<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) August 5, 1998
SYQUEST TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation)
0-19674 94-2793941
(Commission File Number) (IRS Employer Identification No.)
47071 Bayside Parkway, Fremont, California 94538
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (510) 226-4000
Not Applicable
(Former name or former address, if changed since last report.)
<PAGE>
INFORMATION TO BE INCLUDED IN THE REPORT
Item 5. Other Events
Appointment of Chief Financial Officer
On August 5, 1998, SyQuest Technology, Inc. (the "Company") issued a press
release announcing that Henry C. Lo was named chief financial officer. A copy
of that press release is attached hereto as Exhibit 99.1 and incorporated herein
by this reference.
Announcement of Restructuring Plans
On August 6, 1998, the Company issued a press release announcing certain
restructuring and related matters. A copy of that press release is attached
hereto as Exhibit 99.2 and incorporated herein by this reference.
Amendment of Accountant's Report
The report of PricewaterhouseCoopers LLP on SyQuest Technology, Inc.'s
fiscal 1997 consolidated financial statements was amended on August 14, 1998,
to add an explanatory paragraph regarding the Company's ability to continue as
a going concern. The amended report and consolidated financial statements as
of September 30, 1997 and 1996 and for each of the three years ended September
30, 1997 are attached as Exhibit 99.3 and are incorporated herein by
reference.
Item 7. Financial Statements and Exhibits
c) Exhibits
99.1 Company's press release dated August 5, 1998.
99.2 Company's press release dated August 6, 1998.
99.3 Consolidated Financial Statements for SyQuest Technology, Inc.
as of September 30, 1997 and 1996 and for each of the three years ended
September 30, 1997.
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 hereunto duly authorized.
SYQUEST TECHNOLOGY, INC.
(Registrant)
<PAGE>
Date: September 2, 1998 By /s/ Henry Lo
Henry Lo
Chief Financial Officer
<PAGE>
Exhibit 99.1
PRESS RELEASE
SyQuest Technologies Names Henry C. Lo Chief Financial Officer
FREMONT, Calif., August 5, 1998 - SyQuest Technology, Inc. (NASDAQ:SYQT), the
world leader in removable cartridge hard drive technology, today named Henry C.
Lo as chief financial officer, succeeding Bob l. Corey, who left the company in
May.
For the past three years Lo was with StorMedia, Inc., a supplier of thin film
disk components for hard drives used in portable and desktop computers, network
servers and workstations. Previously he worked for GE Capital-Genstar Container
Corporation and earlier Coopers & Lybrand in San Francisco.
About SyQuest Technology
Based in Fremont, Calif., SyQuest Technology, Inc. is the leader in removable
cartridge hard drive storage technology. The company offers the best
performing, most affordable, and easy to use, high capacity removable hard
drives and cartridges in the marketplace. SyQuest award winning products are
ideal storage solutions for SOHO/professionals, families, students, Internet
users and more. SyQuest (SYQT) is publicly traded on NASDAQ's National Market
System. The company's web site is http://www.syquest.com.
This news release contains forward-looking statements that involve risks and
uncertainties, including competition in the marketplace for the company's
products, and other risks detailed from time to time in the SEC reports filed by
SyQuest including its most recent reports on Forms 8K, 10K and 10Q.
<PAGE>
Exhibit 99.2
PRESS RELEASE
SyQuest Technology Restructures Business As Next Step In Turn-Around
Market Shifts Lead Company to Redefine and Streamline Operations; includes
Workforce Cuts and Cessation of Fremont Production
FREMONT, Calif., August 6, 1998 - In a continuing effort to effect its
turnaround strategy, SyQuest Technology, Inc. (NASDAQ: SYQT), the world leader
in removable cartridge hard drive technology, today executed a restructuring and
streamlining of operations designed to improve the company's financial
performance.
The firm also said that its revenues for the third quarter, ended June 30, 1998,
will be slightly below, and operating losses slightly higher, than the preceding
quarter. The company expects revenues to decline further in the quarter ended
September 30, 1998 and will post charges related to the restructuring. However,
the company anticipates revenues to show seasonal strength in the December 31,
1998 quarter.
SyQuest said it has taken essential steps to bring costs into alignment with
demand, due to market conditions that have affected the PC and data storage
industries. The restructuring includes ending all Fremont manufacturing; a
worldwide workforce reduction of approximately 950 people; a scaling-back of
administrative, sales, marketing and research expenditures, and other cost-
cutting moves in its Penang manufacturing facility.
"We regret the impact that these actions are having on individual employees and
recognize the contribution they have made to the business," said Ed Harper,
SyQuest president and CEO.
The company said it has made tangible progress in cost reduction and production
yield improvements during the past year. That progress has enabled the current
restructuring by allowing SyQuest to maintain its focus on the SparQ 1.0 GB
removable cartridge hard drive, while eliminating duplicate manufacturing
operations and leveraging the strengths of a streamlined organization.
The company said its restructuring will reduce its expenses to less than half
their previous level and thus significantly improve financial performance.
Retail demand for the SparQ drive remains high based on sell-through reports.
According to data received from PC Data, SyQuest has reached 50% retail market
share within its product category.
About SyQuest Technology
Based in Silicon Valley, SyQuest Technology, Inc. is the leader in removable
cartridge hard drive storage technology. The company
<PAGE>
offers the best performing, most affordable high capacity removable hard drives
and cartridges in the marketplace. SyQuest's easy-to-use, award-winning
products are ideal storage solutions for SOHO/professionals, families, students
and iternet users. The company's Web site is http://www.syquest.com.
This news release contains forward-looking statements that involve risks and
uncertainties, including competition in the marketplace for the company's
products, and other risks detailed from time to time in the SEC reports filed by
SyQuest including its most recent reports on Forms 8K, 10K and 10Q.
<PAGE>
EXHIBIT 99.3
REPORT OF PRICEWATERHOUSECOOPERS LLP, INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders
SyQuest Technology, Inc.
In our opinion, the accompanying consolidated statement of financial
condition and the related statement of results of operations, of stockholders
equity (deficit) and of cash flows present fairly, in all material respects,
the financial position of SyQuest Technology, Inc. and subsidiaries at
September 30, 1997, and the consolidated results of their operations and their
cash flows for the year ended September 30, 1997, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit. We conducted our
audit of these statements in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 1 to the financial
statements, the Company has incurred significant recent losses from operations
and will need to obtain additional financing to fund operations for the year
ending September 30, 1998 and beyond. These matters raise substantial
doubt about its ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 1. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
PricewaterhouseCoopers LLP
San Jose, California
December 29, 1997, except as to
Note 14, paragraph 3 and
Note 1, paragraphs 7 to 8,
which are as of August 14, 1998.
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
SyQuest Technology, Inc.
We have audited the accompanying consolidated balance sheet of SyQuest
Technology, Inc. and subsidiaries as of September 30, 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the two years in the period ended September 30, 1996. These financial
statements and schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
Since the date of completion of our audit of the accompanying consolidated
financial statements and initial issuance of our report thereon dated December
11, 1996, the Company, as discussed in Note 1 "Basis of Presentation", paragraph
5, has experienced operating losses and a reduction in revenues that has
adversely affected the Company's reported results of operations for the first
two fiscal quarters of 1997. Note 1 "Basis of Presentation", paragraph 5,
describes management's plans to address these issues.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
SyQuest Technology, Inc. and subsidiaries at September 30, 1996, and the
consolidated results of their operations and their cash flows for each of the
two years in the period ended September 30, 1996, in conformity with generally
accepted accounting principles.
/s/Ernst & Young, LLP
San Jose, California
December 11, 1996, except for Note 1, "Basis of
Presentation", paragraph 9 as to which the date is June 27, 1997
<PAGE>
SYQUEST TECHNOLOGY, INC.
