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 March 31, 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 March 31, 1997, 42,564,013 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 ended Six months ended
March 31, March 31,
---------------------- -----------------------
1997 1996 1997 1996
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Net revenues $16,786 $47,445 $65,097 $126,112
Cost of revenues 30,051 69,003 67,317 149,093
Provision for losses on purchase commitments - 3,833 - 11,672
---------- ---------- ---------- -----------
Gross (loss) (13,265) (25,391) (2,220) (34,653)
Operating Expenses:
Selling, general and administrative 12,730 14,351 24,057 28,815
Research and development 6,617 7,360 11,718 14,520
Restructuring costs - 3,600 - 3,600
---------- ---------- ---------- -----------
Total operating expenses 19,348 25,311 35,775 46,935
(Loss) from operations (32,613) (50,702) (37,995) (81,588)
Interest income (expense) (1,106) (403) (2,538) (318)
---------- ---------- ---------- -----------
(Loss) before income taxes (33,719) (51,105) (40,533) (81,906)
Provision for income taxes - - - 3,000
---------- ---------- ---------- -----------
Net (loss) ($33,719) ($51,105) ($40,533) ($84,906)
========== ========== ========== ===========
Net (loss) per share ($1.31) ($4.49) ($2.30) ($7.48)
========== ========== ========== ===========
Common and common equivalent shares
used in computing per share amounts 26,206 11,371 20,466 11,351
========== ========== ========== ===========
<FN>
See notes to consolidated condensed financial statements
</TABLE>
<PAGE>
SYQUEST TECHNOLOGY, INC.
CONSOLIDATED CONDENSED BALANCE SHEET
(In thousands)
<TABLE>
<CAPTION>
March 31, September 30,
1997 1996
------------- -------------
(Unaudited) (Note)
<S> <C> <C>
Assets
Current assets:
Cash, cash equivalents and short-term investments $3,136 $3,670
Accounts receivable, net 25,281 30,341
Inventories, net 22,692 10,538
Prepaid expenses and deferred income taxes 6,986 2,471
------------- -------------
Total current assets 58,095 47,020
Net plant, property and equipment 20,441 27,180
Other assets 173 981
------------- -------------
$78,709 $75,181
============= =============
Liabilities and Stockholders' (Deficit)
Current liabilities:
Bank borrowings $30,354 $19,268
Accounts payable 16,245 23,917
Accrued compensation and other liabilities 20,775 18,671
Provision for losses on purchase commitments - 1,966
Current portion of long-term debt 10,907 20,549
------------- -------------
Total current liabilities 78,281 84,371
Long-term debt and other long-term liabilities 11,384 21,163
Stockholders' equity (deficit):
Preferred stock - -
Common stock 42 14
Additional paid in capital 162,501 102,598
Treasury stock (12,855) (12,855)
Accumulated deficit (160,644) (120,110)
------------- -------------
Total stockholders' (deficit) (10,956) (30,353)
------------- -------------
$78,709 $75,181
============= =============
<FN>
Note: The consolidated condensed balance sheet at September 30, 1996 has been derived from
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>
Six months ended
March 31,
----------------------
1997 1996
---------- ---------
<S> <C> <C>
Operating Activities:
Net (loss) ($40,533) ($84,906)
Adjustments to reconcile net (loss) to cash used in
operating activities:
Depreciation 6,567 4,889
Deferred income taxes - 3,000
Provision for bad debts (623) 4,035
Capital asset adjustment 2,470 -
Other 496 24
Net changes in current assets and current liabilities:
Accounts receivable 5,683 8,725
Inventories (12,154) (5,866)
Accounts payable 1,507 35,913
Accrued expenses and other liabilities 2,456 3,727
Other (6,481) 2,164
---------- ---------
Net cash used in operating activities (40,612) (28,295)
Investing activities:
Purchase of equipment and leasehold improvements (2,298) (11,487)
Other assets 640 118
---------- ---------
Net cash used in investing activities (1,658) (11,369)
Financing activities:
Proceeds from issuance of common stock 8,728 195
Proceeds from issuance of preferred stock 28,490 17,494
Net proceeds from bank borrowings 11,086 -
Repayments on long term debt (6,568) -
---------- ---------
Net cash provided by financing activities 41,736 17,689
Net increase (decrease) in cash and cash equivalents (534) (21,975)
Cash and cash equivalents at beginning of the period 3,670 29,648
---------- ---------
Cash and cash equivalents at end of the period $3,136 $7,673
========== =========
Non-Cash Financing Activities
During the second fiscal 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 fiscal quarter ended March 31, 1997, the Company charged $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 fiscal quarter ended March 31, 1997, the Company declared $385 of
accrued preferred dividends paid with 163,981 common shares.
