<PAGE>
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, 1998
COMMISSION FILE NUMBER 0-19674
----------------
SYQUEST TECHNOLOGY, INC.
(REGISTRANT)
DELAWARE 94-2793941
(STATE OR OTHER JURISDICTION OF IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION) (I.R.S. EMPLOYER
47071 BAYSIDE PARKWAY FREMONT, CA
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
94538
(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 April 30, 1998, 95,295,668 shares of the Registrant's common stock,
$0.0001 par value, were issued and outstanding.
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<TABLE>
<CAPTION>
INDEX
SYQUEST TECHNOLOGY, INC.
PAGE
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PART I FINANCIAL INFORMATION
ITEM 1. Consolidated Condensed Financial Statements
Consolidated Condensed Statements of Operations--Three months
and six months ended March 31, 1998 and March 31, 1997..................................... 3
Consolidated Condensed Statements of Financial Condition--March 31, 1998 and
September 30, 1997......................................................................... 4
Consolidated Condensed Statements of Cash Flow--Six months ended March 31,
1998 and March 31, 1997.................................................................... 5
Notes to Consolidated Condensed Financial Statements--March 31, 1998................................ 6-10
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...... 10-18
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings.......................................................................... 19
ITEM 2. Changes in Securities...................................................................... 19
ITEM 6. Exhibits and Reports on Form 8-K........................................................... 20
SIGNATURES............................................................................................ 21
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2
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<TABLE>
<CAPTION>
SYQUEST TECHNOLOGY, INC.
CONSOLIDATED CONDENSED STATEMENTS OF RESULTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
-------------------- --------------------
1998 1997 1998 1997
--------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenue........................................................................ $ 47,028 $ 16,786 $ 79,089 $ 65,097
Cost of revenue.................................................................... 52,241 30,051 92,874 67,317
--------- -------- -------- --------
Gross profit (loss)........................................................... (5,213) (13,265) (13,785) (2,220)
Operating Expenses:
Selling, general and administrative........................................... 21,156 12,730 44,896 24,057
Research and development...................................................... 3,540 6,617 7,418 11,718
--------- -------- -------- --------
Total operating expenses...................................................... 24,696 19,348 52,314 35,775
--------- -------- -------- --------
Loss from operations.......................................................... (29,909) (32,613) (66,099) (37,995)
Net interest expense............................................................... (674) (1,106) (1,299) (2,538)
--------- -------- -------- --------
Loss before income taxes........................................................... (30,583) (33,719) (67,398) (40,533)
Provision for income taxes......................................................... 873 873
--------- -------- -------- --------
Net loss........................................................................... (31,456) (33,719) (68,271) (40,533)
--------- -------- -------- --------
Value assigned to warrants issued in conjunction with preferred stock offerings.... (2,100) --
Preferred stock dividend........................................................... (251) (691) (331) (1,264)
Effect of incremental yield embedded in conversions terms.......................... (5,300)
--------- -------- -------- --------
Net loss applicable to common stock holders........................................ $ (31,707) $(34,410) $(70,702) $(47,097)
========= ======== ======== ========
Basic and diluted loss per share................................................... $ (0.43) $ (1.31) $ (1.00) $ (2.30)
========= ========= ========= =========
Weighted average shares............................................................ 72,973 26,206 70,982 20,466
========= ========= ========= =========
</TABLE>
See notes to consolidated condensed financial statements
3
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<TABLE>
<CAPTION>
SYQUEST TECHNOLOGY, INC.
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS)
MARCH 31, SEPTEMBER 30,
1998 1997
--------- ----------
ASSETS
------
<S> <C> <C>
Current assets:
Cash and cash equivalents ................... $ 16,559 $ 7,083
Accounts receivable, net .................... 33,072 19,535
Inventories, net ............................ 36,154 26,737
Prepaid expenses and deposits ............... 8,497 6,049
--------- ---------
Total current assets ........................ 94,282 59,404
Net property, equipment and leasehold improvements 25,857 22,999
Other assets ..................................... 229 246
--------- ---------
$ 120,368 $ 82,649
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Short term borrowings ....................... $ 25,483 $ 23,291
Accounts payable ............................ 36,466 14,800
Accrued expenses and other liabilities ...... 16,671 15,532
Current portion of long-term debt ........... 3,387 4,345
--------- ---------
Total current liabilities .............. 82,007 57,968
--------- ---------
Long-term debt ................................... 2,639 4,024
Other long-term liabilities ...................... 914 959
Mandatory redeemable warrants .................... 5,145 14,085
Stockholders' equity:
Preferred stock ............................. -- --
Common stock ................................ 8 6
Additional paid in capital .................. 315,084 222,766
Treasury stock .............................. (12,855) (12,855)
Retained deficit ............................ (272,574) (204,304)
--------- ---------
Total stockholders' equity ............. 29,663 5,613
--------- ---------
$ 120,368 $ 82,649
========= =========
</TABLE>
See notes to consolidated condensed financial statements
4
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<TABLE>
<CAPTION>
SYQUEST TECHNOLOGY, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
SIX MONTHS
ENDED
MARCH 31,
--------------------------
1998 1997
--------- ----------
<S> <C> <C>
Operating Activities:
Net loss .............................................................. $(68,271) $ (40,533)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation ...................................................... 3,305 6,567
Capital Asset Write-Off ........................................... -- 2,470
Compensation cost in stock option plans ........................... 857 --
Other ............................................................. -- (127)
Net changes in current assets and current liabilities:
Accounts receivable ................................................... (13,537) 5,683
Inventories ........................................................... (9,417) (12,154)
Accounts payable ...................................................... 22,099 1,507
Accrued expenses and other liabilities ................................ 833 2,456
Prepaid expenses and other ............................................ (1,945) (6,481)
-------- ---------
Net cash used in operating activities ................................. (66,076) (40,612)
Investing activities:
Purchase of equipment and leasehold improvements ...................... (6,163) (2,298)
Other assets .......................................................... -- 640
-------- ---------
Net cash used in investing activities ................................. (6,163) (1,658)
Financing activities:
Net proceeds from issuance of common stock ............................ 43,782 8,728
Net proceeds from issuance of preferred stock ......................... 38,491 28,490
Net proceeds from bank borrowings ..................................... 2,192 11,086
Repayments on long term debt .......................................... (2,750) (6,568)
-------- ---------
Net cash provided by financing activities ............................. 81,715 41,736
Net increase (decrease) in cash and cash equivalents ..................... 9,476 (534)
Cash and cash equivalents at beginning of the period ..................... 7,083 3,670
-------- ---------
Cash and cash equivalents at end of the period ........................... $ 16,559 $ 3,136
======== =========
</TABLE>
See notes to consolidated condensed financial statements
5
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SYQUEST TECHNOLOGY, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 1998
NOTE 1 -- 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. During the last
24 months, the Company incurred aggregated consolidated net losses of
$188,687,000, including a net loss of approximately $68.7 million for the year
ended September 30, 1997 and a net loss of aprroximately $68.3 million for the
first six months of fiscal 1998. Working capital was $12,275,000 at March 31,
1998, compared to $1,436,000 at September 30, 1997 and ($37,351,000) at
September 30, 1996.
The Company is in the process of executing a turnaround and faces
significant risks associated with successful execution of its turnaround
strategy. These risks include, but are not limited to, risks associated with
lack of cash flow and available funds, technology and product development,
introduction and market acceptance of new products, changes in the marketplace,
competition from existing and new competitors and retention of key personnel.
The Company introduced new products in November 1997 and incurred
production start-up costs associated with the launch of those products that
contributed to the losses reported for the fiscal quarters ended December 31,
1997 and March 31, 1998. The Company has funded the cumulative losses
primarily through the sale of preferred and common stock and the issuance of
additional common stock on the exercise of existing warrants. At the November
1997 Special Stockholders' Meeting, the stockholders approved an increase in
the Company's authorized capital stock from 120 million common shares to 240
million common shares.
Management believes, based on the $45.8 million in cash raised in the
quarter ended March 31, 1998 and approximately $20.2 million received in April
1998 from the exercise of common stock purchase warrants, as well as extension
of its bank credit lines and available cash balances, that the Company has
sufficient cash resources to fund operations through the end of fiscal 1998.
There can be no assurance, however, that the Company will be successful in
achieving its internal financial plan. Management's financial plans for fiscal
1998 include raising additional equity capital primarily from the exercise of
currently outstanding warrants. If all of the warrants outstanding at March
31, 1998 were exercised, the Company would receive cash proceeds of
approximately $150 million; however, the outstanding warrants do not include
any demand or call provisions. To induce existing warrant holders to exercise
their warrants management may have to offer discounts to the contractual
exercise price, issue exchange warrants at market or negotiated discount
exercise prices or provide other incentives. Management believes it has
additional sources of equity capital through issuance of additional
convertible preferred stock or through issuance of debt instruments such as
convertible debentures. There can be no assurance, however, that such
financings would be available when needed, if at all, or on favorable terms
and conditions. The precise amount and timing of the Company's future funding
needs cannot be determined accurately at this time, and will depend on a
number of factors, including the market demand for the Company's products, the
quality of product development efforts, availability of critical components,
management of working capital, and continuation of normal payment terms and
conditions for purchase of materials and services.