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1997 1996
------------- -------------
(IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
Current assets:
Cash and cash equivalents........................ $ 7,083 $ 3,670
Accounts receivable, net......................... 19,535 30,341
Inventories, net................................. 26,737 10,538
Prepaid expenses and deposits.................... 6,049 2,471
-------- ---------
Total current assets........................... 59,404 47,020
Net plant, property and equipment.................. 22,999 27,180
Other assets....................................... 246 981
-------- ---------
Total Assets....................................... $ 82,649 $ 75,181
======== =========
Current liabilities:
Short-term borrowings............................ $ 23,291 $ 19,268
Accounts payable................................. 14,800 23,917
Accrued liabilities.............................. 15,532 20,637
Current portion of long-term debt................ 4,345 20,549
-------- ---------
Total current liabilities...................... 57,968 84,371
Long-term debt..................................... 4,024 20,971
Other long-term liabilities........................ 959 192
Mandatory Redeemable Warrants...................... 14,085 --
Stockholders' equity (deficit):
Preferred stock, $.0001 par value in 1997 and
$.001 in 1996: 4,000,000 shares authorized;
129,000 and 19,193 shares issued and outstand-
ing............................................. -- 18
Common stock, $.0001 par value in 1997 and $.001
in 1996: 120,000,000 and 60,000,000 shares
authorized; 59,887,000 and 12,312,769 shares
issued and outstanding.......................... 6 14
Additional paid in capital....................... 222,766 108,262
Treasury common stock at cost--1,225,000 shares
in 1997 and 1996................................ (12,855) (12,855)
Retained deficit................................. (204,304) (125,792)
-------- ---------
Total stockholders' equity (deficit)........... 5,613 (30,353)
======== =========
Total Liabilities and Shareholders Equity.......... $ 82,649 $ 75,181
======== =========
</TABLE>
See accompanying notes.
3
<PAGE>
SYQUEST TECHNOLOGY, INC.
CONSOLIDATED STATEMENT OF RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
------------------------------------
1997 1996 1995
----------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Net revenue.............................. $ 122,723 $ 200,407 $ 299,544
Cost of revenue.......................... 123,624 248,693 248,497
---------- ----------- ----------
Gross Profit (loss)...................... (901) (48,286) 51,047
Operating Expenses:
Selling, general and administrative.... 45,074 51,743 44,264
Research and development............... 17,996 25,920 23,892
Restructuring costs.................... -- 4,727 --
---------- ----------- ----------
Total operating expenses................. 63,070 82,390 68,156
Loss from operations..................... (63,971) (130,676) (17,109)
Interest income/(expense)................ (4,350) (1,037) 1,134
Other income/expense..................... -- (1,938) 468
---------- ----------- ----------
Net Loss before income taxes............. (68,321) (133,651) (15,507)
Provision for Income Taxes............. (350) (3,000) 3,721
Net Loss................................. (68,671) (136,651) (11,786)
---------- ----------- ----------
Embedded Yield on Preferred Stock........ (5,300) (5,682) --
Preferred Stock Dividend................. (1,991) -- --
Valued Assigned to Warrants.............. (2,550) -- --
---------- ----------- ----------
Net Loss applicable to common stock
holders................................. (78,512) (142,333) (11,786)
========== =========== ==========
Basic and Diluted Loss per share......... $ (2.25) $ (12.38) $ (1.07)
========== =========== ==========
Common and common equivalent shares used
in computing per share amounts.......... 34,815 11,497 11,063
========== =========== ==========
</TABLE>
See accompanying notes.
4
<PAGE>
SYQUEST TECHNOLOGY, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
TOTAL
PREFERRED STOCK COMMON STOCK ADDITIONAL TREASURY
----------------- -------------- PAID-IN- COMMON ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL STOCK DEFICIT TOTAL
------- ------- ------ ------ ---------- -------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at October 1,
1994................... -- $ -- 10,825 $ 12 $ 74,161 $(11,655) $ 28,327 $ 90,845
Stock options
exercised.............. -- -- 502 1 2,932 -- -- 2,933
Shares issued under The
Employee Stock Purchase
Plan................... -- -- 97 -- 1,061 -- -- 1,061
Purchase of treasury
stock at cost.......... -- -- (100) -- -- (1,200) -- (1,200)
Income tax benefit from
stock options
exercised.............. -- -- -- -- 1,321 -- -- 1,321
Stock option
compensation........... -- -- -- -- 14 -- -- 14
Net loss................ -- -- -- -- -- -- (11,786) (11,786)
------- ------- ------ ---- -------- -------- --------- ---------
Balance at September 30,
1995................... -- -- 11,324 13 79,489 (12,855) 16,541 83,188
Stock options
exercised.............. -- -- 386 1 1,421 -- -- 1,422
Shares issued under The
Employee Stock Purchase
Plan................... -- -- 64 -- 350 -- -- 350
Issuance of preferred
stock.................. 20 19 -- -- 18,981 -- -- 19,000
Debt to equity
conversion............. -- -- 371 -- 2,338 -- -- 2,338
Conversion of preferred
stock to common stock.. (1) (1) 168 -- 1 -- -- --
Embedded yield on
preferred stock........ -- -- -- -- 5,682 -- (5,682) --
Net loss................ -- -- -- -- -- -- (136,651) (136,651)
------- ------- ------ ---- -------- -------- --------- ---------
Balance at September 30,
1996................... 19 18 12,313 14 108,262 (12,855) (125,792) (30,353)
Issuance of common
stock.................. -- -- 3,294 3 11,367 -- -- 11,370
Issue preferred stock
and warrants, net...... 380 -- -- -- 67,348 -- -- 67,348
Conversion of debt to
equity................. -- -- 7,677 8 24,813 -- -- 24,821
Conversion of preferred
stock into common
stock.................. (276) (18) 36,175 36 (18) -- -- --
Preferred dividends paid
in preferred and common
stock.................. 6 -- 428 -- 1,991 -- (1,991) --
Adjustment due to change
in par value........... -- -- -- (55) 55 -- -- --
Warrants issued for
services received...... -- -- -- -- 1,098 -- -- 1,098
Embedded yield and
warrant value on
preferred stock........ -- -- -- -- 7,850 -- (7,850) --
Net loss................ -- -- -- -- -- -- (68,671) (68,671)
------- ------- ------ ---- -------- -------- --------- ---------
Balance September 30,
1997................... 129 $ -- 59,887 $ 6 $222,766 $(12,855) $(204,304) $ 5,613
======= ======= ====== ==== ======== ======== ========= =========
</TABLE>
See accompanying notes.
5
<PAGE>
SYQUEST TECHNOLOGY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
1997 1996 1995
-------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Operating Activities:
Net (loss).................................... $(68,671) $(136,651) $(11,786)
Adjustment to reconcile net (loss) to cash
used in operating activities:
Depreciation................................ 7,874 10,578 8,052
Deferred income taxes....................... -- 4,528 (4,227)
Write-off of fixed assets................... 2,296 6,782 99
Other....................................... 374 (84) 26
Net cash used in operating activities
Accounts receivable......................... 9,892 25,312 (8,934)
Inventories................................. (16,199) 23,675 (22,065)
Accounts payable............................ (3,216) 13,413 15,161
Accrued expenses and other liabilities...... (3,123) 2,148 16,498
Other....................................... (3,342) (405) (359)
-------- --------- --------
Net cash used in operating activities......... (74,115) (50,704) (7,535)
Investing activities:
Purchase of short-term Investments............ -- -- (3,178)
Purchase of equipment and leasehold improve-
ments........................................ (5,990) (17,820) (12,509)
Other......................................... -- (675) (799)
Proceeds from sale of short-term investments.. -- -- 4,893
-------- --------- --------
Net cash used in investing activities......... (5,990) (18,495) (11,593)
Financing activites:
Proceeds from issuance of common stock and
warrants..................................... 12,442 1,772 3,994
Proceeds from issuance of preferred stock and
warrants..................................... 80,200 19,000 --
Purchase of treasury stock.................... -- -- (1,200)
Net proceeds from bank borrowings............. 4,023 22,875 --
Repayments of long-term debt.................. (13,147) (426) --
-------- --------- --------
Net cash provided by financing activities..... 83,518 43,221 2,794
Net increase (decrease) in cash and cash equiva-
lents.......................................... 3,413 (25,978) (16,334)
Cash and cash equivalents at beginning of the
period......................................... 3,670 29,648 45,982
-------- --------- --------
Cash and cash equivalents at end of the period.. $ 7,083 $ 3,670 $ 29,648
======== ========= ========
</TABLE>
See accompanying notes.
6
<PAGE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ -----
<S> <C> <C> <C>
Conversion of debt and accounts payable to common
stock.............................................. 24,821 4,638 --
Interest paid....................................... 4,295 1,100 --
Taxes paid.......................................... -- 900 --
</TABLE>
7
<PAGE>
SYQUEST TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of these financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Prior Year Presentation
Certain prior years statement of financial condition, statement of results
of operations, and statement of cash flow amounts have been reclassified to
conform to the 1997 presentation.
Basis of Consolidation
The consolidated financial statements include the accounts of SyQuest
Technology, Inc. (the "Company" or "SyQuest") and its wholly owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation.