<FN>
See notes to consolidated condensed financial statements
</TABLE>
<PAGE>
SYQUEST TECHNOLOGY, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
March 31, 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 month period ended March 31, 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:
March 31, September 30,
1997 1996
--------- -------------
(In thousands)
Raw materials $13,829 $ 5,005
Work in process 3,573 4,481
Finished goods 5,290 1,052
--------- -------------
$22,692 $10,538
========= =============
NOTE: 3 - NET LOSS PER SHARE
At March 31, 1997, the Company had 7,013 shares of 7% Cumulative
Convertible Preferred Stock, Series 1 (Series 1) issued and
outstanding, entitling the holder to a 7% per share dividend. The
computation of earnings per share for the quarter ended March 31,
1997, includes an adjustment of $0.7 million for dividends payable on
the Company's Series 1, Preferred Stock issues that require payment
of cumulative dividends. The loss per share for the three month and
six month periods ended March 31,1997, 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 January 17, 1997, the Company renegotiated its line of credit with
a financial institution, continuing the existing terms and extending the
line through January 31, 1998. The new line 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. On March 19, 1997, the
Company further renegotiated this line of credit to provide for an
interim $10.0 million additional borrowing capacity in excess of that
allowed under the accounts receivable and inventory availability
formula. This interim accommodation provided temporary
incremental funds to assist in the production ramp-up of the
Company's new SyJet product. The incremental interim availability
declined to $5 million as of April 30, 1997 and declines to $2.5
million on May 31, 1997 and expires on June 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.
On April 25, 1997, the Company's manufacturing subsidiary in Penang,
Malaysia, SyQuest Technology Sdn Bhd (M), extended its existing line
of credit for (RM) 17.5 million (approximately $7.0 million) with a
Malaysian financial institution. The line is secured by the subsidiary's
building, equipment and inventory.
NOTE: 5 - CONVERTIBLE PREFERRED STOCK
The Company has raised significant financing during the third fiscal
quarter that will end June 30, 1997. See Part II, item 2. of this Form
10-Q.
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 second fiscal quarter which ended March 31, 1997, the
Company converted $12.9 million of notes payable to vendors into
approximately 5.0 million shares of common stock. For the six months
ended March 31, 1997, an aggregate of $25.7 million of such notes
had been converted.
See Dilution of Common Stock section in MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
During the second fiscal quarter which ended March 31, 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 5,106,033, 12,440,447, and 3,289,981
shares of common stock for an aggregate of 20,836,461 shares of
common stock in exchange for 8,547 shares of the Company's 7%
Cumulative Convertible Preferred Stock, Series 1, all 24,500 shares of
the Company's 5% Cumulative Convertible Preferred Stock, Series 2,
and all 5,500 shares of the Company's Convertible Preferred Stock,
Series 1, respectively.
See exhibit 11.1 for the determination 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 based upon the weight of currently
available information.
