million votes in favor, 112 thousand votes
opposed, and 81 thousand abstaining votes,
(iii) the appointment of Price Waterhouse, LLP as
the Company's Independent Accountants.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibit 11.1 Computation of Earnings per Share
b. Financial data Schedule
c. Reports on Form 8-K
A current report on Form 8-K, dated June 11,
1997, was filed by the Company reporting
under item 5 and 7 the registration of
Registrant's Common Stock on Form S-3, and
related exhibits.
A current report on Form 8-K, dated June 2,
1997, was filed by the Company reporting
under item 5 the exchange of debt for equity
pursuant to Regulation D.
A current report on Form 8-K, dated April 4,
1997, was filed by the Company reporting
under item 5, 7, and 9, the exchange of debt
for equity pursuant to Regulation D, the
presentation of pro forma financial
statements, information and related exhibits,
and the sale of equity securities pursuant to
Regulation S, respectfully.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
SYQUEST TECHNOLOGY, INC.
(Registrant)
Date: August 14, 1997 By: /s/ Bob L. Corey
Bob L. Corey
Executive Vice President,
Finance & Chief Financial Officer
EXHIBIT INDEX
Exhibit 11.1 - Computation of Earnings per share
Exhibit 27.1 - Financial data schedule
EXHIBIT 11.1
SYQUEST TECHNOLOGY, INC.
COMPUTATION OF EARNINGS PER SHARE
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended
June 30,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Net (Loss) before cumulative effect of
cumulative preferred stock dividends and
extraordinary credit ($10,672) ($41,317)
Cumulative preferred stock dividends (394) -
Value assigned to warrants issued in
conjunction with Preferred Stock Offerings (24,050) -
--------- ---------
Net (loss) applicable to Common Shareholders (35,116) (41,317)
Common and common equivalent shares
outstanding: 44,054 11,450
Net (loss) common and common equivalent share ($.80) ($3.61)
========= =========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXT
FROM THE ACCOMPANYING FINANCIAL STATEMENTS AND IS QUALIF
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<FISCAL-YEAR-END> Sep-28-1997
<PERIOD-START> Apr-1-1997
<PERIOD-END> Jun-30-1997
<PERIOD-TYPE> 9-MOS
<CASH> $7,471
<SECURITIES> 0
<RECEIVABLES> 24,083
<ALLOWANCES> 0
<INVENTORY> 24,931
<CURRENT-ASSETS> 61,273
<PP&E> 19,387
<DEPRECIATION> 0
<TOTAL-ASSETS> 80,660
<CURRENT-LIABILITIES> 59,050
<BONDS> 5,444
0
0
<COMMON> 48
<OTHER-SE> 13,431
<TOTAL-LIABILITY-AND-EQUITY> 80,660
<SALES> 96,806
<TOTAL-REVENUES> 96,806
<CGS> 98,146
<TOTAL-COSTS> 98,146
<OTHER-EXPENSES> 46,428
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (3,437)
<INCOME-PRETAX> (51,205)
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