Basis of Presentation
The Company's consolidated financial statements have been presented on a
going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. Over the last
two years the Company has experienced aggregate consolidated net losses of
$205,322,000 including a net loss of $68,671,000 for the year ended September
30, 1997. Working capital at September 30, 1997 was $1,436,000 as compared to
($37,351,000) at September 30, 1996.
The Company is in a turnaround situation which necessitates certain action
by Management which affect the business environment in which the Company
operates. The Company continues to face significant risks associated with
successful execution of its turnaround strategy. These risks include, but are
not limited to technology and product development, introduction and market
acceptance of new products, changes in the marketplace, liquidity, competition
form existing and new competitors which may enter the marketplace and
retention of key personnel.
As a result of new product introductions and funding continued operating
losses, the Company needs sufficient capital to implement a marketing strategy
that will adequately address the appropriate markets and generate sales demand
for its current and planned future products. The Company has funded the
cumulative losses primarily by issuance of additional capital stock. At the
November 1997 Special Stockholders' Meeting the Stockholders approved
increasing the Company's authorized capital stock from 120 million common
shares to 240 million common shares.
Adverse market conditions in the personal computer and data storage industries
have resulted in lower than anticipated unit shipments and sales prices of the
Company's products. As a result, the Company has experienced significant revenue
shortfalls, negative cash flow, a lack of liquidity and excess inventory. The
Company anticipates continuing losses during its fourth quarter ending September
30, 1998, commensurate with the losses incurred during the first three quarters
of fiscal 1998.
The Company's existing capital resources are insufficient to fund operations
through the remainder of its fiscal year ending September 30, 1998. The Company
will look to proceeds from the exercise of outstanding warrants issued in
connection with previously completed financings, or from sales of common or
preferred stock, or debt securities to fund operations until market conditions
improve. The Company has no agreements with investors or potential investors to
exercise warrants or sell equity or debt securities, however, and there is no
assurance that the Company will be able to secure such additional financing.
Without such additional funding, there is no assurance that the Company will
be able to continue as a going concern.
As disclosed in Forms 10-Q filed with the SEC for the first and second fiscal
quarters of 1997, the Company released its results from continuing operations
and its financial condition through March 31, 1997. Such Forms 10-Q address
the Company's operating losses, decrease in revenues, subsequent financing and
management's plans to continue to reduce costs, increase revenues and obtain
additional financing.
8
<PAGE>
SYQUEST TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997
Cash and Cash Equivalents
Cash equivalents consist of highly liquid investments with a maturity of
three months or less when purchased. These investments consist of income
producing securities, which are readily convertible to cash and are stated at
cost, which approximates market.
Fair Value of Financial Instruments
The carrying value of the Company's financial instruments, including cash
and cash equivalents, accounts receivable, accounts payable, accrued expenses
and liabilities approximate fair value due to their short maturity.
Concentration of Credit Risk
The Company performs on-going credit evaluations of its customer's financial
condition and limits the amount of credit extended when deemed necessary. No
collateral is generally required. The Company maintains an allowance for
potential credit losses which is based on the expected collectibility of all
accounts receivable. Management believes that any risk of loss is
significantly reduced by the ongoing and frequent evaluation of customer
balances and related allowances. At September 30, 1997, one customer accounted
for approximately 16% of the Company's worldwide revenues.
Inventories
Inventories are stated at the lower of cost (determined on the first-in,
first-out method) or market. The Company provides for obsolete, slow moving or
excess inventories in the period when obsolescence or inventory in excess of
expected demand is first identified.
Net Plant, Property and Equipment
Net plant, property and equipment is stated on the basis of cost. Equipment
is depreciated over the estimated useful lives (three to five years) of the
assets using the straight-line method. Property and leasehold improvements are
amortized by the straight-line method over the shorter of the life of the
related asset or the term of the lease.
9
<PAGE>
SYQUEST TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997
In fiscal 1997, the Company adopted Statement of Financial Accounting
Standard No. 121 "Accounting for the Impairment of Long Lived Assets and for
Long Lived Assets to be Disposed Of." Accordingly, the Company evaluates asset
recoverability at each balance sheet date or when an event occurs that may
impair recoverability of the asset.
Revenue Recognition
The Company recognizes revenue upon shipment to customers and provides an
estimated allowance for returns based on the return history experienced by the
Company. The Company also provides an allowance for estimated price protection
upon announcement of a reduction in published prices.
Product Warranty
The Company generally warrants its products for one to three years. A
provision for estimated future warranty costs is recorded at the time of
shipment.
Income Taxes
Deferred tax assets and liabilities are recognized for the expected tax
consequences of temporary differences between the income tax bases of assets
and liabilities and the amounts reported for financial reporting purposes for
all periods presented. (Note 5)
Foreign Currency Translation and Foreign Currency Transactions
The functional currency of the Company's foreign subsidiaries is the US
dollar. Subsidiary financial statements are remeasured into US dollars for
consolidation and foreign exchange gain and losses are recognized in the
current period results of operations. Foreign currency transaction gains
(losses) of $671,000, ($573,000), and $468,000 are included in other income
and expense for 1997, 1996, and 1995, respectively.
Off Balance Sheet Risk
The Company currently does not enter into foreign currency forward exchange
contracts to hedge exposure related to foreign currency exchange risk and it
does not enter into derivative financial instruments for trading purposes. At
September 30, 1997 and 1996, the Company had no forward exchange contracts
outstanding.
Stock Based Compensation
The Company accounts for its stock option plans and the Employee Stock
Purchase Plan in accordance with provisions of the Accounting Principles
Board's Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees."
In 1995, the Financial Accounting Standards Board released Statement of
Financial Accounting Standard No. 123 (SFAS 123), "Accounting for Stock Based
Compensation". SFAS 123 provides an alternative to APB 25 and is effective for
fiscal years beginning after December 15, 1995. The Company adopted FAS 123 in
fiscal 1997, however, the Company continued to account for its employee stock
compensation purchase plans in accordance with the provisions of APB 25.
Additional pro forma disclosures as required by SFAS 123 are presented in note
11.
Loss Per Share
Loss per share for years ending September 30, 1997, 1996, and 1995 is based
on the weighted average number of shares of common stock outstanding. All
other common equivalent shares were antidilutive. In 1997, the Financial
Accounting Standards Board released Statement of Financial Accounting Standard
No. 128 (SFAS
10
<PAGE>
SYQUEST TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997
128), "Earnings per Share". SFAS 128 is effective for fiscal years ending
after December 15, 1997. The statement redefines earnings per share under
Generally Accepted Accounting Principles. Under the new standard, primary
earnings per share is replaced by basic earnings per share and fully diluted
earnings per share is replaced by diluted earnings per share. Approximately,
74.9 million, 6.4 million, and 2.2 million of potentially dilutive shares for
1997, 1996 and 1995, respectively, have not been included in the computation
of diluted earnings per share as they would have been antidilutive for the
periods presented. The Company has restated earnings per share to comply with
the new standard.
Comprehensive Income
In 1997, the Financial Accounting Standards Board released Statement of
Financial Accounting Standard No. 130 (SFAS 130), "Comprehensive Income". SFAS
130 is effective for fiscal years ending June 30, 1999. The statement
establishes presentation and disclosure requirements for reporting
comprehensive income. Comprehensive income includes charges or credits to
equity that are not the result of transactions with owners. The Company plans
to adopt the disclosure requirement and report comprehensive income as part of
the Consolidated Statement of Stockholders' Equity as required under SFAS 130,
and expects that there will be no material impact on the Company's financial
position and results of operations as a result of the adoption of SFAS 130.
Segments of an Enterprise and Related Information
In 1997, the Financial Accounting Standards Board released Statement of
Financial Accounting Standard No. 131 (SFAS 131), "Disclosures about Segments
of an Enterprise and Related Information Comprehensive Income". SFAS 131 is
effective for the Company's fiscal years ending September 30, 1999. The
statement requires the Company to report certain financial information about
operating segments in the Company's financial statements. It also requires the
Company to report certain information about its products and services, the
geographic areas in which it operates and its major customers. The SFAS
established the "management approach" for reporting which provides that
segments should be reported consistent with management's internal segments for
operation decision making purposes and assessing performance.
11
<PAGE>
SYQUEST TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997
2. BUSINESS SEGMENT AND CONCENTRATION OF CREDIT RISK
The Company operates in one business segment, the development, production
and marketing of removable cartridge Winchester disk drives and associated
cartridges. The Company has a manufacturing facility in Penang, Malaysia which
produces the majority of the Company's drives and cartridges. The Company
sells primarily to distributors in the personal computer market. The Company
performs ongoing credit evaluations of its customers' financial condition and
generally requires no collateral. For the year ended, September 1997, one
customer accounted for approximately 16% of the Company's worldwide revenues.