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
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
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. The adoption of SFAS 128 would not have a
material impact on the per share for the three or six months ended
March 31, 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
market 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, liquidity issues, and risks associated
with competition from other companies. The Company has
experienced delays in production of the SyJet product and
anticipates a continued decline in selling volumes and average
selling prices of its legacy (mature products) product lines. As a
result, during the quarter ended March 31, 1997, the Company took
actions that are expected to reduce its operating costs and plans to
make further cost reduction decisions in the future. Nonetheless,
the Company's loss for its second fiscal quarter was $33.7 million.
Subsequent to March 31, 1997, the Company was successful in
raising additional equity for an aggregate of $31.0 million, ($30
million net of associated fees) of which $5.0 million is attributable
to the issuance of 5% Cumulative Convertible Preferred Stock,
Series 3, and $26.0 million to the issuance of 5% Cumulative
Convertible Preferred Stock, Series 4. The issuance of the Series
3 and Series 4 Preferred Stock will have a dilutive effect on the
common stock of the Company. See Dilution of Common Stock
section in MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Additionally, during the quarter ended March 31, 1997, and on April
15, 1997, the Company successfully converted $12.9 million and
$1.3 million, respectively, in vendor notes payable to equity.
Management intends to pursue further debt to equity conversions
as part of its turnaround strategy. However, there can be no
assurances that management will be successful in further debt to
equity conversions. As a result of the number of common shares
currently issued and committed, the ability to convert further debt to
equity will require shareholder approval. While the Company has
made progress in producing the SyJet product, there can be no
assurance that the Company will be successful in overcoming
delays in producing the SyJet product, 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 may 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 restructuring of notes payable.
The ability to raise cash through further equity funding will require
shareholder approval. 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. An inability to overcome
these risk factors would have a material adverse effect on the
Company's financial performance and on its liquidity.
Net Revenues
Net revenues for the quarter ended March 31, 1997 were $16.8
million, compared to $47.4 million reported for the comparable prior
year quarter. Revenue was negatively affected by lower volumes
on the Company's mature drive and cartridge products not offset by
new product offerings. During the quarter the Company
commenced volume sales of its new SyJet 1.5 Gigabyte
Removable Cartridge Hard Drive. Production was constrained,
however, by industry-wide shortages of critical components and
other production shortfalls. While the Company continues its
efforts to increase its manufacturing output for SyJet to meet the
sales demand there can be no assurances that the Company will
be successful in manufacturing the required unit volumes or that the
product will continue to be accepted in the marketplace.
Absent a substantial increase in sales of the Company's products
prior to the end of the third fiscal quarter, the Company will
continue to incur losses although management believes that the
loss will be at lower levels than experienced in the second quarter.
Lower than expected revenues have resulted in a reduction in the
availability of cash reserves and required the Company to raise
additional equity capital subsequent to March 31, 1997. There can
be no assurances that the equity raised will be sufficient to fund the
Company's operations into the future or that the Company would be
successful in raising additional capital in the future, if additional
funds were required. The ability to raise cash through further equity
funding will require shareholder approval. Additionally, factors
such as sell through rates in the channels, price pressures on the
Company's products, and delays in the ramp of SyJet production
could have adverse impacts on revenues.
The Company is in the process of implementing reductions to its
operating cost structure and will attempt to maintain spending
levels consistent with revenue expectations. Additionally, the
Company is implementing changes designed to simplify the
organizational and operating structure which management believes
will result in streamlining the business and the realization of cost
efficiencies. There can be no assurances that management will be
successful in implementing these changes or in achieving the
desired outcome.
Gross Loss
The Company recorded a gross loss for the quarter ended March
31, 1997 of $13.3 million, or 79 percent of net revenues, compared
to a gross loss of $25.4 million, or 54 percent of net revenues, in
the comparable prior year quarter. Absent a substantial increase in
the Company's revenues and commensurate cost reductions, cost
as a percentage of revenue will continue to be significant. The
current quarter gross margin loss is primarily attributable to several
factors including, significant price reductions in the Company's
mature product lines, new product line start-up costs which were
expensed during the quarter, excess production capacity, and
excess facilities charges all of which unfavorably impacted the
margins. Additionally, margins were unfavorably impacted by
increased charges for capital equipment use based on
management's estimates of remaining utility of production assets.