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.
6
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Operating results for the three and six months ended March 31, 1998 are not
necessarily indicative of the results that may be expected for the year ending
September 30, 1998. 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, 1997.
NOTE 2 -- INVENTORIES
Inventories are comprised of the following:
MARCH 31, SEPTEMBER 30,
1998 1997
------- -------
(IN THOUSANDS)
Raw materials....................... $21,825 $13,675
Work in process..................... 6,824 6,840
Finished goods...................... 7,505 6,222
------- -------
$36,154 $26,737
======= =======
NOTE 3 -- NET LOSS PER SHARE
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
128, "Earnings per Share", during fiscal 1998.
The computation of net loss per share for the quarter ended March 31, 1998
includes an adjustment related to the computation of earnings per share
applicable to common shareholders of $0.3 million, representing preferred stock
dividends. Absent this adjustment, the net loss per share applicable to the
operations of the business would be $0.43. The computation of net loss per share
for the six months ended March 31, 1998 includes adjustments related to the
computation of earnings per share applicable to common stockholders of $2.1
million, representing the value assigned to warrants issued in connection with
Series 5 preferred stock, and $0.3 million, representing preferred stock
dividends. Absent these adjustments, the net loss per share applicable to the
operations of the business would be $0.96. The net loss per share has decreased
during the periods presented primarily due to the increased number of new common
shares outstanding.
The basic net loss per share amount for the three and six month periods
ended March 31, 1998 are based on the weighted average number of shares of
common stock outstanding during the period.
Options, warrants and common shares issuable on the conversion of preferred
stock have been excluded from the computation of diluted earnings per share, as
they are anti-dilutive.
7
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<TABLE>
<CAPTION>
COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
MARCH 31, MARCH 31, MARCH 31, MARCH 31,
----------- ---------- ----------- -----------
1998 1997 1998 1997
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Net Loss..................................................... $ (31,456) $ (33,719) $ (68,271) $ (40,533)
Value assigned to warrants issued in conjunction with
preferred stock offerings................................. -- -- (2,100) --
Cumulative preferred stock dividends......................... (251) (691) (331) (1,264)
Effect of incremental yield embedded in conversions terms.... -- -- -- (5,300)
----------- ---------- ---------- -----------
Net loss applicable to common stockholders................... $ (31,707) $ (34,410) $ (70,702) $ (47,097)
Weighted average shares...................................... 72,973 26,206 70,982 20,466
Basic and diluted loss per share............................. $ (0.43) $ (1.31) $ (1.00) $ (2.30)
</TABLE>
NOTE 4 -- LINES OF CREDIT
In May 1998, the Company renegotiated its domestic line of credit with a
financial institution, continuing the existing terms and extending the line
through May 31, 1999. The line provides for a limit on borrowings of the lesser
of $30.0 million or a combination of 80 percent of eligible accounts receivable
and 40 percent of eligible finished goods inventory. As of March 31, 1998,
approximately $20.7 million of borrowings were outstanding under the line.
On March 31, 1998, the Company's manufacturing subsidiary in Penang,
Malaysia, SyQuest Technology Sdn Bhd (M), had a banking facility with a
Malaysian financial institution expiring September 1998 and consisting of a line
of credit for (RM) 17.5 million (approximately $4.8 million) and a term loan for
(RM) 9.6 million (approximately $2.6 million). The subsidiary's building,
equipment, inventory, and eligible receivables secure the facility. As of March
31, 1998, approximately $7.4 million of borrowings were outstanding against this
facility.
NOTE 5 -- CONVERTIBLE PREFERRED STOCK
At March 31, 1998, the Company had issued and outstanding 46 shares of 5%
cumulative convertible preferred stock, Series 3 (Series 3), 57,657 shares of 5%
convertible preferred stock, Series 4 (Series 4), 21,182 shares of convertible
preferred stock, Series 5 (Series 5), and 30,177 of 5% convertible preferred
stock Series 7 (Series 7). Each of the holders of Series 3, Series 4 and Series
7 preferred stock is entitled to a 5% per share dividend.
During the quarter ended March 31, 1998, the Company incurred a penalty
due to the late registration of the shares of common stock underlying the
Series 5 preferred stock. The penalty was calculated based on the terms of the
Series 5 preferred stock agreements and consists of cash penalties totaling
approximately $0.6 million plus an additional 2.7 million warrants to be
issued. The Company is currently negotiating to satisfy the cash penalties
with shares of common stock.
During the quarter ended March 31, 1998, the Company issued 30,000 shares
of convertible preferred stock
8
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(Series 7) for net proceeds of approximately $28.8 million.
NOTE 6 -- COMMON STOCK
During the quarter ended March 31, 1998, the Company received proceeds of
approximately $17.1 million from the exercise of outstanding stock purchase
warrants and the purchase of shares under the Company's Employee Stock Purchase
Plan. These transactions resulted in the issuance of approximately 6.3 million
shares of common stock. The Company also issued new warrants to purchase
approximately 5.1 million shares of common stock in conjunction with the
issuance of Series 7 preferred stock.
During the quarter ended March 31, 1998, the Company reclassified
approximately $0.5 million which had been previously classified as mandatory
redeemable warrants into additional paid-in capital as a result of warrants
exercised from Series 4 preferred shares. Additionally, the Company reclassified
approximately $1.0 million from mandatory redeemable warrants into additional
paid-in capital on termination of the redeemable feature in the related
warrants.
During the quarter ended March 31, 1998, certain holders of the Company's
Series 4 and Series 5 preferred stock converted their preferred stock into
common stock. The conversions resulted in the issuance of a total of 3,541,571
shares of common stock in exchange for 197 shares of the Company's Series 4
preferred stock and 8,818 shares of the Company's Series 5 preferred stock.
Subsequent to March 31, 1998, the Company issued approximately 8.0 million
shares of common stock for proceeds of approximately $20.2 million pursuant to
warrant exercises by holders of Series 3 and Series 5 preferred stock. As an
incentive for warrant holders to exercise these warrants, the Company issued an
additional 3.2 million common shares.
NOTE 7 -- LITIGATION
On March 3, 1998, Iomega filed suit in France in the Paris Court of First
Instance against the Company, its French subsidiary, SyQuest Technology SARL
("SyQuest SARL"), and a distributor of the Company's products in France
alleging, among other things, that the Company's SyJet cartridges infringe
Iomega's cartridge design rights and a recently issued patent. The complaint
requests money damages and an injunction against the Company from further
infringement. Iomega subsequently requested summary proceedings in which it made
a motion to enjoin the Company from selling SyJet cartridges in France based on
alleged infringement and to block sales of certain of the Company's products in
France. A hearing was held in Paris on April 3, 1998, and the French court
issued an order on April 30, 1998 denying Iomega's motion to enjoin sales of
SyJet cartridges. The Company believes that no valid patent claims or designs of
Iomega are infringed by its SyJet product and will continue to vigorously defend
the action.
On April 29, 1998, Iomega filed suit in France in the Paris Court of
First Instance against the Company, its French subsidiary, SyQuest SARL, and a
distributor of the Company's products in France. The suit alleges that the
Company's SparQ 1.0 gigabyte cartridge infringes Iomega's design for its Jaz
cartridge and Iomega's European patent application number 956002B.4 relating to
an anti-rattle mechanism. The Company believes that no valid patent claims or
designs of Iomega are infringed by its SparQ product and intends to vigorously
defend the action.
Due to the inherent uncertainty of litigation, management is unable to
predict the outcome of the above litigation. 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 any of the
litigation described above, as the amount of losses, if any, is not yet
determinable or reasonably estimable.
9
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NOTE 8 - RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," and SFAS No. 131, "Segment Reporting." These
statements are effective for the Company's fiscal year ending September 30,
1999. SFAS 130 defines the items to be included in the determination of
comprehensive income, and SFAS 131 specifies revised guidelines for determining
an entity's operating segments and the type and level of financial information
to be disclosed. Management believes the adoption of SFAS 130 and 131 will not
have a material impact on the Company's financial statements and disclosures.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following is a discussion and analysis of the consolidated financial
condition and results of operations for the Company for the second fiscal
quarter ended March 31, 1998, and of certain factors that may affect the
Company's prospective financial condition and results of operations. The
following should be read in conjunction with the Condensed Consolidated
Financial Statements and related Notes appearing elsewhere herein, and with
the Company's cautionary statement regarding forward-looking statements.
This Management's Discussion and Analysis of Financial Condition and
Results of Operations contains, in addition to historical information,
forward-looking statements that are based on current expectations and beliefs.