The following tables summarize the Company's operations in different
geographic areas:
<TABLE>
<CAPTION>
ADJUSTMENTS
NORTH AND
AMERICA EUROPE FAR EAST ELIMINATIONS CONSOLIDATED
--------- ------- -------- ------------ ------------
1997 (IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Sales to unaffiliated
customers.............. $ 69,146 $43,854 $ 9,723 -- $ 122,723
Transfers between geo-
graphic locations...... $ 10,370 $ 5,719 $117,503 $(133,592) --
Loss from Operations.... $ (64,125) $ 74 $ 3,759 $ (3,679) $ (63,971)
Identifiable Assets..... $ 56,191 $ 4,971 $ 28,642 $ (7,155) $ 82,649
1996
Sales to unaffiliated
customers.............. $ 131,122 $57,235 $ 12,050 -- $ 200,407
Transfers between geo-
graphic locations...... $ 27,060 $21,718 $228,288 $(277,066) --
Loss from Operations.... $(107,274) $ 452 $(20,187) $ (3,667) $(130,676)
Identifiable Assets..... $ 33,837 $ 2,536 $ 49,626 $ (10,818) $ 75,181
1995
Sales to unaffiliated
customers.............. $ 186,276 -- $113,268 -- $ 299,544
Transfers between geo-
graphic locations...... $ 8,590 -- $256,106 $(264,696) --
Loss from Operations.... $ (20,973) -- $ 5,618 $ (1,754) $ (17,109)
Identifiable Assets..... $ 97,008 -- $ 73,483 $ (5,807) $ 164,484
</TABLE>
Sales and transfers between geographic areas generally provide a profit.
Income from operations is total net revenues less operating expenses. The
identifiable assets by geographic area are those assets used in the Company's
operations in each area.
12
<PAGE>
SYQUEST TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997
3. SUPPLEMENTARY BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Accounts receivable:
Accounts receivable...................................... $25,318 $36,035
Less allowances ......................................... (5,783) (5,694)
------- -------
$19,535 $30,341
======= =======
Inventories:
Raw materials............................................ $13,675 $ 5,005
Work-in-process.......................................... 6,840 4,481
Finished goods........................................... 6,222 1,052
------- -------
$26,737 $10,538
======= =======
Property, equipment and leasehold improvements:
Equipment................................................ 47,971 49,340
Furniture and Fixtures................................... 5,734 2,710
Property and leasehold improvements...................... 10,001 9,896
------- -------
63,706 61,946
Accumulated depreciation and amortization................ 40,707 34,765
------- -------
22,999 27,180
======= =======
Accrued expenses and other liabilities:
Accrued Warranty......................................... 1,832 6,757
Advertising.............................................. 2,123 2,999
Accrued compensation and benefits........................ 2,451 3,811
Other.................................................... 9,126 7,070
------- -------
15,532 20,637
======= =======
</TABLE>
4. BORROWINGS AND COMMITMENTS
At September 30, 1997, the Company had a line of credit agreement with a
U.S. financial institution, expiring March 1998. Borrowings under the
agreement bear interest at "LIBOR" (London Interbank Offered Rate) plus 4.825%
(10.75% at September 30, 1997 and 10.25% at September 30, 1996). The Company
is obligated to pay $10,000 of interest per month, regardless of outstanding
borrowings. The agreement provides for borrowings not to exceed $30 million or
an amount equal to 80% of the Company's eligible accounts receivables plus the
lesser of 40% of the Company's eligible finished goods inventories or $5.0
million. The agreement places limitations on additional borrowings and payment
of cash dividends. As of September 30, 1997, approximately $17.6 million of
borrowings were outstanding under the line of credit agreement.
On September 30, 1997, The Company's had a revolving banking facility (the
"facility") with a Malaysian financial institution consisting of a line of
credit of Malaysian Ringitts (RM) 17.5 million (approximately $5.4 million)
expiring March 1998 and a term loan of (RM) 9.9 million (approximately $3.0
million). The interest rate associated with the line of credit was 8.85% at
September 30, 1997, as compared to 8.28% at September 30, 1996. The term loan
is to be repaid in 120 monthly installments which began July 1997, and bears
interest at the rate of 1.0% over the bank's base lending rate (10.65% at
September 30, 1997 and 9.15% at September 30, 1996). The term loan has a
related overdraft facility of (RM) 2.0 million (approximately $0.6 million)
due on demand. The facility is secured by the subsidiary's building,
equipment, inventory and eligible receivables.
13
<PAGE>
SYQUEST TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997
During fiscal years 1997 and 1996, the Company converted approximately $33.0
million in accounts payable and purchase commitments with certain suppliers to
notes payable. The notes, which bear interest at a rate of 10%, are scheduled
to be repaid by September 1998. Additionally, during the same period, the
Company converted approximately $30 million of accounts payable to equity.
On July 15, 1996, the Company issued a 6% Convertible Subordinated Debenture
to a supplier in the amount of $7.7 million. The debenture agreement allows
the holder to convert up to $2,775,000 of the principal amount of the
debenture into no more than 400,000 shares of the Company's Common Stock at
the conversion price of $6.9375 per share. As of September 30, 1997, none of
the principal of the debenture had been converted to Common Stock. The balance
of the debenture agreement of approximately $3.5 million at September 30, 1997
is scheduled to be repaid by February 1999.
Lines of credit, term loan and notes payable obligations consist of the
following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Short-term Borrowings
Line of Credit, expiring March 1998...................... $17,619 $14,729
Line of Credit, principal and interest due on demand..... 5,383 4,010
Overdraft facility to term loan.......................... 289 529
------- -------
Total short term....................................... 23,291 19,268
Long-term Debt
Term Loan, payments due in monthly installments through
June 2007............................................... 3,039 3,607
Subordinated Debenture, payable in monthly installments
through February 1999................................... 3,544 7,252
Notes Payable to suppliers, payable in monthly
installments through September 1998..................... 1,786 30,661
------- -------
Total long-term debt................................... 8,369 41,520
------- -------
Total Debt................................................. 31,660 60,788
Less: Current portion...................................... 27,636 39,817
------- -------
Long-term debt............................................. $ 4,024 $20,971
======= =======
</TABLE>
Future minimum payments on lines of credit, term loan and notes payable are
as follows (in thousands):
<TABLE>
<S> <C>
1998............................................................... $27,636
1999............................................................... 1,480
2000............................................................... 495
2001............................................................... 495
2002............................................................... 495
Thereafter......................................................... 1,059
Total minimum payments............................................... $31,660
</TABLE>
The Company leases its United States facilities under noncancelable
operating lease agreements. These leases terminate through 2001, and certain
leases include five-year renewal options as well as provisions for adjustments
to lease payments based on the fair market value of similar properties. The
Company leases its Singapore facility under noncancelable lease agreements
expiring in 1997.
Total rent expense amounted to $2,300,000, $2,507,000, and $3,250,000 for
1997, 1996, and 1995, respectively.
14
<PAGE>
SYQUEST TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997
Future minimum rental commitments under non-cancelable operating leases are
as follows (in thousands):
<TABLE>
<S> <C>
1998................................................................. 2,230
1999................................................................. 1,425
2000................................................................. 197
2001................................................................. 13
------
Total minimum lease payments......................................... $3,865
======
</TABLE>
5. INCOME TAXES
The income tax provisions for fiscal 1997, 1996, and 1995 consist of the
following:
<TABLE>
<CAPTION>
1997 1996 1995
---- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Federal:
Current............................................ $-- $(1,528) $ (421)
Deferred........................................... -- 3,197 (2,578)
---- ------- -------
1,669 (2,999)
State:
Current............................................ -- -- 181
Deferred........................................... -- 1,331 (928)
---- ------- -------
-- 1,331 (747)
Foreign:
Current............................................ 350 -- 25
---- ------- -------
Provision (benefit) for income taxes............... 350 $ 3,000 $(3,721)
==== ======= =======
</TABLE>
Deferred tax assets and liabilities are determined based on differences
between the financial reporting and tax basis of assets and liabilities and
are measured by applying enacted tax rates and laws to the taxable years in
which such differences are expected to reverse. The significant components of
the Company's deferred tax assets and liabilities were as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Deferred Tax Assets
Credit carryforward...................................... $ 1,894 $ 1,894
Receivable reserves...................................... 2,295 2,979
Warranty reserves........................................ 724 1,575
Inventory valuation reserve.............................. 6,372 7,142
Domestic and foreign tax net operating losses............ 64,465 38,997
Other.................................................... 2,819 3,056
-------- --------
Total deferred tax assets................................ 78,569 55,643
Valuation allowance...................................... (71,844) (50,061)
-------- --------
Net deferred tax assets.................................. 6,725 5,582
Deferred Tax Liabilities................................. (6,725) (5,582)
-------- --------
Net deferred tax assets.................................. $ -- $ --
======== ========
</TABLE>
15
<PAGE>
SYQUEST TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997
Realization of deferred tax assets is dependent on future earnings, if any,
the timing and amount of which are uncertain. Accordingly, a valuation
allowance, in an amount equal to the net deferred tax asset as of September
30, 1997 has been established to reflect these uncertainties.