For the six months ended March 31, 1997, the gross loss
aggregated $2.2 million compared to a gross loss of $34.6 million
for the comparable prior year period. The decrease in the gross
margin loss over the comparable prior year period is principally
attributable to: (i) the very high gross margin loss incurred on
production costs for the EZ 135 system products and EZ 135
cartridge manufacturing yields; (ii) the EZ 135 disk drives were
unprofitable at the gross margin level; (iii) the establishment by the
Company of a $15.9 million reserve for excess and obsolete
inventory and non-cancelable purchase commitments. The
reduction the gross loss over the comparable prior year period was
also impacted by continued cost reductions in the Company's
mature product offerings and increasing sales of the Company's
SyJet product line.
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 margins. Consequently, there can be no
assurances that the Company will achieve necessary
improvements in margins in the future.
Selling, General and Administrative Expenses
For the quarter ended March 31, 1997, selling, general and
administrative expenses aggregated $12.7 million, or 76 percent of
net revenues compared to $14.4 million, or 30 percent of net
revenues, for the comparable prior year quarter. The decrease in
aggregate spending of $1.6 million or 11% percent over the
comparable prior year quarter is primarily attributable to the
Company's ongoing attempts to control costs. There can be no
assurance that the Company can continue to decrease aggregate
selling, general and administrative expenses. Additionally, during
the quarter, the Company incurred costs associated with the
resolution of customer disputes and costs of personnel reductions
associated with the simplification of the Company's operations and
structure.
For the six months ended March 31, 1997, selling, general and
administrative expenses aggregated $24.1 million compared to
$28.8 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 March
31, 1997 aggregated $6.6 million, or 39 percent of net revenues,
compared to $7.4 million, or 16 percent of net revenues, for the
comparable prior year quarter. The 11 percent decrease in
research and development spending is principally the result of the
Company's ongoing strategic initiative to minimize expense levels
and focus engineering efforts 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 and will continue to make these investments
commensurate with its revised operating cost structures.
For the six months ended March 31, 1997, research and
development expenses aggregated $11.7 million compared to
$14.5 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 continued cost reduction efforts.
Interest Expense
Net interest expense aggregated $1.1 million for the quarter ended
March 31, 1997 compared to $0.4 million for the comparable prior
year quarter. For the six months ended March 31, 1997, net interest
expense aggregated $2.5 million compared to $0.4 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 March 31, 1997 was $33.7 million
compared to $51.1 million for the comparable prior year quarter.
For the six months ended March 31, 1997, the net loss was $40.5
million compared to $84.9 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.
Particular reference should be made to the Gross Loss segment.
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 begun to experience 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 supplier notes into common stock. During the quarter
ended March 31, 1997, $12.9 million of vendor notes were
converted to an equivalent number of shares of common stock.
Subsequent to March 31, 1997 and additional $1.3 million was
converted. There can be no assurance, however, that the
Company will be successful in its attempts to convert the remaining
notes which could have an adverse affect on the Company's
liquidity. Additionally, liquidity has been affected by servicing debt,
funding of operational losses, and SyJet development costs.
Subsequent to March 31, 1997, the Company raised $31.0 million
of additional capital to fund operations, re-size its operations and
cost structures commensurate with revenue expectations, and
increase available lines of credit. However, there can be no
assurances that the Company will be successful in achieving these
objectives.
At March 31, 1997 the Company had cash and short-term
investments of $3.1 million, comparable to the $3.7 million at
September 30, 1996. Borrowings under the Company's credit
facilities amounted to $30.4 million at March 31, 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 a deficit position of $11.0 million at March 31, 1997. Equity
financings and vendor debt to equity conversions subsequent to
March 31, 1997 and through May 9, 1997 improved the Company's
net worth significantly to a positive $19.7 million. Working capital
also increased from a negative position of $37.4 million at
September 30, 1996 to a negative position of $20.2 million at
March 31, 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'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
further equity funding without shareholder approval.