Such forward-looking statements involve a number of risks and uncertainties
that could cause actual results to differ materially. Some of the factors that
could cause actual results to differ materially include, among other factors,
market acceptance of the Company's new products; shortages of critical
components; shortage of cash to pay suppliers or other disruptions in the
supply of key components; competitive pricing; excess or shortage of
manufacturing capacity; industry competition; unanticipated manufacturing
delays or costs; shortage of cash or other resources to implement marketing
plans or fund other operations or capital expenditures; and adverse results
of litigation. See "Risk Factors," below, as well as such other risks and
uncertainties as are described in the Company's Securities and Exchange
Commission reports and filings for a discussion of the factors that could
cause actual results to differ materially from the forward-looking statements.
RESULTS OF OPERATIONS
The Company continues to face significant risks associated with strong
competition in the marketplace and acceptance of new products. The Company faces
additional risks associated with technology and product development, shortages
of components, changes in the Company's marketplace, and liquidity and cash flow
issues. The Company historically has not carried a significant backlog of
customer orders. Its customers tend to order product for immediate shipment and,
as such, the Company does not have visibility on order rates and demand for its
products generally beyond thirty days.
The Company began shipments of its newest product, SparQ, during the
quarter ended December 31, 1997. SparQ is a 1.0 gigabyte removable cartridge
storage solution consisting of a hard disk drive and removable cartridge which
is competitively priced at $199 with an additional 3 cartridges priced at $99.
The initial demand for the product has been favorable, and SparQ was a major
contributor to net revenue during the six months ended March 31, 1998;
however, there can be no assurance of continued acceptance by the marketplace.
The Company incurred a significant loss in the six months ended March 31, 1998
primarily as a result of substantial expenses incurred for the advertising and
marketing campaign associated with the launch of SparQ, the impact of price
reductions during the December quarter in response to continued price
competition, manufacturing start-up costs related to SparQ and an inability to
ship against customer orders. The inability to ship against customer orders
resulted primarily from production start-up inefficiencies related to SparQ,
including manufacturing yield problems related to SyJet cartridges, late
delivery of raw materials, and the need for additional tooling and capital
equipment required for production.
In an effort to increase shipments of SparQ to meet anticipated customer
demand, the Company increased the deployment of available resources to SparQ
during the six months ended March 31, 1998. SparQ was designed and released as a
low cost mass market removable cartridge storage solution and, consequently, the
Company must achieve a significant ramp in units of production. Increasing SparQ
shipments over the next several quarters beyond fiscal 1998 will require
additional manufacturing equipment at an estimated cost of up to $20 to $30
million. The Company plans to finance the capital expenditures and related
working capital required by issuing additional capital stock either through the
exercise of outstanding stock warrants or issuance of new securities. There is
no assurance that the Company will be able to secure additional cash resources
when needed, if at all, or on favorable terms. The inability to do so could have
a materially adverse
10
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effect on the Company's financial condition and performance and liquidity.
Management has decided to focus its other new product, Quest, exclusively
on Original Equipment Manufacturer (OEM) opportunities. The cost of distribution
into the OEM channel is less than the cost of distribution into the retail
marketplace. The production ramp-up for Quest will only occur if management
determines that there is sufficient OEM demand for this product.
NET REVENUE
Net revenue for the quarter ended March 31, 1998 was $47.0 million,
compared to $16.8 million reported for the comparable prior year's quarter. The
increase in net revenue for the current quarter resulted primarily from an
approximately 300% increase in the number of systems sold and an approximately
50% increase in the number of cartridges sold from the quarter ended March 31,
1997. Net revenue for the six months ended March 31, 1998 was $79.1 million,
compared to $65.1 million for the comparable period in the prior year. The
increase in net revenue, primarily from sales of SparQ systems and cartridges,
was partially offset by a decrease in net revenue from the Company's older
"Legacy" products and the EZ Flyer 230 product. The decrease in net revenue from
the EZ Flyer product primarily resulted from price reductions effected since the
comparable prior year's period. The percentage mix of net revenue by product
family compared to the comparable prior year's quarter was:
<TABLE>
<CAPTION>
CURRENT YEAR PRIOR YEAR
------------ ----------
Q2 Q2
------ ------
<S> <C> <C>
Legacy products................. 5% 45%
EZ Flyer and SyJet products..... 36% 55%
SparQ products.................. 59% 0%
Total................. 100% 100%
</TABLE>
The Company began shipments of its newest product, SparQ, during the first
fiscal quarter ended December 31, 1997.
Factors such as slow sell through rates in the sales channels, price
pressures on the Company's products, competitive product introductions and
component shortages may continue to have an adverse impact on net revenue.
GROSS PROFIT (LOSS)
The Company reported a gross loss for the quarter ended March 31, 1998 of
$5.2 million, compared to a gross loss of $13.3 million in the same prior year's
quarter, and reported a gross loss of $13.8 million for the six months ended
March 31, 1998, compared to a gross loss of $2.2 million in the same prior
year's period. The improvement in the gross loss in the current quarter was
driven by the increase in revenue derived primarily from SparQ systems and
cartridges. The increase in the gross loss for the six months ended March 31,
1998, compared to the same period in the prior year, resulted primarily from a
reduction in product prices effected in November 1997 on SyJet drives and SyJet
and EZ Flyer 230 cartridges, a reduction in the mix of revenue from the "Legacy"
products which were comprised predominantly of cartridges that realize a higher
gross profit than a drive, scrap and rework costs related to a reduction in
cartridge yields in manufacturing, and new product production start-up costs
related to the SparQ 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 gross profits.
Consequently, there can be no assurances that the Company will achieve
profitability in the future.
11
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
For the quarter ended March 31, 1998, selling, general and administrative
expenses totaled $21.2 million, or 45 percent of net revenue, compared to $12.7
million, or 76 percent of net revenue, for the same prior year's quarter.
Selling, general and administrative expenses totaled $44.9 million for the six
months ended March 31, 1998, or 57 percent of net revenue, compared to $24.1
million, or 37 percent of net revenue, for the same period in the prior year.
The significant increase in expenses during the three- and six-month periods
ended March 31, 1998, compared to the same periods in the prior year, resulted
primarily from increased expenses associated with the Company's new sales and
marketing campaign which included programs aimed at stimulating sales demand on
newer products, and increased legal fees incurred during the period. The Company
plans to continue to incur significant advertising and promotional expenses
related to programs aimed at stimulating sales demand, but not to the extent
incurred during the six-month period ended March 31, 1998.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses for the quarter ended March 31, 1998 were
$3.5 million, or 8 percent of net revenue, compared to $6.6 million, or 39
percent of net revenue, for the same prior year's quarter. For the six months
ended March 31, 1998 research and development expenses were $7.4 million, or 9
percent of net revenue, compared to $11.7 million, or 18 percent, in the same
period in the prior year. The decrease in expense was principally the result of
the Company's ongoing efforts to focus engineering on its primary core products.
The Company believes that it must continue to make significant investments in
research and development to effectively compete in its markets.
INTEREST EXPENSE
Net interest expense was $0.7 million for the quarter ended March 31, 1998,
compared to $1.1 million for the same quarter of the prior year. For the six
months ended March 31, 1998 net interest expense was $1.3 million, compared to
$2.5 million for the same period in the prior year. The decreases resulted
primarily from a decrease in the average outstanding borrowings during the
current fiscal year.
INCOME TAX EXPENSE
The tax provision reported for the quarter ended March 31, 1998 relates to
income generated at the Company's manufacturing facility in Penang, Malaysia.
LIQUIDITY AND CAPITAL RESOURCES
The Company incurred operating losses during the last 24 months totaling
approximately $188.7 million, including a net loss of approximately $68.3
million during the six-month period ended March 31, 1998. The lack of cash flow
and available funds caused by the accumulated losses have adversely affected the
Company's product delivery and marketing efforts, restricted flexibility in
payment terms required by suppliers and manufacturers, limited access to credit,
affected employee recruitment and retention, and diverted management time and
attention. During the second half of fiscal 1996, the Company began assembling a
turnaround management team in an attempt to address these difficulties and
restore viability.
The Company funded its working capital requirements and capital
expenditures during the period October 1996 through April 1998 through a
combination of existing cash resources, asset-based borrowings and a series of
capital financing transactions. During this period, the Company raised gross
proceeds of approximately $200 million from sales to private investors of
convertible preferred stock, common stock and warrants. During the six months
ended March 31, 1998, the Company raised approximately $82.3 million of
additional capital primarily to fund the loss from operations and its sales and
marketing programs aimed at stimulating demand for new products. During April
1998, the Company raised approximately $20.2 million of additional capital from
the exercise of outstanding warrants to purchase common stock.
12
<PAGE>
There can be no assurance that operating losses will not continue despite
new product introductions due primarily to product start-up costs, competitive
price reductions and the risk that the Company's new products may not be
accepted in the marketplace. Continuing operating losses will necessitate
additional financings in the future. Factors such as higher interest rates, the
inability to borrow without collateral, higher capital financing costs and
limitations on further equity funding without stockholder approval or the
unavailability of such funding will materially and adversely affect the
Company's cash resources, cash flow and financial condition.