The reconciliation of income taxes provided at the federal statutory rate to
the income tax provision follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Income taxes (benefit) computed at the federal
statutory rate................................ $(24,035) $(46,610) $(5,272)
State income taxes (benefit) net of federal in-
come taxes effect............................. - -- (511)
Foreign losses for which no current tax benefit
is recognizable............................... 2,602 1,366 --
Taxes provided on earnings of foreign subsidi-
aries previously considered to be permanently
invested in non-US operations................. -- -- 1,768
Utilization of tax credits..................... -- -- (566)
Valuation allowance for deferred tax assets.... 21,783 48,244 427
Other.......................................... -- -- 433
-------- -------- -------
$ 350 $ 3,000 $(3,721)
======== ======== =======
</TABLE>
Income taxes paid (refunded) were ($3,139,000), and $1,600,000, in fiscal
1996, and 1995, respectively.
The Company has approximately $12,000,000 in foreign net operating loss
carryforwards. These carryforwards will expire in fiscal 1999 through fiscal
2002.
At September 30, 1997, the Company had federal net operating loss
carryforwards of approximately $163 million. These carryforwards will expire
in 2010 and 2011 if not utilized. The Company had state net operating loss
carryforwards of approximately $93 million that will expire in 2002 if not
utilized. In addition, the Company had research and development tax credit
carryforwards for federal and state tax purposes of approximately $1.3 million
and $0.4 million, respectively. The federal tax credit carryforwards will
expire beginning in fiscal 2007 if not utilized.
During fiscal 1997, the Company experienced a "change of ownership" for tax
purposes that would result in an annual limitation on the utilization of
domestic net operating loss and tax credit carryforwards in future periods.
6. RESTRUCTURING CHARGES
In the quarter ended March 31, 1996, the Company developed and began
implementation of a plan to relocate the international manufacturing
capabilities in Singapore to Penang, Malaysia. The relocation was completed in
the third quarter of fiscal 1996. The Company recorded a $3.6 million charge
for direct costs related to exiting manufacturing facilities in Singapore. The
charge consisted of $1.6 million for the write-off of leasehold improvements,
$0.6 million for site closure and related costs and $1.4 million for staff
severance and retrenchment. As of September 30, 1996, substantially all of
these costs had been incurred, and no additional accrual was recorded.
In the quarter ended June 30, 1996 the Company recorded a $1.9 million
charge for restructuring costs associated with the consolidation and closure
of several of its administrative support locations. Actual charge in the
quarter ended September 30, 1996, were approximately $0.5 million associated
with the write-off of fixed
16
<PAGE>
SYQUEST TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997
assets, $0.5 million of severance compensation, and $0.1 million for remaining
lease obligations. As of September 30, 1996, the consolidation of one location
was substantially complete, $0.8 million of the charge was reversed due to the
Company's decision to continue operations at one of the locations, and $0.6
million remains accrued to cover remaining exit costs.
7. TREASURY STOCK
In 1993, the Board of Directors authorized the Company to repurchase up to
one million shares of the Company's Common Stock. In April 1994, the Board of
Directors authorized the Company to repurchase up to an additional 500,000
shares of the Company's Common Stock. There were no treasury stock
transactions during fiscal 1997. The Company acquired 100,000 and 625,000
shares of its Common Stock for approximately $1.2 million and $6.0 million
through open market transactions during fiscal 1995 and 1994, respectively.
The Company has acquired a total of 1,225,000 shares of its Common Stock as
of September 30, 1997. These shares are held as treasury stock at September
30, 1997.
8. CONVERTIBLE PREFERRED STOCK
In June 1996, the Company issued 20,000 shares of 7% Cumulative Convertible
Preferred Stock, Series 1 ("Series 1") for net proceeds of approximately $19.0
million. The shares were convertible at the lessor of $11.0 per share or 77%
of the average market price for the 5 trading days immediately preceding
conversion. At September 30, 1997, all of the "Series 1" shares had been
converted into approximately 10,301,708 shares of the Company's common stock.
In October 1996, the Company issued 5,500 shares of its Cumulative
Convertible Preferred Stock, Series 1 ("Convertible Preferred Stock") for
proceeds of $5,500,000. In order to minimize the discount to market present in
the "Series 1" financing, the "Convertible Preferred Stock" included warrant
coverage to acquire 550,000 shares of the Company's Common Stock at an
exercise price of $5.50 per share. The "Convertible Preferred Stock" was
convertible at the lessor of $6.50 per share or 85% of the average market
price for the 5 trading days immediately preceding conversion. In addition to
the warrants noted above, the holders of the Series 1 Preferred Stock were
entitled to receive, for every three shares of Common Stock acquired through
conversion, a warrant to purchase one share of Common Stock at an exercise
price equal to the lesser of $7.15per share or 110% of the average market
price for the 5 trading days immediately preceding conversion. All "Series 1"
warrants expire three years after the date of issue. At September 30, 1997,
all of the "Convertible Preferred Stock" had been converted into approximately
3,289,981 shares of the Company's Common Stock.
In October 1996, the Company also issued 24,500 shares of its 5% Cumulative
Convertible Preferred Stock, Series 2 ("Series 2") for proceeds of
$24,500,000. The "Series 2" financing included warrant coverage to acquire
approximately 4,146,816 shares of the Company's Common Stock. The "Series 2"
Stock was convertible at the lessor of $6.50 per share or 85% of the average
market price for the 5 trading days immediately preceding conversion. The
"Series 2" warrant formula specified that for every three shares of Common
Stock acquired through conversion, the holder would receive a warrant to
purchase one share of Common Stock at an exercise price equal to the lesser of
$7.15per share or 110% of the average market price for the 5 trading days
immediately preceding conversion. The "Series 2" warrants expire in three
years after the date of issue. The "Series 2" stock also contained a 5%
cumulative dividend payable in cash or common stock at the option of the
Company. At September 30, 1997, all of the "Series 2" Stock had been converted
into approximately 12,440,447 shares of the Company's Common Stock.
17
<PAGE>
SYQUEST TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997
In April 1997, the Company issued 50,000 shares of its 5% Cumulative
Convertible Preferred Stock, Series 3 ( "Series 3") for proceeds of
$5,000,000. The "Series 3" stock is convertible at the greater of the
arithmetical average of the closing sale price of the Common Stock for the 5
trading days immediately preceding the conversion or 90% of the closing sale
price the day before the conversion, but not greater than the closing sale
price on April 2, 1997 ($2.25). The "Series 3" Stock included warrant coverage
to acquire 5,000,000 shares of the Company's Common Stock at an exercise price
equal to the greater of the arithmetical average of the closing sale price of
the Common Stock for the 5 trading days immediately preceding the exercise of
the warrants or 90% of the closing sale price of the Common Stock on the day
immediately prior to the exercise of the warrants, but in no event greater
than $2.25 per share. The warrants expire seven years from the date of
issuance. The "Series 3" stock also contained a 5% cumulative dividend payable
in cash or common stock at the option of the Company. At September 30, 1997,
25,000 shares of the "Series 3" stock have been converted into approximately
1,386,500 shares of the Company's Common Stock.