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 completed prior to
March 31, 1997 and subsequent to that date, as described above.
Accounts receivable aggregated $25.3 million at March 31, 1997
compared to $30.3 million at September 30, 1996, a decrease of
$5.0 million. The decrease in accounts receivable is primarily due
to the lower sales in the quarter ended March 31, 1997 partially
offset by a deterioration in the aging due principally to European
receivables. The Company has instituted an aggressive collections
program and, subsequent to March 31, 1997, has experienced
improvements to its accounts receivable agings. Inventories, net of
reserves, aggregated $22.7 million at March 31, 1997, an increase
of $12.2 million, compared to the $10.5 million at September
30,1996. The increase in inventories is primarily attributable to
production of the EZFlyer 230, work in process on the SyJet
products and low sales in the quarter ended March 31, 1997.
On January 17, 1997, the Company renegotiated its line of credit
with a domestic 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
inventories. On March 19, 1997, the Company further renegotiated
this line of credit to provide for an interim $10.0 million additional
borrowing capacity in excess of that allowed under the accounts
receivable and inventory availability formula. This interim
accommodation provided temporary incremental funds to assist in
the production ramp-up of the Company's new SyJet product. The
incremental interim availability declined to $5 million as of April 30,
1997 and declines to $2.5 million on May 31, 1997 and expires on
June 30, 1997.
For further information on bank borrowings, refer to the
consolidated financial statements and footnotes thereto included in
the Company's annual report to Form 10-K, as amended, for the
year ended September 30, 1996.
The Company raised significant financing during the quarter ended
March 31, 1997. See Part II, item 2 of this Form 10-Q. Should the
Company fail to execute its current sales strategy, the Company
may require additional equity funding which, if successful, will
cause further dilution on the common stock. The ability to raise
cash through further equity funding will require shareholder
approval. See Dilution of Common Stock section in
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
The Company has deferred further negotiation of an equity
investment with 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.
During the quarter ended March 31, 1997, the Company used
$40.6 million in cash for operating activities and $2.3 million in
capital expenditures.
The Company believes that, based on a number of events
occurring, the current sources of financing available to the
Company will be sufficient to fund the Company's 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. The Company is in the process of performing an
extensive review of its operating cost structure and will implement
spending levels consistent with revenue expectations.
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 an impact on the Company's revenues. The Company must
also continue implementing an operating cost structure that will
ensure spending levels consistent with revenue expectations.
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. There can
be no assurance that the Company will successfully achieve these
objectives.
DILUTION OF COMMON STOCK
During the quarter ended March 31, 1997, all of the Company's 5%
Cumulative Convertible Preferred Stock, Series 2 and Convertible
Preferred Stock, Series 1 stock was converted. The remaining
7,013 shares of the 7% Cumulative Convertible Preferred Stock,
Series 1 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, substantially all 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. Should such funding occur further
dilution of the common stock will result.
FUTURE PROFITABILITY
Although the Company continues to execute its turnaround plan,
adjusting operations to reduce losses and rebuild the business, the
Company does not expect to return to profitability. Although the
Company believes it will ultimately be successful in its turnaround
attempts, and that the Company will return to profitability in the
future, there can be no assurances that the Company will be
successful or that it will have, or be capable of obtaining, sufficient
capital to withstand prolonged operating losses.
SHORTAGES OF CRITICAL COMPONENTS; ABSENCE OF
SUPPLY CONTRACTS; SUPPLIER WORKOUTS
Many components incorporated in, or used in the manufacture of,
the Company's products are currently only available from sole
source suppliers. During the 1996 fiscal year, the Company
experienced disruption in its supply of certain components for a
number of reasons including the shortage of cash to pay suppliers.