At March 31, 1998, the Company had cash and short-term investments of $16.6
million, compared to $7.1 million at September 30, 1997. The increase in cash
resulted from the issuance of convertible preferred stock, the exercise of
outstanding stock purchase warrants, and an increase in accounts payable. These
increases were partially offset by the net loss recorded for the six months
ended March 31, 1998 and by increases in accounts receivables and inventories,
as well purchases of property and equipment during the period. The Company
improved its net worth to $29.7 million at March 31, 1998, compared to $5.6
million at September 30, 1997. The improvement resulted primarily from proceeds
related to the issuance of convertible preferred stock, the exercise of
outstanding stock purchase warrants and the reclassification of mandatory
redeemable warrants to equity, partially off-set by the net loss for the six
months ended March 31, 1998.
Working capital improved from $1.4 million at September 30, 1997 to $12.3
million at March 31, 1998. This increase was primarily the result of an increase
in cash and short-term investments of $9.5 million, an increase in accounts
receivable of $13.5 million and an increase in inventories of $9.4 million. The
increases in working capital were partially offset by the increase in accounts
payable of $21.7 million. The increase in accounts receivable was primarily
attributable to increased net revenue during the quarter ended March 31, 1998,
compared to the fourth fiscal quarter of 1997. Days sales outstanding in
accounts receivable at March 31, 1998 was 63 days compared to 68 days at
September 30, 1997. The increase in inventories was primarily attributable to an
increase in raw materials related to the new SparQ product. Inventory turnover
at March 31, 1998 was 5.1 times. The increase in accounts payable was also
consistent with the build up of raw materials required for the manufacture of
the SparQ product.
During fiscal 1998, the Company experienced a return to regular business
terms with key suppliers.
In May 1998, the Company renegotiated its domestic line of credit with a
financial institution, continuing the existing terms and extending the line
through May 31, 1999. The line provides for a limit on borrowings of the lesser
of $30.0 million or a combination of 80 percent of eligible accounts receivable
and 40 percent of eligible finished goods inventory. As of March 31, 1998,
approximately $20.7 million of borrowings were outstanding under the line.
On March 31, 1998, the Company's manufacturing subsidiary in Penang,
Malaysia, SyQuest Technology Sdn Bhd (M), had a banking facility
with a Malaysian financial institution expiring September 1998 and
consisting of a line of credit for (RM) 17.5 million (approximately $4.8
million) and a term loan for (RM) 9.6 million (approximately $2.6 million). The
subsidiary's building, equipment, inventory and eligible receivables secure the
facility. As of March 31, 1998, approximately $7.4 million of borrowings were
outstanding against this facility.
The Company raised significant funds during the six months ended March 31,
1998. See Part II, Item 2 of this Form 10-Q. The Company will require additional
equity funding which, if successful, will cause further dilution of the
outstanding common stock. Further equity funding may require stockholder
approval of each transaction or stockholder approval of an increase in the
Company's authorized common stock.
For the six months ended March 31, 1998, the Company used $66.1 million in
cash for operating activities and $6.2 million for capital expenditures.
Management believes, based on the additional $20.2 million in cash raised
in April 1998, extension of its bank credit lines and available cash balances,
that the Company has sufficient cash resources to fund operations through the
end of fiscal 1998. There can be no assurance, however, that the Company will be
successful in achieving its internal financial plan.
13
<PAGE>
Additional financing may not be available when needed, if at all, or on
favorable terms. Failure to raise additional capital when needed or failing to
renew the existing bank lines of credit will have a material adverse effect on
the Company's liquidity, financial condition and operations.
RISKS FACTORS
Uncertain Profitability or Successful Turnaround
The Company continues to execute its turnaround plan, which includes
focusing on its core products and production efficiencies. A successful
turnaround and return to profitability are subject to the risks described
herein and in the Company's Annual Report on Form 10-K, as amended, for its
fiscal year ended September 30, 1997. Many of the risks are beyond the
Company's control. There can be no assurance that the Company will execute its
turnaround plan or that it will secure sufficient capital to withstand
prolonged operating losses.
Market acceptance of the Company's products 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 its products are
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 and SparQ product lines. Additionally, the
decline in volumes and pricing on mature products will continue to have a
negative impact on the Company's revenue. The Company historically has not
carried a significant backlog of customer orders. Its customers tend to order
product for immediate shipment and, consequently, the Company does not have
visibility on order rates or demand for its products generally beyond thirty
days. Critical to each of these factors is the Company's ability to attract
additional investment capital. There can be no assurances that the Company will
achieve these objectives.
Dilution of Common Stock
At March 31, 1998, the Company had issued and outstanding 46 shares of
Series 3 preferred stock, 57,657 shares of Series 4 preferred stock, 21,182
shares of Series 5 preferred stock and 30,177 shares of Series 7 preferred
stock. Several of the Company's financings have included significant warrant
coverage which, when exercised, will result in the issuance of additional shares
of common stock. Assuming the conversion of all outstanding preferred stock, the
exercise of outstanding warrants and the fulfillment of other existing
commitments to issue common stock, approximately 80 million additional shares of
common stock would be issued based on existing preferred stock and warrant
balances outstanding as of April 30, 1998. Total shares outstanding at that date
were approximately 95 million, providing a total of 175 million common shares
outstanding if all convertible preferred stock is converted and warrants and
options are exercised.
As of March 31, 1998, the Company had outstanding options and warrants to
purchase approximately 60 million shares of common stock. The exact number of
shares of common stock issuable on conversion of the Series 4, Series 5 and
Series 7 preferred stock (collectively, the "Preferred Stock") cannot be
estimated with certainty because, generally, such issuances of common stock will
vary inversely with the market price of the common stock at the time of such
conversion, and there is maximum limit on the number of shares of common stock
that may be issuable. The number of shares of common stock issuable on
conversion of the Preferred Stock is also subject to various adjustments to
prevent dilution resulting from stock splits, stock dividends or similar
transactions. Further, the Company may issue additional shares of Series 3,
Series 4 and Series 7 preferred stock in lieu of cash dividends due the holders
of such preferred stock.
To the extent that such options and warrants are exercised or such
convertible securities are converted, substantial dilution of the interests of
the Company's stockholders is likely to result and the market price of the
common stock could be materially adversely affected. Such dilution will be
greater if the future market price of the common stock decreases, as the number
of conversion shares to be issued will increase. For the life of such warrants,
options and convertible securities, the holders will have the opportunity to
profit from a rise in the price of the underlying securities. The existence of
such warrants, options and convertible securities is likely to affect,
materially and adversely, the terms on which the Company can obtain additional
financing, and the holders of such warrants, options and convertible securities
can be expected to exercise them at a time when the Company would otherwise, in
all likelihood, be able to obtain additional capital by an offering of its
unissued capital stock on terms more favorable to the Company than those
provided by such warrants, options and convertible securities. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
The Company has filed Registration Statements on Form S-8 under the
Securities Act to register shares of Common Stock subject to stock options and
to the Company's employee stock purchase plan that will permit the resale of
such shares, subject to Rule 144 volume limitations applicable to affiliates of
the Company and vesting restrictions. The Company has also registered the common
stock issuable on exercise of the warrants and conversion of the convertible
securities pursuant to prospectuses included in Registration Statement Nos.
333-7369, 333-17119, 333-28225 and 333-40329. Such registered shares can
be sold without any holding period or sales volume limitations.
Shortages of Critical Components; Absence of Supply Contracts
Many components incorporated in, or used in the manufacture of, the
Company's products are currently only available from sole source suppliers. The
Company purchases all of its sole and limited source components and equipment
pursuant to purchase orders placed from time-to-time, and has no guaranteed
supply arrangements. The inability to obtain sufficient components and
equipment, obtain or develop alternative sources of supply at competitive prices
and quality, or avoid manufacturing delays could prevent the Company from
producing sufficient quantities of its products to satisfy market demand, result
in delays in product shipments, increase the Company's material or manufacturing
costs, or cause an imbalance in the inventory level of certain components.
Moreover, difficulties in obtaining sufficient components may cause the Company
to modify the design of its products to use more readily available components,
and such design modifications could result in increased costs and product
performance problems. Any or all of these problems could, in turn, result in the
loss of customers, provide an opportunity for competing products to achieve
market acceptance or increase market share and otherwise adversely affect the
Company's business and financial results.
14
<PAGE>
Quarterly Fluctuations in Operating Results
The Company has experienced and 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, availability of critical components, lower gross profits associated
with the Company's newer products and decreasing demand for the Company's older
products could contribute to this quarterly fluctuation. Moreover, the Company's
expense levels are based in part on expectations of future sales levels, and a
shortfall in expected sales could therefore result in a disproportionate
decrease in the Company's financial performance. As a result of these and other
factors, including possible further dilution, it is likely that the Company will
continue to experience significant fluctuations in quarterly operating profits.