In May 1997, the Company issued 280,000 shares of its 5% Cumulative
Convertible Preferred Stock, Series 4 ( "Series 4") for proceeds of
$28,000,000. The "Series 4" stock is convertible at the greater of the
arithmetical average of the closing sale prices of the Common Stock for the 5
trading days immediately preceding the conversion or 90% of the closing sale
price the day before the conversion, but in no event greater than $2.3438 The
"Series 4" Stock included warrant coverage to acquire 28,000,000 shares of the
Company's Common Stock. The "Series 4" stock also contained a 5% cumulative
dividend payable in cash or common stock at the option of the Company. At
September 30, 1997, 25,000 shares of the "Series 4" stock have been converted
into approximately 1,386,500 shares of the Company's Common Stock. Refer to
the Company's May 30, 1997 8-K for a more detailed description of the "Series
4" transaction. The exercise price (the "Exercise Price")of the Warrants will
be the greater of the arithmetical average of the closing sales price per
share of common stock on the five consecutive trading days preceding the
delivery of the Exercise Notice (as defined below) and 90% of such closing
sale price on the day immediately prior to the delivery of the Exercise
Notice, but in any event not greater than $3.0469 per share. (The Warrants
issued to the Purchasers are not exercisable until the lapse of a period
ending on the sixty-fifth day after such Purchaser delivers a notice to
Registrant designating an aggregate number of Warrant Shares to be purchased.
Once such notice is given and the 65-dayperiod has passed, a Purchaser may
exercise its Warrant up to the number of shares designated in the 65-day
notice by providing further notice to Registrant that the Purchaser is
exercising the Warrant (the "Exercise Notice"). The Warrants expire seven
years from the date of each Purchaser's respective Agreement.)
In September, 1997, the Company issued 20,000 shares of its Convertible
Preferred Stock Series 5 ( "Series 5") for proceeds of $20,000,000. The
"Series 5" stock is convertible at the greater of the arithmetical average of
the closing sale prices of the Common Stock for the 5 trading days immediately
preceding the conversion or 90% of the closing sale price the day before the
conversion, but in no event greater than $3.0469. The "Series 5" Stock
included warrant coverage to acquire 14,000,000 shares of the Company's Common
Stock at an exercise price equal to the greater of the arithmetical average of
the closing sale price of the Common Stock for the 5 trading days immediately
preceding the exercise of the warrants or 90% of the closing sale price of the
Common Stock on the day immediately prior to the exercise of the warrants, but
in no event greater than $3.0469 per share. The warrants expire seven years
from the date of issuance. At September 30, 1997, none of the "Series 5" stock
had been converted.
Holders of the Company's Preferred Stock have no voting rights. In the event
of a voluntary or involuntary liquidation, the holders of the Preferred Stock
have a liquidation preference over the holders of the Company's Common Stock.
18
<PAGE>
SYQUEST TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997
9. MANDATORILY REDEEMABLE SECURITIES
The Series 3 and Series 4 warrants noted above and certain warrants issued
with common stock contain a mandatory redemption feature whereby in the event
of an unsolicited tender offer for the majority of the Company's then
outstanding Common Stock ("change in control"), at the option of the warrant
holder, the warrants become redeemable for the cash value of the warrants. The
warrant agreement specifies the methodology to be used to determine the cash
value in the event of a change in control. Consequently, at September 30,
1997, the fair value of the warrants has been classified as a liability on the
Consolidated Statement of Financial Condition.
The Series 5 warrants contain a clause whereby if the Company is unable to
provide sufficient shares of the Company's Common Stock to completely fulfill
the exercise of the warrants, then the Company must pay the warrant holder the
fair market value of the Company's Stock within 30 days of the receipt of the
exercise notice of the warrants. Consequently, at September 30, 1997, the fair
value of the warrants has been classified as temporary equity on the
Consolidated Statement of Financial Condition. This clause was removed as a
result of the shareholder vote discussed further at the subsequent events
footnote at note 14.
The financial statements for the year ended September 30, 1997 reflect the
classification of the fair value assigned to warrants issued during the year
(that were subject to the mandatory redemption features noted above) as
mandatorily redeemable warrants on the Consolidated Statement of Financial
Condition. Total Stockholders' Equity on the Consolidated Statement of
Financial Condition at September 30, 1997 has been reduced by the fair value
assigned to warrants of $14.1 million to $5.6 million. The fair value assigned
to the warrants is based on an independent appraisal received by the Company.
10. RESTATEMENT (UNAUDITED)
The independent appraisal received by the Company resulted in a significant
reduction in the value originally assigned to the warrants issued in
conjunction with the convertible preferred stock. The fair value of warrants
issued in connection with certain mandatorily redeemable Preferred Stock has
been reflected as reducing the income available to common shareholders for the
purposes of the earnings per share computation. Previously, the Company had
included the fair value of warrants issued in conjunction with all Preferred
Stock in the determination of the earnings per share. Accordingly, the
reported net loss per share has been re-stated to reduce the net loss per
share for the year and quarters affected as follows.
<TABLE>
<CAPTION>
Q1 Q2 Q3 Q4 YTD
------ ------ ----- ----- ------
<S> <C> <C> <C> <C> <C>
Basic and Diluted loss per share
as reported..................... $ (.86) $(1.31) $(.80) $(.54) $(3.34)
Change to net loss per share..... -- -- .49 .21 1.09
Revised Basic and Diluted loss
per share....................... $ (.86) $(1.31) $(.31) $(.33) $(2.25)
</TABLE>
The re-statement did not impact the reported net loss or cash flows of the
Company during the year ended September 30, 1997.
11. STOCK OPTION PLANS AND COMMON STOCK RESERVED
In 1991, the Company adopted the SyQuest Technology, Inc. 1991 Stock Option
Plan (the "Plan") covering 3,403,524 shares of common stock for issuance under
the Plan and assumed stock options currently outstanding under predecessor
stock option plans. The Plan provides for the issuance of incentive stock
options and non statutory stock options to officers, employees (including
directors who are also employees), consultants,
19
<PAGE>
SYQUEST TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997
independent contractors and advisors to or of the Company or any parent,
subsidiary or affiliate of the Company. Options granted under the Plan are
granted at fair value on the date of grant and become exercisable within the
times or upon the events determined by the Stock Option Committee as set forth
in the grant and expire within ten years from the date of the grant. In 1995,
the Company adopted an amendment to the Plan to increase the authorized number
of shares for the plan to 4,428,524. On September 26, 1996, the shareholders
approved an amendment to the Plan to increase the number of shares issuable
under the Plan to 6,000,000. Other minor changes were made to the Plan to
comply with changes in Rule 16B3 under the Securities and Exchange Act of
1934. These changes did not affect the terms of any existing options.
In 1992, the Company adopted the 1992 Nonemployee Director Stock Option Plan
(the "Director Plan") and reserved 150,000 shares of Common Stock for
issuance. The Director Plan was amended in 1994 to increase the size of the
annual option grants. The Board of Directors administers the Director Plan. In
1995, the Company adopted an amendment to the Nonemployee stock option plan to
increase the authorized number of shares for the plan to 250,000. On September
26, 1996, the shareholders approved an amendment to the Director Plan to
increase the authorized number of shares to 500,000. Options are granted at
fair value on the grant date and options may only be granted to Directors who
are not employees of the Company or its subsidiaries (Outside Directors). All
option grants are automatic and nondiscretionary. After each annual meeting of
stockholders at which directors are elected, reelected, or continuing as
directors, each Outside Director shall be automatically granted an option or
options. These options are to purchase such number of shares of Common Stock
as necessary so that during each of the four immediately following twelve-
month periods of July 1 through June 30, such Outside Directors will have
stock options (including Company stock options granted under plans other than
the Director Plan) which become exercisable with respect to a minimum of
10,000 shares during each such period. Prior to 1994 the minimum was 2,500
shares during each such period. On September 26, 1996, the stockholders
approved a one-time grant of 30,000 options for each new Outside Director
which were not counted in determining annual grants in the future. Other minor
changes were made to the Director Plan to comply with changes in Rule 16 of
the Securities and Exchange Commission Act of 1934. As of September 30, 1996,
options to purchase 160,000 shares of common stock were outstanding under the
Director plan.
On August 8, 1997, all outstanding options, except for Officer and Director
options, with a share price ranging from $28.25 per share to $3.0625 per share
were canceled and repriced with new options having an exercise price of
$2.5938 per share, the fair market value as of the date of the repricing. A
total of 1,401,934 shares were repriced.