The Company continues to experience component shortages due
to limited cash availability which affected the Company's ability to
produce its products and limited the Company's ability to
implement certain cost reduction and productivity improvement
plans. Moreover, the Company may continue to experience
difficulty in the future in obtaining a sufficient supply of many key
components due to the shortage of cash to pay suppliers and other
reasons. A disruption in the supply of key components would have
a material adverse affect on the Company's ability to generate
sales and the ability to successfully launch 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 margins associated with
the Company's newly introduced 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 results of operations. 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
The Company has been named as a defendant in four putative
class action lawsuits. Two of the actions, Ravens, et al. v. Iftikar, et
al. (filed April 2, 1996) and Bellezza, et al. v. Iftikar, et al. (filed May
24, been brought in the United States District Court for the Northern
District of California and have been assigned to the Honorable
Vaughn Walker (collectively, the "Federal Lawsuit"). Certain
current and former officers and directors also have been named as
defendants in the Federal Lawsuit. Plaintiffs have petitioned the
Court to consolidate the foregoing complaints into one consolidated
action. That request, as well as other procedural matters which
arose during a July 18, 1996, case management conference, is
under consideration. The plaintiffs in the Federal Lawsuit purport to
represent a class of all persons who purchased the Company's
Common Stock between October 21, 1994 and February 1, 1996.
The Federal Lawsuit alleges that the defendants violated the
federal securities laws through material misrepresentations and
omissions. The third suit is a purported class action entitled Gary
S. Kaufman v. SyQuest Technology Inc., et al. was filed on March
25, 1996, in the Superior Court of the State of California for the
County of Alameda (the "Kaufman Lawsuit"). Certain current and
former executive officers and directors of the Company are also
named as defendants in the Kaufman Lawsuit. The plaintiffs in the
Kaufman Lawsuit purport to represent a class of all persons who
purchased the Company's Common Stock between May 2, 1995,
and February 2, 1996. The Kaufman Lawsuit alleges that
defendants violated various California laws through material
misrepresentations and omissions. Unspecified damages are
sought. The fourth purported class action entitled Ravens, et al. v.
Iftikar, et al., was filed on October 11, 1996 in the Superior Court of
the State of California for the County of Alameda (the "Ravens
Lawsuit"). The Ravens Lawsuit alleges that the Company and
certain of its former officers and directors violated various
California laws through material representations and omissions
between October 21, 1994 and February 2, 1996, and is
purportedly brought on behalf of persons who purchased stock
during that period. Unspecified damages are sought. The Ravens
Lawsuit has been consolidated with the Kaufman Lawsuit.
Plaintiffs are preparing a consolidated complaint. The Company
intends to defend the cases vigorously.
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.
On May 14, 1996, the Company was served with a shareholder's
derivative action filed in Alameda County, California, Superior
Court entitled John Nitti, et al. v. Syed Iftikar, et al. On July 22,
1996, plaintiffs filed an amended complaint. The action seeks to
recover unspecified damages and punitive damages on behalf of
the Company from current and former officers and directors of the
Company for alleged breach of fiduciary duty, unjust enrichment
and waste of corporate assets. The Company is a nominal
defendant in the action. The complaint alleges that the officers and
directors issued false and misleading information and sold shares
of the Company's stock at artificially inflated prices. The
allegations are essentially the same as those in the putative class
actions. The Company intends to defend this case vigorously.
The Company has filed suit against Nomai, S.A. (Nomai) and
Maxell in France for copyright and patent infringement, and though
it did not obtain the temporary injunction sought against Nomai
prohibiting the sale and distribution of Nomai's 200 megabyte
cartridges, the underlying suit continues. The Company has also
initiated an arbitration proceeding against Nomai seeking payment
of outstanding royalties of approximately $1 million. The arbitration
process began in May 1995, in San Jose, California.
On January 27, 1997, the Company has 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 threatened to file a counter claim for alleged breach of contract
and unfair competition.
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 March 31, 1997, the holders of the 5,500 shares of the
Company's Convertible Preferred Stock, Series 1 and the holders
of the 24,500 shares of the Company's 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. 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.