Dependence on Proprietary Technology
The Company's ability to compete effectively in its markets depends heavily
on the establishment and maintenance of proprietary technologies. The Company
relies on a combination of patent, copyright and trade secret law to protect the
technology in its drives and cartridges. The Company holds numerous U.S. and
foreign patent applications and patents relating to its drives and hard disk
cartridges. Many of these patents and applications, however, do not pertain to
the Company's recent product generations, and there can be no assurance as to
the degree of protection afforded by these patents or the likelihood that
additional patents will issue pursuant to pending patent applications.
Furthermore, there can be no assurance that third parties will not independently
develop the same or similar technology, develop around the patented aspects of
any of the Company's products or proposed products, or otherwise obtain access
to the Company's proprietary technology. In particular, the Company's sales
would be materially adversely affected if any unlicensed parties develop
removable cartridges compatible with the Company's disk drives.
Certain technology used in the Company's products is licensed from third
parties. The termination of any such license arrangements could have a material
adverse effect on the Company's business and financial results.
Intellectual Property Litigation
Patent and similar litigation frequently is complex and expensive and its
outcome can be difficult to predict. There can be no assurance that the Company
will prevail in any proceedings that have been or may be commenced by or against
the Company. The Company is currently involved in the intellectual property
lawsuits summarized below.
On December 3, 1997, SPARC International, Inc. filed a lawsuit against the
Company in the United States District Court in and for the Northern District of
California. 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 preliminary and
permanent injunctions 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 which was
held on March 23, 1998. Subsequently, the court denied Sparc International's
motion for a preliminary injunction. The Company believes that it does not
infringe any valid trademarks of SPARC International, Inc., and intends to
defend the case vigorously.
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 its products. Iomega seeks a judgment of
infringement, monetary damages, injunctive relief, disgourgement of profits, and
trebled actual damages on the disputed products. Iomega also seeks exemplary
damages and attorney's fees based on SyQuest's alleged willful infringement of
15
<PAGE>
Iomega's patents and 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 discovery
stage. In interrogatory responses served December 3, 1997, Iomega asserted that
SyQuest's recently introduced SparQ and Quest products 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 March 3, 1998, Iomega filed suit in France in the Paris Court of First
Instance against the Company, its French subsidiary, SyQuest Technology SARL
("SyQuest SARL"), and a distributor of the Company's products in France
alleging, among other things, that the Company's SyJet cartridges infringe
Iomega's cartridge design rights and a recently issued patent. The complaint
requests money damages and an injunction against the Company from further
infringement. Iomega subsequently requested summary proceedings in which it made
a motion to enjoin the Company from selling SyJet cartridges in France based on
the alleged infringement and to block sales of certain of the Company's products
in France. A hearing was held in Paris on April 3, 1998, and the French court
issued an order on April 30, 1998 denying Iomega's motion to enjoin sales of
SyJet cartridges. The Company believes that no valid patent claims or designs of
Iomega are infringed by its SyJet product and will continue to defend the action
vigorously.
On April 29, 1998, Iomega filed suit in France in the Paris Court of First
Instance against the Company, its French subsidiary, SyQuest SARL, and a
distributor of the Company's products in France. The suit alleges that the
Company's SparQ 1.0 gigabyte cartridge infringes Iomega's design for its Jaz
cartridge and Iomega's European patent application number 956002B.4 relating to
an anti-rattle mechanism. The Company believes that no valid patent claims or
designs of Iomega are infringed by its SparQ product and intends to defend the
action vigorously.
On or about June 10, 1997, the Company initiated litigation against
Castlewood Systems, Inc. and eleven former Company employees in Santa Clara
Superior Court, entitled SyQuest Technology, Inc. v. Castlewood Systems, Inc.,
_____________________________________________________
et al. (Case No. 766757), asserting ten (10) causes of action, including claims
______
for misappropriation of trade secrets, unfair competition, and breach of
fiduciary duty. The complaint seeks money damages and an injunction from
engaging in such conduct. On or about July 16, 1997, Castlewood filed a cross-
complaint against the Company, alleging three causes of action (interference
with prospective economic advantage, unfair competition and trade libel) and
seeking damages and injunctive relief. Since that time, the parties have engaged
primarily 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
section 2019 (d), which was deemed acceptable by such Referee on October 20,
1997, and to adjudicate the discovery matters between the parties. Discovery
is under way, and there can be no assurance as to what financial effect this
litigation may have on the Company.
On January 27, 1997, the Company filed a lawsuit in Federal District Court
in the Northern District of California, entitled SyQuest Technology,
__________________
Inc. v. Nomai. S.A. et al. (Case No. C97-0271 FMS) (the "Nomai Action").
_________________________
The Lawsuit named as defendants Nomai, S.A., Nomus, Inc. (Nomai, S.A. and Nomus,
Inc. sometimes hereinafter referred to as "Nomai"), Marc Frouin, Herve Frouin,
Electronique d2 and La Cie Ltd., certain competitors and/or manufacturers and
their shareholders. The Nomai Action alleged patent, trademark and copyright
infringement, unfair competition, breach of contract and other claims arising
out of the use by Nomai and others of the Company's proprietary technology in
certain of Nomai's competing products. The suit seeks to block further sales of
such products and damages deriving from harm done to the Company by this
conduct. During April through June 1997, Nomai, S.A., Marc Frouin and Herve
Frouin (collectively the "Nomai Parties") filed certain cross-complaints against
the Company. The Company, Nomai, S.A. and the Nomai Parties have resolved their
respective claims in the Nomai Action, pursuant to a settlement agreement. In
accordance with that settlement agreement, the parties filed a Stipulation to
Dismiss
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<PAGE>
with prejudice the Company's complaint and the Nomai Parties' cross-complaints
on December 16, 1997. 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 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, among other
things, 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 effect on the Company's financial
position or results of operations.
Periodically, the Company is made aware that technology used by the Company
in the manufacture of some or all of its products may infringe on product or
process technology rights held by others. Resolution of whether the Company's
manufacture of products has infringed on valid rights held by others could have
a material adverse effect on the Company's financial position and results of
operations, and may require material changes in production processes and
products. Several companies have individually contacted the Company concerning
its alleged use of intellectual property belonging to them. Companies that have
contacted the Company include one company that has alleged that the Company's
products infringe six U.S. patents. It is the Company's belief that the claims
are without merit or that the infringement claims relate to component parts
purchased from vendors. The Company also believes that in the event this company
prevailed on its claims, the Company would be indemnified by its vendors for any
liability arising from the alleged infringements and that this matter would not
have a material adverse effect on its financial condition or results of
operations. Another company has notified the Company that it believes a number
of the Company's removable cartridge hard drive products infringe several of
that company's 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.
Securities Class Action and Derivative Litigation
The Company has been named as a defendant in four putative class action
lawsuits. Two of the actions, Ravens, et al. v. Iftikar, et al. (filed April 2,
_________________________________
1996) and Belleza, et al. v. Iftikar, et al. (filed May 24, 1996) have been
__________________________________
brought in the United States District Court for the Northern District of
California and have been assigned to the Honorable Vaughn Walker (collectively,
the "Federal Lawsuits"). Certain current and former officers and directors also
have been named as defendants in the Federal Lawsuits. The plaintiffs in the
Federal Lawsuits 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 Lawsuits allege that the defendants violated the federal securities laws
through certain alleged material misrepresentations and omissions and seek
unspecified damages. 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 federal court denied the motion of certain plaintiffs to be appointed
lead plaintiffs under the Private Securities Litigation Reform Act of 1995 (the
"Reform Act") on the ground, inter alia, that the plaintiffs' published notice
to the class did not constitute adequate notice of the litigation under the
Reform Act. In July 1997, the 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 judgment. Plaintiffs have informed the Court that they elect to stand on
the existing notice and complaint.
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The third suit, 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 Lawsuits")
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 through
February 1, 1996. Pursuant to a Stipulation and Order entered on August 6, 1997,
the State Court Lawsuits have been referred to mediation before a retired
federal judge.
On May 14, 1996, the Company was served with a shareholder derivative
action filed in the Superior Court of the State of California for the County of
Alameda 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 Lawsuits described above.
The Company intends to defend the Federal Lawsuits, the State Court
Lawsuits and the Derivative Lawsuit vigorously, but there can be no assurance as
to the outcome or the financial effect, if any, the litigation may have on the
Company. If there is an adverse result, the Company does not expect any
particular product line to be affected as the plaintiffs seek monetary damages
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 established for these
lawsuits as the amount of losses, if any, are not yet determinable or reasonably
estimable.
From time to time, the Company is involved in litigation that it considers
to be in the normal course of business. Other than as set forth above, the
Company was not engaged in any legal proceedings as of March 31, 1998, 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.
18
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See "Risk Factors -- Intellectual Property Litigation" for a description
of certain lawsuits filed against the Company by Iomega Corporation in France
during the quarter ended March 31, 1998.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the quarter ended March 31, 1998, the Company issued Series 7
convertible preferred stock for $28.8 million in net proceeds and also received
net proceeds of approximately $17.1 million from the exercise of outstanding
warrants. Further, an additional 5.1 million warrants were issued in conjunction
with the issuance of Series 7 preferred stock.