The following table summarizes stock option activity under the Plan and the
Director Plan:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
SHARE
SHARES PRICE
------ --------
<S> <C> <C>
Outstanding at September 30, 1994........................ 2,301 9.75
Granted.................................................. 833 13.4
Exercised................................................ (502) 5.85
Cancelled................................................ (431) 14.12
------ -----
Outstanding at September 30, 1995........................ 2,201 12.04
Granted.................................................. 2,247 5.79
Exercised................................................ (386) 3.69
Cancelled................................................ (1,306) 9.57
------ -----
Outstanding at September 30, 1996........................ 2,756 8.21
Granted.................................................. 2,302 3.24
Exercised................................................ (16) 1.02
Cancelled................................................ (1,765) 5.83
------ -----
Outstanding at September 30, 1997........................ 3,277 6.09
</TABLE>
20
<PAGE>
SYQUEST TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997
The following table summarizes shares of Common Stock reserved for future
issuance by the Company under the Company's stock option and purchase plans as
of September 30, 1997:
<TABLE>
<S> <C>
(AMOUNTS ARE IN THOUSANDS)
1991 stock option plan.................................................... 3,700
Director stock option plan................................................ 130
Employee stock purchase plan.............................................. 353
-----
4,183
=====
</TABLE>
As of September 30, 1997, options to purchase approximately 586,731 shares
of Common stock were exercisable. Options granted vest over a period of 4
years.
The weighted average estimated fair value at the date of grant, as defined
by SFAS 123, for options granted in fiscal 1996 and 1997 was $2.5399 and
$1.2502 per option, respectively. The estimated grant date fair value
disclosed above was calculated using the Black-Scholes model. This model, as
well as other currently accepted option valuation models, was developed to
estimate the fair value of freely tradable, fully transferable options without
vesting restrictions, which significantly differ from the Company's option
awards. These models also require subjective assumptions, including future
stock price volatility and expected time to exercise, which greatly affect the
calculated values. Significant option groups outstanding at September 30, 1997
and related weighted average exercise price and contractual life information
are as follows:
OUTSTANDING AND EXERCISABLE BY OPTION RANGE
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE WEIGHTED
REMAINING AVERAGE NUMBER
RANGE OF NUMBER CONTRACTUAL EXERCISE VESTED AND
EXERCISE PRICE OUTSTANDING LIFE PRICE EXERCISABLE
- -------------- ----------- ----------- -------- -----------
<S> <C> <C> <C> <C>
$2.5938 -- $3.873 ................. 3,298,359 4 years 3.32 727,036
$0.30 -- $12.50 ................. 2,683,540 4 years 5.5463 758,662
</TABLE>
The Company's calculations were made using the following weighted average
assumptions:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 1996
------------- ------- -------
<S> <C> <C>
Expected life.............................................. 2 years 2 years
Risk-free interest rate.................................... 6.13% 6.12%
Volatility................................................. 57.14% 56.99%
Dividend yield............................................. 0% 0%
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN
In 1992, the Company adopted the 1992 Employee Stock Purchase Plan (the
"Purchase Plan"), and 500,000 shares of common stock were reserved for
issuance under the Purchase Plan. The Purchase Plan is intended to qualify
under Section 423 of the Internal Revenue Code of 1986, as amended. Under the
plan, eligible employees of the Company may purchase shares of Common Stock
through payroll deductions. The ESPP consists of two 6-month offering and
purchasing periods each year. The purchase price per share is 85% of the lower
of the fair market values of the Common Stock at the commencement period or
the last day of the purchase period. Purchases are limited to 15% of an
eligible employee's compensation subject to a maximum annual employee
contribution limited to a $15,000 fair market value. Of the 500,000 shares
authorized under the ESPP, 89,206 shares were issued during fiscal 1997.
21
<PAGE>
SYQUEST TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997
Compensation costs (including pro forma net income per share amounts) for
the grant date fair value, as defined by SFAS 123, of the purchase rights
granted under the ESPP were calculated using the Black-Sholes model. The
following weighted average assumptions are included in the estimated grant
date fair value calculations for rights to purchase stock under the ESPP:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
------------------
<S> <C>
Expected life...................................................... 6 months
Risk-free interest rate............................................ 5.97%
Volatility......................................................... 58.96%
Dividend yield..................................................... 0%
</TABLE>
The weighted average estimated grant date fair value, as defined by SFAS
123, or rights to purchase stock under the ESPP granted in fiscal 1997 was
$1.2088 per share.
PRO FORMA NET LOSS AND NET LOSS PER SHARE
Had the Company recorded compensation expense based on the estimated grant
date fair value, as defined by SFAS 123, for awards granted under the 1991 and
1992 Stock Option Plans and the Employee Stock Purchase Plan, the Company's
pro forma net loss and net loss per share for the years ended September 30,
1997 and 1996, would have been as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 1996
------------- --------- ----------
IN THOUSANDS EXCEPT
PER SHARE DATA
<S> <C> <C>
Pro forma net (loss)................................. $ (69,702) $ (138,355)
Pro forma basic and diluted (loss) per share......... (2.28) (12.53)
</TABLE>
The pro forma effect on net loss and net loss per share for fiscal 1997 and
1996 is not representative of the pro forma effect on net income (loss) in the
future years because it does not take into consideration pro forma
compensation expense related to grants prior to fiscal 1995.
12. BONUS, PROFIT SHARING AND 401(K) SAVINGS AND RETIREMENT PLANS
The Company has an incentive stock bonus plan for certain key employees that
provides shares of the Company's stock based on meeting certain milestones.
Such determination considers the extent to which individuals and the Company
meet objectives during the year. The Company incurred approximately $353,000
of stock bonus expense in 1997. The Company did not incur bonus expenses in
1996 and 1995.
The Company adopted a 401(k) Savings and Retirement Plan (the "Savings
Plan") to provide for voluntary salary deferral contributions on a pretax
basis in accordance with Section 401(k) of the Internal Revenue Code of 1986,
as amended. The Company has the option of matching a certain percent of each
participant's contribution to the Savings Plan. The Company's maximum
contribution per participant is limited to $1,000. The Company made matching
contributions of approximately $266,000, $254,000 and $242,000 in 1997, 1996,
and 1995, respectively.
The Company has bonus and profit sharing plans that provide additional
compensation to substantially all employees. The profit sharing compensation
is determined on an annual basis based principally on a percentage of income
after taxes, before profit sharing, and the Company meeting certain objectives
for the year. Bonuses for officers and key management personnel are determined
annually at the discretion of the Board of Directors. Such determination
considers the extent to which individuals and the Company meet objectives for
the year. The Company did not incur profit sharing expenses in 1997 or 1996.
22
<PAGE>
SYQUEST TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997
13. LITIGATION
The Company has been named as a defendant in four putative class action
lawsuits. Two of the actions, Ravens, et al. v. Iftikar, et al. (filed April
2, 1996) and Belleza, et al. v. Iftikar, et al. (filed May 24, 1996) have been
brought in the United States District Court for the Northern District of
California and have been assigned to the Honorable Vaughn Walker
(collectively, the "Federal Lawsuit"). Certain current and former officers and
directors also have been named as defendants in the Federal Lawsuit. The
plaintiffs in the Federal Lawsuit purport to represent a class of all persons
who purchased the Company's Common Stock between October 21, 1994 and February
1, 1996. The Federal Lawsuit alleges that the defendants violated the federal
securities laws through certain alleged material misrepresentations and
omissions. In general, the litigation alleges insider trading by certain
officers and directors of the Company, failures to disclose on a timely basis
contamination problems in the SQ3270 drive, failure to disclose on a timely
basis that the EZ135 drive could not be sold profitably given the cost of
production, and the failure of certain of the Company's financial statements
to reflect properly the value of inventory relating to those two drives. In
January 1997, the Court denied the motion of certain plaintiffs to be
appointed lead plaintiffs under the Private Securities Litigation Reform Act
of 1995 (the "Reform Act") on the ground, inter alia, that the plaintiffs'
published notice to the class did not constitute adequate notice of the
litigation under the Reform Act. In July 1997, the Court denied a motion for
reconsideration of its prior order and directed the plaintiffs to issue a
revised notice and/or amend their complaint by August 22, 1997, or be subject
to a motion to dismiss or for summary judgement. Plaintiffs have informed the
Court that they elect to stand on the existing notice and complaint.
The third suit is a purported class action entitled Gary S. Kaufman v.
SyQuest Technology Inc., et al. was filed on March 25, 1996, in the Superior
Court of the State of California for the County of Alameda (the "Kaufman
Lawsuit"). The fourth purported class action, entitled Ravens, et al. v.
Iftikar, et al., was filed on October 11, 1996, in the Superior Court of the
State of California for the County of Alameda (the "Ravens Lawsuit"). The
Kaufman Lawsuit and the Ravens Lawsuit (collectively the "State Court
Lawsuit") have been consolidated and a Consolidated Amended Complaint was
filed on December 6, 1996. The allegations are essentially the same as in the
Federal Lawsuits and seek unspecified damages and punitive damages on behalf
of all persons who purchased the Company's Common Stock from October 21, 1994
and February 1, 1996. Pursuant to a Stipulation and Order entered on August 6,
1997, the State Court Lawsuit has been referred to mediation before a retired
federal judge.