As of March 31, 1997, there remained 7,013 shares of the
Company's 7% Cumulative Convertible Preferred Stock, Series 1.
During this quarter 8,547 shares of the 7% Cumulative Convertible
Preferred Stock, Series 1 were converted into 5,016,033 shares of
the Company's common stock, and an additional 109,134 shares
were issued in lieu of paying the holders of such preferred stock a
cash dividend. The exact number of shares issuable upon
conversion of such 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 may, at its election, choose to issue
additional shares of Common Stock in lieu of cash dividends to the
holders of such preferred stock.
During the quarter ending March 31, 1997, entities holding claims
totaling $12.9 million against the Company exchanged those claims
for a total of 5,007,850 shares of the Company's Common Stock.
These transactions are set forth in greater detail in the Report on
Form 8-K filed in April 1997 [the Fletcher 8-K].
Subsequent to March 31, 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 $26.0 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 may,
at its election, choose to issue 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 shares are more fully set forth in
the Company's Report on Form 8-K filed in April 1997. The
Company anticipates filing a Report of Form 8-K describing in more
detail the terms of the sale of the Series 4 Shares promptly after
the filing of this Report on form 10-Q.
From September 27, 1996, through October 30,1996, the Company
issued to four of its suppliers 1,874,837 shares of the Company's
Common Stock in exchange for approximately $11.5 million of its
trade debt, pursuant to Regulation D under the Securities Act of
1933, as amended (the "1933 Act"). Each of those suppliers
warranted that it is an accredited investor and received registration
rights, as described in the Company's Current Report on Form 8-K,
as amended, dated October 31, 1996, (October 8-K) which was
incorporated by reference in the Company's form 10-Q for the
quarter ended December 31, 1996.
On October 8, 1996, in reliance on Regulation D under the 1933
Act, the Company issued to certain accredited investors 5,500
shares of its Convertible Preferred Stock. Series 1, $0.001 par
value per share (the Convertible Preferred Stock), for an
aggregate purchase price of $5,500,000, and granted to those
investors certain stock purchase warrants to acquire up to 550,000
shares of Common Stock for $5.50 per share. The Convertible
Preferred Stock is convertible into Common Stock and additional
warrants as described in the October 8-K which was incorporated
by reference in the Company's form 10-Q for the quarter ended
December 31, 1996.
On October 8, 1996, in reliance on Regulation D under the 1933
Act, the Company issued to certain accredited investors 24,500
shares of its 5% Cumulative Preferred Stock, Series 2, $0.001 par
value per share (the Series 2 Preferred Stock), for an aggregate
purchase price of $24,500,000. The Series 2 Preferred Stock is
convertible into Common Stock and Warrants as described in the
October 8-K which was incorporated by reference in the Company's
form 10-Q for the quarter ended December 31, 1996.
In conjunction with the issuance of the Convertible Preferred Stock
and the Series 2 Preferred Stock, the Company issued to certain
accredited investors, as part of their compensation for their
facilitation of those transactions, certain stock purchase warrants to
acquire up to 50,000 shares of Common Stock for $10.875 per
share and up to 75,000 shares of Common Stock for $7.15 per
share.
On November 13, 1996, in reliance on Regulation S under the 1933
Act, the Company issued to a non-U.S. company 1,500,000 shares
of Common Stock that became freely tradeable, subject to
compliance with applicable securities laws, on approximately
February 12, 1997, for an aggregate purchase price of $8,531,250.
As part of this transaction, the Company also issued a warrant that
will become exercisable for between 375,000 shares and
1,875,000 shares of Common Stock, depending on a number of
factors described in the Company's Current Report on Form 8-K
dated November 11, 1996, which was incorporated by reference in
the Company's 10-Q for the quarter ended December 31, 1996.