During the quarter ended March 31, 1998, certain holders of the Company's
Series 4 and Series 5 preferred stock converted their preferred stock into
common stock. The conversions resulted in the issuance of a total of 3,541,571
shares of common stock in exchange for 197 shares of the Company's Series 4
preferred stock and 8,818 shares of the Company's Series 5 preferred stock.
19
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------------ -----------------------
4.1 Certificate of Designations, Preferences and Rights of
5% Cumulative Convertible Preferred Stock, Series 6,
filed herewith.
4.2 Certificate of Designations, Performances and Rights of
5% Cumulative Convertible Preferred Stock, Series 7.
Incorporated by Reference to Exhibit 10.1 to the
Company's Report on Form 8-K dated February 13, 1998.
27.1 Financial Data Schedule
b. Reports on Form 8-K. The Company filed three reports on Form 8-K during
the quarter ended March 31, 1998. These reports are summarized below.
A current report on Form 8-K, dated February 13, 1998, was
filed by the Company reporting under item 5 the sale of its
Series 7 preferred stock and under item 7 a related press
release.
A current report on Form 8-K, dated February 17, 1998, was
filed by the Company reporting under item 5 the sale of
additional Series 7 preferred stock.
A current report on Form 8-K, dated March 25, 1998, was filed
by the Company reporting under item 5 the issuance of certain
equity securities, and under item 7 a related press release.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: 05/15/98 SyQuest Technology, Inc. (Registrant)
By: /s/ EDWIN L. HARPER
----------------------------
Edwin L. Harper
President and
Chief Executive Officer
Dated: 05/15/98 By: /s/ MICHAEL K. CLEMENS
----------------------------
Michael K. Clemens
Acting Chief Financial Officer
21
<PAGE>
EXHIBIT INDEX
Exhibit
Index Description of Document
- ------- -----------------------
4.1 Certificate of Designations, Preferences and Rights
of 5% Cumulative Convertible Preferred Stock, Series
6, filed herewith.
4.2 Certificate of Designations, Preferences and Rights
of 5% Cumulative Convertible Preferred Stock, Series
7. Incorporated by reference to Exhibit 10.1 to the
Company's Report on Form 8-K dated February 13,
1998.
27.1 Financial Data Schedule
22
<PAGE>
EXHIBIT 4.1
CERTIFICATE OF DESIGNATIONS, PREFERENCES
AND RIGHTS OF 5% CUMULATIVE CONVERTIBLE
PREFERRED STOCK, SERIES 6
OF
SYQUEST TECHNOLOGY, INC.
SyQuest Technology, Inc. (the "Company"), a corporation organized and
existing under the General Corporation Law of the State of Delaware, does hereby
certify that, pursuant to authority conferred on the Board of Directors of the
Company by the Certificate of Incorporation, as amended, of the Company, and
pursuant to Section 151 of the General Corporation Law of the State of Delaware,
the Board of Directors of the Company at a meeting duly held, adopted
resolutions providing for the designations, preferences and relative,
participating, optional or other rights, and the qualifications, limitations or
restrictions thereof, of forty thousand (40,000) shares of 5% Cumulative
Convertible Preferred Stock, Series 6, of the Company, as follows:
RESOLVED, that the Company is authorized to issue 40,000 shares of 5%
Cumulative Convertible Preferred Stock, Series 6, $.0001 par value (the
"Series 6 Preferred Shares"), which shall have the following powers,
designations, preferences and other special rights:
1. Dividends. The holders of the Series 6 Preferred Shares shall be
---------
entitled to a cash dividend of five percent per annum of the Stated Value
(as defined below), on a cumulative basis (prorated for any portion of the
applicable period during which the Series 6 Preferred Shares are
outstanding). Dividends shall accrue from the date of issuance of the
Series 6 Preferred Shares and shall be payable on the last day of each
calendar quarter, commencing March 30, 1998, through and including the date
on which the Series 6 Preferred Shares are converted. Dividends may be
paid at the Company's option in cash or, on not less than ninety days'
notice from the Company to each holder of Series 6 Preferred Shares; in
additional Series 6 Preferred Shares, provided that the Company may not
elect to pay dividends in additional Series 6 Preferred Shares to the
extent that the number of authorized and unissued Series 6 Preferred Shares
is insufficient to make such payment or the ability of the holders of the
Series 6 Preferred
<PAGE>
Shares to convert Series 6 Preferred Shares or to exercise the Warrant (as
hereinafter defined) is restricted by Section 2(h) below. If the Company
elects to pay to any holder of Series 6 Preferred Shares any such dividend
in additional Series 6 Preferred Shares, the number of such additional
Series 6 Preferred Shares shall be determined by dividing the aggregate
amount of such dividend payable to such holder by 1000; provided that no
fraction of a Series 6 Preferred Share shall be issued, but in lieu
thereof, the Company shall pay in cash an amount equal to such fraction
multiplied by $1000.
2. Conversion of Series 6 Preferred Shares. The holders of the
---------------------------------------
Series 6 Preferred Shares shall have the right, at their option, but
subject to the terms of the purchase agreement with the Company governing
the terms of such holder's purchase of Series 6 Preferred Shares (the
"Purchase Agreement"), to convert the Series 6 Preferred Shares into shares
of the common stock of the Company, $.0001 par value, as such stock now
exists or may be changed from time to time hereafter ("Common Stock"), on
the following terms and conditions:
(a) Conversion Right. Any or all of the Series 6 Preferred Shares
----------------
shall be convertible at any time (except as limited herein, by the material
provisions of the Purchase Agreement or by other applicable law) into
whole, fully paid and nonassessable shares of Common Stock, at the
conversion price (the "Conversion Price") in effect at the time of
conversion determined as hereinafter provided. Each Series 6 Preferred
Share shall have a stated value of $1,000 (the "Stated Value") for the
purpose of such conversion and the number of shares of Common Stock
issuable on conversion of each Series 6 Preferred Share shall be determined
by dividing the Stated Value thereof by the Conversion Price then in
effect. It shall be the Company's burden of proof to establish the
materiality of the terms of the Purchase Agreement or the applicability of
other law if the Company maintains that the Series 6 Preferred Shares are
not convertible.
(b) Conversion Price. The Conversion Price shall be the greater
----------------
of (1) the arithmetical average of the closing sale prices per share of
Common Stock on the five consecutive trading days preceding the delivery of
any Conversion Notice (as that term is hereinafter defined), as reported by
the Nasdaq National Market (the "NNM"), or, if the NNM is not then the
principal trading market for the Common Stock, on the principal trading
market for the Common Stock at that time, or, if there is then no such
principal trading market, the fair market value per share of Common Stock
during such period as determined in good faith by the Board of Directors of
the Company, and (2) ninety percent of such closing sale price on the day
immediately preceding the delivery of the Conversion Notice (as that term
is hereinafter defined); provided that the Conversion Price shall not be
greater than 110% of the closing sale price per share of Common Stock as
reported by the NNM on the first business day prior to the first day that
any Series 6 Preferred Shares are issued. If the value of the Common Stock
is so to be determined by the Board of Directors of the Company and the
holders of the Series 6 Preferred Shares disagree with said valuation, the
value of the Common Stock will be determined by binding arbitration in
accordance with the Commercial Arbitration Rules
2
<PAGE>
then prevailing of the American Arbitration Association, and such
arbitration shall proceed in San Francisco, California, or at such other
place as agreed to in writing by the Company and the holders of the Series
6 Preferred Shares.
(c) Adjustment to Conversion Price. In the event that the
------------------------------
Company shall declare a dividend or make a distribution on or with respect
to the outstanding shares of its Common Stock in shares of its Common
Stock, subdivide its outstanding shares of Common Stock into a greater
number of shares, or combine its outstanding shares of Common Stock into a
smaller number of shares, then, in each such event, the Conversion Price in
effect at the time of the record date for such dividend or distribution or
the effective date of such subdivision or combination shall be
proportionately adjusted, if necessary, as determined in good faith by the
Board of Directors of the Company, so that the holder of any Series 6
Preferred Shares surrendered for conversion after such time shall be
entitled to receive the aggregate number of shares of Common Stock that the
holder would have owned or been entitled to receive had such Series 6
Preferred Shares been converted immediately prior to such record date or
effective date and the resulting Common Stock had been subject to such
dividend, distribution, subdivision or combination. Such adjustment shall
be made successively whenever any event specified above shall occur.