On May 14, 1996, the Company was served with a shareholders derivative
action filed in Alameda County, California, Superior Court entitled John
Nitti, et al. v. Syed Iftikar, et al (the "Derivative Lawsuit"). On July 22,
1996, plaintiffs filed an amended complaint. The action seeks to recover
unspecified damages and punitive damages on behalf of the Company from current
and former officers and directors of the Company for alleged breach of
fiduciary duty, unjust enrichment and waste of corporate assets. The Company
is a nominal defendant in the action. The complaint alleges that the officers
and directors issued false and misleading information and sold shares of the
Company's stock at artificially inflated prices. The allegations are
essentially the same as those in the putative class actions. Counsel for
plaintiffs in the Derivative Lawsuit are participating in the mediation
ordered for the State Court Lawsuit described above.
The Company intends to defend the Federal Lawsuit, the State Court Lawsuit
and the Derivative Lawsuit vigorously, but there can be no assurance as to
what financial effect this litigation may have on the Company. If there is an
adverse result, the Company does not expect any particular product line to be
effected as the plaintiffs seek monetary, rather than injunctive relief.
Nevertheless, a materially unfavorable outcome could have an adverse effect on
the Company's financial condition, results of operations and cash flow. No
loss contingency has been provided for these lawsuits as the amounts of any
loss, if any, are not yet determinable or reasonably estimable.
23
<PAGE>
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 below, 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.
On December 3, 1997, SPARC International, Inc. filed a lawsuit in the United
States District Court in and for the Northern District of California against
the Company. The lawsuit alleges that the Company's use of the trademark SparQ
in connection with its recently introduced SparQ removable cartridge hard
drive product constitutes an infringement of the SPARC trademark owned by
SPARC International, Inc. The complaint requests money damages and a
preliminary and permanent injunction enjoining the Company from further
infringement. On December 19, 1997, SPARC International, Inc. filed a motion
seeking a preliminary injunction enjoining the Company from using the SparQ
trademark on its removable cartridge hard drive products and requesting a
hearing on January 26, 1998. The Company believes that it does not infringe
any valid trademarks of SPARC International, Inc. and intends to defend itself
vigorously against this action.
On July 29, 1997, Iomega Corporation ("Iomega") initiated an action for
patent and trademark infringement against SyQuest in the United States
District Court for the District of Delaware. The suit alleges that SyQuest's
SyJet and EZFlyer 230 products infringe United States Utility Patent No.
5,644,444, entitled "Read/Write Protect Scheme for a Disk Cartridge and
Drive", and that the cartridges sold by SyQuest for use with its SyJet and
EZFlyer 230 products infringe United States Design Patent No. Des. 378,518,
entitled "Computer Storage Disk Cartridge." The suit further alleges that
SyQuest has infringed Iomega's claimed "Jet" trademark and engaged in unfair
competition through the use of the "SyJet" name for one of it products. Iomega
seeks a judgment of infringement, monetary damages, injunctive relief,
disgourgement of profits, treble actual damages on the disputed products, and
attorney's fees. Iomega also seeks exemplary damages and attorneys' fees based
on SyQuest's alleged willful infringement of Iomega's claimed trademark.
SyQuest has filed an answer and counterclaim denying infringement and
requesting a declaratory judgment that the patents-in-suit are invalid and not
infringed. The case is in the early stages of discovery. In interrogatory
responses served December 3, 1997, Iomega asserted that SyQuest's recently
introduced SparQ product and not yet introduced Quest product infringe
Iomega's design patent and that it is investigating whether it believes that
the SparQ or Quest products infringe Iomega's utility patent. The Court has
set a trial date of January 11, 1999. SyQuest believes it has meritorious
defenses to Iomega's allegations and intends to defend the case vigorously.
On or about June 10, 1997, the Company initiated litigation against
Castlewood Systems, Inc. and eleven (11) former Company employees in Santa
Clara Superior Court, No. 766757 asserting ten (10) causes of action,
including claims for misappropriation of trade secrets, unfair competition,
and breach of fiduciary duty. On or about July 16, 1997, Castlewood filed a
Cross-Complaint against the Company, alleging three (3) causes of action
(interference with prospective economic advantage; unfair competition; trade
libel). The Company seeks money damages and an injunction from engaging in
such conduct. Since that time, the parties have engaged exclusively in
hearings before Thomas E. Schatzel, Esq., the Court-appointed discovery
referee, to finalize the Company's identification of trade secrets in
accordance with the requirements of the California Code of Civil Procedure (S)
2019 (d). The Company's Seconded Amended Identification of Trade Secrets was
deemed acceptable by the Discovery Referee on October 20, 1997. Discovery has
only recently begun, and there can be no assurance as to what impact this
litigation may have on the Company.
In 1996, the Company filed suit against Nomai, S.A. (Nomai) and Maxell in
France for copyright and patent infringement. The Company initiated an
arbitration proceeding against Nomai seeking payment of outstanding royalties
of approximately $1 million. On January 27, 1997, the Company filed a
Complaint in the United States District Court in Northern District of
California against Nomai, S.A., Nomus, Inc., Marc Frouin, Herve Frouin,
Electronique d2, and La Cie Ltd., entitled SyQuest Technology, Inc. v. Nomai,
S.A. et al. (Case No. C97-0271 FMS) (the "Nomai Action") alleging patent and
trademark infringement, misrepresentation, breach of contract and other
claims. During April through June 1997, Nomus, Inc., Marc Frouin and Herve
Frouin (collectively the "Nomai Parties") filed certain Cross-Complaints
against the Company. The parties have engaged in discussions concerning the
terms of a potential resolution to the Nomai Action. The Company and the Nomai
Parties have
24
<PAGE>
resolved the claims alleged in the Nomai action on December 16, 1997, pursuant
to a Settlement Agreement, ("Settlement Agreement"). In accordance with the
Settlement Agreement a stipulation to dismiss the Company's complaint and the
Nomai's Parties' cross-complaint with prejudice was filed. The Nomai Action
remains pending against defendants Electronique d2 and La Cie Ltd.
On, March 7, 1997, RKS Design, Inc. filed suit against the Company alleging
that the Company failed to pay $48,394.21 of interest charges on fees charged
for design services rendered with respect to its EZ Flyer and SyJet products.
The suit requests damages including profits associated with these products,
interest and attorneys' fees. The Company has filed a counterclaim asserting,
inter alia, that no amount is owing to RKS, and that the Company is entitled
to a refund of certain overpayments made to RKS. The Company does not believe
that this claim will have a material adverse affect on the Company or its
financial position or its results of operations.
Due to the inherent uncertainty of litigation, management is unable to
predict the outcome of the above litigation. A materially unfavorable outcome
of the above litigation could have an adverse effect on the Company's
financial condition, results of operations and cash flows.
From time to time, the Company is involved in litigation that it considers
to be in normal course of business. Other than as set forth above, the Company
is not engaged in any legal proceedings as of September 30, 1997, which the
Company expects individually or in the aggregate to have a material adverse
effect on the Company's financial condition or results of operation.
14. SUBSEQUENT EVENTS
On November 5, 1997, at a special shareholder meeting, the shareholders of
the Company approved a proposal amending the existing articles of
incorporation to increase the authorized shares of the Company from 120
million to 240 million. On December 10, 1997, assuming the conversion of all
outstanding preferred stock and the exercise of all outstanding warrants and
other stock commitments, the Company has outstanding and committed
approximately 153 million shares of the Company's common stock.
During October and November, 1997, the Company issued Series 5 convertible
preferred stock for approximately $10 million in proceeds and approximately 7
million of outstanding warrants were exercised resulting in approximately $26
million in proceeds to the Company. Further, the Company committed to issue
4.5 million new warrants to warrant holders to exercise outstanding warrants
with terms and conditions substantially the same as other outstanding Series 5
warrants.
Adverse market conditions in the personal computer and data storage industries
have resulted in lower than anticipated unit shipments and sales prices of the
Company's products. As a result, the Company has experienced significant revenue
shortfalls, negative cash flow, a lack of liquidity and excess inventory. The
Company anticipates continuing losses during its fourth quarter ending
September 30, 1998, commensurate with the losses incurred during the first
three quarters of fiscal 1998. A discussion of Management's plans to address
the continued losses is included at Note 1 "Basis of Presentation",
paragraph 8.
25