As of December 16, 1996, the Company agreed to issue a total of
four warrants to acquire an aggregate of 320,000 shares of
Common Stock to a consultant, Bain & Company, Inc. ("Bain"), in
exchange for consulting services to be performed by Bain between
December 16, 1996 and April 16, 1997. Four stock purchase
warrants to acquire 80,000 shares each, an aggregate of 320,000
shares of Common Stock, were issued to Bain on each January 16,
February 16, March 16, and April 16, 1997. The stock purchase
warrants are exercisable for four years from the date of grant at an
exercise price per share of Common Stock equal to the greater of
(a) the arithmetic average of the closing sale price per share, or in
the absence of a closing sale price on any day, the closing bid
price per share on that day, of the Common Stock, as reported by
the NASDAQ National Market for the five consecutive trading days
preceding the grant date with respect to such warrant, and (b) the
closing sale price per share, or in the absence of a closing sale
price, the closing bid price per share, of the Common Stock, as so
reported for the trading day preceding such grant date, minus
$0.10. The warrant exercise prices of each of the four warrants
relating to the dates of the warrant issuances were $3.06 for the
warrant issued January 16, 1997, $2.59 for the warrant issued
February 16, 1997, $2,73 for the warrant issued March 16, 1997,
and $2.34 for the warrant issued April 16, 1997. The terms of these
warrants and certain registration rights granted to Bain in
connection therewith, are more fully described in the Warrant
Purchase Agreement and Exhibits between the Company and Bain
dated as of December 16, 1996.
To the extent that such options and warrants are exercised, shares
of Common Stock are issued in lieu of cash dividends or
convertible securities are converted (and the warrants issuable
upon such conversion are exercised), substantial dilution of the
interests of the Company's stockholders is likely to result and the
market price of the Common Stock may be materially adversely
affected. Such dilution will be greater if the future market price of
the Common Stock decreases. For the life of such warrants,
options and convertible securities, described above, 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.
Item 6. Exhibits
a. Exhibit 11.1 Computation of Earnings per share
b. Exhibit 27.1 Financial data schedule
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: May 15, 1997 By: /s/ Henry C. Montgomery
Henry C. Montgomery
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 Six months ended
March 31, March 31,
--------------------- ---------------------
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
(Loss) before cumulative effect of cumulative preferred
stock dividends and extraordinary credit ($33,719) ($51,105) ($40,533) ($84,906)
Cumulative preferred stock dividends (691) - (1,264) -
Effect of incremental yield embedded in conversions
terms - - (5,300) -
--------- --------- --------- ---------
Net (loss) ($34,410) ($51,105) ($47,097) ($84,906)
========= ========= ========= =========
Common and common equivalent shares
outstanding: 26,206 11,371 20,466 11,351
Net (loss) per share ($1.31) ($4.49) ($2.30) ($7.48)
========= ========= ========= =========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE ACCOMPANYING FINANCIAL STATEMENTS AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<FISCAL-YEAR-END> Sep-28-1997
<PERIOD-START> Oct-1-1996
<PERIOD-END> Mar-31-1997
<PERIOD-TYPE> 6-MOS
<CASH> $3,136
<SECURITIES> 0
<RECEIVABLES> 25,281
<ALLOWANCES> 0
<INVENTORY> 22,692
<CURRENT-ASSETS> 58,095
<PP&E> 20,441
<DEPRECIATION> 0
<TOTAL-ASSETS> 78,709
<CURRENT-LIABILITIES> 78,281
<BONDS> 11,384
0
0
<COMMON> 42
<OTHER-SE> (10,998)
<TOTAL-LIABILITY-AND-EQUITY> 78,709
<SALES> 65,097
<TOTAL-REVENUES> 65,097
<CGS> 67,317
<TOTAL-COSTS> 67,317
<OTHER-EXPENSES> 35,775
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (2,538)
<INCOME-PRETAX> (40,533)
<INCOME-TAX> 0
<INCOME-CONTINUING> (40,533)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (40,533)
<EPS-PRIMARY> ($2.30)
<EPS-DILUTED> ($2.30)
</TABLE>