(d) Limitation on Beneficial Ownership. The Company shall not be
----------------------------------
required to effect any conversion of Series 6 Preferred Shares and no
holder of Preferred Shares shall have the right to convert any Series 6
Preferred Shares pursuant to Section 2 to the extent that after giving
effect to such conversion such person (together with such person's
affiliates) would beneficially own 5.00% or more of the outstanding shares
of the Common Stock following such conversion. For purposes of the
foregoing sentence, the number of shares of Common Stock beneficially owned
by a person and its affiliates shall include the number of shares of Common
Stock issuable upon conversion of the Series 6 Preferred Shares with
respect to which the determination of such sentence is being made, but
shall exclude the number of shares of Common Stock which would be issuable
upon (i) conversion of the remaining, unconverted Series 6 Preferred Shares
beneficially owned by such person and its affiliates and (ii) exercise or
conversion of the unexercised or unconverted portion of any other
securities of the Company (including, without limitation, any warrants)
subject to a limitation on conversion or exercise analogous to the
limitation contained herein beneficially owned by such person and its
affiliates. Except as set forth in the preceding sentence, for purposes of
this Section 2(d), beneficial ownership shall be calculated in accordance
with Section 13(d) of the Securities Exchange Act of 1934, as amended. A
holder of preferred Shares may waive the restrictions of this paragraph
only upon not less than 61 days prior written notice to the Company (with
such waiver taking effect only upon the expiration of such 61 day notice
period). Notwithstanding anything to the contrary contained herein, each
Conversion Notice (as defined below) shall constitute a representation by
the holder submitting such Conversion Notice that, after giving effect to
such Conversion Notice, the holder will not beneficially own (as determined
in accordance with this Section 2(d))
3
<PAGE>
more than 5.00% of the outstanding shares of Common Stock as reflected in
the Company's most recent Form 10-Q or Form 10-K, as the case may be, or
more recent public press release or other public notice by the Company
setting forth the number of shares of Common Stock outstanding.
(e) Conversion Notice. On presentation and surrender to the
-----------------
Company (or at any office or agency maintained for the transfer of the
Series 6 Preferred Shares) of the certificate(s) ("Preferred Stock
Certificate(s)") for Series 6 Preferred Shares so to be converted, duly
endorsed in blank for transfer or accompanied by proper instruments of
assignment or transfer in blank and written notice of conversion (a
"Conversion Notice"), the holder of such Series 6 Preferred Shares shall be
entitled, subject to the limitations herein contained, to receive in
exchange therefor a certificate or certificates for whole, fully paid and
nonassessable shares of Common Stock, which certificates shall be delivered
by the fourth trading day after the date of delivery of the Conversion
Notice and Preferred Stock Certificates for the Series 6 Preferred Shares
being converted, and cash for any fractional share of Common Stock on the
foregoing basis. If the Common Stock can be issued without a restrictive
legend pursuant to the Purchase Agreement, on request made by the holders
of the Series 6 Preferred Shares in the Conversion Notice, the Company will
authorize and instruct its transfer agent to issue the Common Stock
electronically. The Conversion Notice shall be deemed delivered and
received on the business day when it is transmitted by facsimile if so
transmitted by 5:00 p.m. California time and if the Company receives the
Preferred Stock Certificate(s) either (1) by 10:00 a.m. California time
within the following two business days, or (2) on the next business day
after it is deposited for next day delivery with a nationally recognized
overnight delivery service. The Series 6 Preferred Shares shall be deemed
to have been converted, and the person converting the same to have become
the holder of record of Common Stock, for all purposes as of the date of
delivery of the Conversion Notice.
(f) Reservation of Shares. The Company shall, as soon as
---------------------
practicable hereafter and then for so long as any of the Series 6 Preferred
Shares are outstanding, reserve and keep available out of its authorized
and unissued Common Stock, solely for the purpose of effecting the
conversion of the Series 6 Preferred Shares, such number of shares of
Common Stock as required pursuant to the Purchase Agreement between the
Company and the holder of the Series 6 Preferred Shares.
(g) Fractional Shares. The Company shall not issue any fraction
-----------------
of a share of Common Stock on any conversion, but shall pay cash therefor
at the Conversion Price then in effect multiplied by such fraction.
(h) Taxes. The Company shall pay any and all taxes that may be
-----
imposed on it with respect to the issuance and delivery of Common Stock on
the conversion of Series 6 Preferred Shares as herein provided. The
Company shall not be required in any event to pay any transfer or other
taxes by reason of the issuance of such Common Stock in names other than
those in which the Series 6 Preferred Shares
4
<PAGE>
surrendered for conversion are registered on the Company's records, and no
such conversion or issuance of Common Stock shall be made unless and until
the person requesting such issuance shall have paid to the Company the
amount of any such tax, or shall have established to the satisfaction of
the Company and its transfer agent, if any, that such tax has been paid.
(i) The 19.9% Limit. If at the time that the Company receives a
---------------
Conversion Notice, the aggregate number of shares of Common Stock issuable
pursuant to such Conversion Notice and all other Conversion Notices
received at that time (the "Subject Conversion Notices"), when added to the
aggregate number of shares of Common Stock (1) previously issued on
conversion of Series 6 Preferred Shares and the exercise of the Warrants to
purchase Common Stock (the "Warrants") issued by the Company to the holders
of the Series 6 Preferred Shares pursuant to the Purchase Agreement on the
date of initial issuance of the Series 6 Preferred Shares and (2) issuable
on conversion of all remaining outstanding Series 6 Preferred Shares
(determining such number as if such Series 6 Preferred Shares were
converted as of the Conversion Date relating to such Conversion Notice) and
(3) issuable on exercise of the Warrants (determined based on the Exercise
Price then in effect, as defined in the Warrants) would exceed nineteen and
nine-tenths percent of the total number of shares of Common Stock
outstanding (adjusted to reflect any split, subdivision, combination or
consolidation of the Common Stock, whether by reclassification,
distribution of a dividend with respect to the outstanding Common Stock
payable in shares of Common Stock, or otherwise, or any recapitalization of
the Common Stock) on the date of the first issuance of Series 6 Preferred
Shares (the "19.9% Limit") and such circumstance would require the approval
of the holders of the Common Stock pursuant to the listing requirements of
the NNM or the rules of the National Association of Securities Dealers,
Inc. (or such stock exchange or other interdealer quotation system that is
then the Principal Market), the number of Series 6 Preferred Shares
identified in the Subject Conversion Notices that, if converted into shares
of Common Stock, would equal or exceed the 19.9% Limit (the "Excess
Preferred Shares"), shall not be converted into Common Stock unless and
until (1) the stockholder approval referred to in section (2)(j) (the
"Stockholder Consent") is obtained, (2) the Company is notified by the NNM,
the National Association of Securities Dealers, or other appropriate
regulatory agency that Stockholder Consent is not required to issues shares
of Common Stock in excess of the 19.9% Limit, or (3) the Company elects to
list its shares on an electronic bulletin board or in such manner as would
allow the Excess Preferred Shares to be converted into Common Stock without
Stockholder Consent. Excess Preferred Shares shall be redeemable until
(1) Stockholder Consent is obtained, (2) the Company is notified by the
NNM, the National Association of Securities Dealers, or other appropriate
regulatory agency that Stockholder Consent is not required to issues shares
of Common Stock in excess of the 19.9% Limit, or (3) the Company elects to
list its shares on an electronic bulletin board or in such manner as would
allow the Excess Preferred Shares to be converted into Common Stock without
Stockholder Consent. Redemption of Excess Preferred Shares shall be
effected as set forth in Section 9 hereof. The Excess Preferred Shares
will be allocated among the holders delivering Subject
5
<PAGE>
Conversion Notices on a pro rata basis based on the relative number of
Series 6 Preferred Shares identified in each such Subject Conversion Notice
on any given date. Once Excess Preferred Shares are convertible into
Common Stock, they shall be so converted only after the Company receives a
subsequent Conversion Notice with respect thereto.
(j) Stockholder Approval. If there are Excess Preferred Shares
--------------------
as described in section (2)(i) and the Company has not been notified by the
NNM, the National Association of Securities Dealers, or other appropriate
regulatory agency that Stockholder Consent is not required to issues shares
of Common Stock in excess of the 19.9% Limit, the Company shall promptly
use its best efforts to obtain the Stockholder Consent, including, without
limitation, causing its Board of Directors to call a special meeting of
stockholders and recommend such approval.
3. Voting Rights. Holders of Series 6 Preferred Shares shall have no
-------------
voting rights, except as required by law.
4. Liquidation, Dissolution, Winding Up. In the event of any
------------------------------------
voluntary or involuntary liquidation, dissolution or winding up of the
Company, the holders of the Series 6 Preferred Shares shall be entitled to
receive in cash out of the assets of the Company, whether from capital or
from earnings available for distribution to its stockholders (the
"Preferred Funds"), before any amount shall be paid to the holders of the
Common Stock, an amount equal to the Stated Value per Preferred Share plus
all accrued but unpaid dividends; provided that, if the Preferred Funds are
insufficient to pay the full amount due to the holders of Series 6
Preferred Shares and holders of shares of other classes or series of
preferred stock of the Company that are of equal rank with the Series 6
Preferred Shares as to payments of Preferred Funds (the "Pari Passu
Shares"), then each holder of Series 6 Preferred Shares and Pari Passu
Shares shall receive a percentage of the Preferred Funds equal to the full
amount of Preferred Funds payable to such holder as a percentage of the
full amount of Preferred Funds payable to all holders of Series 6 Preferred
Shares and Pari Passu Shares. The purchase or redemption by the Company of
stock of any class, in any manner permitted by law, shall not, for the
purposes hereof, be regarded as a liquidation, dissolution or winding up of
the Company. Neither the consolidation or merger of the Company with or
into any other corporation or corporations, nor the sale or transfer by the
Company of less than substantially all of its assets, shall, for the
purposes hereof, be deemed to be a liquidation, dissolution or winding up
of the Company. No holder of Series 6 Preferred Shares shall be entitled
to receive any amounts with respect thereto on any liquidation, dissolution
or winding up of the Company other than the amounts provided for herein.
5. Preferred Rank. With respect to preferences as to payments on the
--------------
liquidation, dissolution or winding up of the Company, the Series 6
Preferred Shares shall rank (1) senior to the Common Stock, (2) with
respect to all other existing capital stock of the Company, senior to such
capital stock if permitted by the terms of such
6
<PAGE>
capital stock or, if not so permitted, on a parity with such capital stock
if permitted by the terms of such capital stock or, if not so permitted,
junior to such capital stock, and (3) senior to all series of any class of
the Company's capital stock issued after the date of the filing of this
Certificate. So long as any of the Series 6 Preferred Shares are
outstanding, no Common Stock and no other capital stock of the Company
ranking junior to the Series 6 Preferred Shares will be redeemed, purchased
or otherwise acquired for any consideration by the Company (except by
conversion into or exchange for stock of the Company ranking junior to the
Series 6 Preferred Shares) unless in each case the Company offers to redeem
the Series 6 Preferred Shares on substantially the same terms (provided
that the redemption price shall not be less than $1,000 per Series 6
Preferred Share). Notwithstanding any provision hereof to the contrary,
the Company may hereafter authorize additional or other capital stock for
issuance to Beijing Legend Group Ltd. and its affiliates that is senior,
equal or junior to the Series 6 Preferred Shares, in respect of the
preferences as to payments on the liquidation, dissolution and winding up
of the Company, but the Company may not otherwise hereafter, for so long as
any Series 6 Preferred Shares are outstanding, authorize additional or
other capital stock that is of senior or equal rank to the Series 6
Preferred Shares, in respect of the preferences as to dividends and
distributions and payments on the liquidation, dissolution and winding up
of the Company. In the event of the merger or consolidation of the Company
with or into another corporation, the Series 6 Preferred Shares shall
maintain their relative powers, designations and preferences provided
herein.
6. Lost or Stolen Certificates. On receipt by the Company of
---------------------------
evidence satisfactory to it of the loss, theft, destruction or mutilation
of any Preferred Stock Certificate, and (in the case of loss, theft or
destruction) of any indemnification undertaking by the holder to the
Company that is reasonably satisfactory to the Company, and on surrender
and cancellation of such Preferred Stock Certificate, if mutilated, the
Company shall execute and deliver a new Preferred Stock Certificate of like
tenor and date; provided that the Company shall not be obligated to re-
issue any lost, stolen or destroyed Preferred Stock Certificate if the
holder thereof complies with this Section 6 and contemporaneously requests
the Company to convert such Series 6 Preferred Shares into Common Stock.
7. Amendment. So long as any Series 6 Preferred Shares are
---------
outstanding, the Company shall not, without first obtaining the approval by
vote or written consent, in the manner provided by law, of the holders of
at least a majority of the total number of Series 6 Preferred Shares
outstanding, voting separately as a class, amend or repeal any provision
of, or add any provision to, the Company's Certificate of Incorporation, if
such action would alter or change the preferences, rights, privileges or
powers of, or the restrictions provided for the benefit of, the Series 6
Preferred Shares.
8. Company's Right to Redeem at Its Election. At any time after the
-----------------------------------------
issuance of Preferred Shares, the Company shall have the right, in its sole
discretion, to redeem (a "Redemption"), from time to time, any or all of
the Preferred Shares. If the
7
<PAGE>
Company elects to redeem some, but not all, of the Preferred Shares then
outstanding, the Company shall redeem a pro-rata amount (based on the
number of Preferred Shares then held by holders of the Preferred Shares)
from each holder of the Preferred Shares.
(a) Redemption Price. The "Redemption Price" shall be an amount
----------------
per Preferred Share equal to one-hundred twenty percent (120%) of the
Stated Value plus all accrued but unpaid dividends.
(b) Mechanics of Redemption. The Company shall effect each
-----------------------
Redemption by delivering written notice ("Notice of Redemption") to each
holder of the Preferred Shares at the address and facsimile number of such
holder appearing in the Company's Preferred Share register. Such Notice of
Redemption shall be deemed to have been delivered and received (i) on the
day it is sent if delivered by facsimile so as to be received prior to 5:00
p.m. local time at the holder of Preferred Shares' facsimile number as
listed in the Purchase Agreement, or one (1) business day later if it is
delivered so as to be received after 5:00 p.m. local time at the holder of
Preferred Shares' facsimile number as listed in the Purchase Agreement,
(ii) one (1) business day, if delivery is within the United States, after
the Company's sending (by overnight courier) of such Notice of Redemption,
or (iii) two (2) business days, if delivery is outside the United States,
after the Company's sending (by two (2) day courier) of such Notice of
Redemption. Such Notice of Redemption shall indicate (y) the number of
Preferred Shares that have been selected for redemption, and (z) the date
that such redemption is to become effective. Once the Notice of Redemption
is deemed to have been delivered and received, the Preferred Shares
designated for a Redemption may be converted into shares of Common Stock if
a Conversion Notice is delivered in accordance with Section 2(d) hereof
within five business days of the date the Notice of Redemption is deemed
delivered and received. After such five day period, any Preferred Shares
designated for Redemption not so converted shall no longer be convertible
into Common Stock, and such Preferred Shares shall be delivered to the
Company by the seventh business day after the Notice of Redemption is
deemed delivered and received.
(c) Payment of Redemption Price. Each holder submitting
---------------------------
Preferred Shares being redeemed under this Section 8 shall deliver such
holder's Preferred Stock Certificates so redeemed to the Company, and the
Company shall pay the applicable Redemption Price to that holder within
five (5) business days after such holder's Preferred Stock Certificates (or
an indemnification undertaking satisfactory to the Company with respect to
such shares in the case of their loss, theft or destruction) are delivered
to the Company.
(d) Company Must Have Immediately Available Funds or Credit
-------------------------------------------------------
Facilities. The Company shall not be entitled to send any Notice of
----------
Redemption at the Company's election pursuant to this Section 8 and begin
the redemption procedure herein, unless it has:
8
<PAGE>
(i) the full amount of the Redemption Price at the Company's
election in cash, available in a demand or other immediately available
account in a bank or similar financial institution;
(ii) credit facilities, with a bank or similar financial
institutions that are immediately available and unrestricted for use in
redeeming the Preferred Shares, in the full amount of the Redemption Price;
(iii) a written agreement with a standby underwriter or
qualified buyer ready, willing and able to purchase from the Company a
sufficient number of shares of stock to provide proceeds necessary to
redeem any stock that is not converted prior to a Redemption; or
(iv) a combination of the items set forth in the preceding
clauses (i), (ii) and (iii), aggregating the full amount of the Redemption
Price.
9. Holder's Right to Redeem. Provided the holder of Series 6
------------------------
Preferred Shares is entitled to require the Company to redeem Excess
Preferred Shares as set forth in Section 2(i) hereof, the following
provisions shall apply:
(a) Redemption Price. The "Excess Preferred Share Redemption
----------------
Price" shall be an amount per Preferred Share equal to one-hundred twenty
percent (120%) of the Stated Value plus all accrued but unpaid dividends.
(b) Mechanics of Redemption. The holder of Excess Preferred
-----------------------
Shares shall effect each redemption by delivering written notice ("Holder's
Notice of Redemption") to the Company stating the number of Excess
Preferred Shares to be redeemed along with the Preferred Stock Certificate
covering such shares. Such Holder's Notice of Redemption shall be deemed to
have been delivered and received on the business day when it is transmitted
by facsimile if so transmitted by 5:00 p.m. California time and if the
Company receives the Preferred Stock Certificate(s) covering the shares to
be redeemed either (1) by 10:00 a.m. California time within the following
two business days, or (2) on the next business day after it is deposited
for next day delivery with a nationally recognized overnight delivery
service.
(c) Payment of Redemption Price. Each holder submitting Excess
---------------------------
Preferred Shares being redeemed under this Section 9 shall deliver such
holder's Preferred Stock Certificates so redeemed to the Company as
required in Section 9(b) hereof, and the Company shall pay the applicable
Excess Preferred Share Redemption Price to that holder within fifteen (15)
business days after such holder's Preferred Stock Certificates (or an
indemnification undertaking satisfactory to the Company with respect to
such shares in the case of their loss, theft or destruction) are delivered
to the Company.
9
<PAGE>
IN WITNESS WHEREOF, the Company has caused this certificate to be signed by
Edwin L. Harper, its President and Chief Executive Officer, as of February 11,
1998.
SYQUEST TECHNOLOGY, INC.
By: /s/ Edwin L. Harper, Pres.
___________________________________
Title: President and Chief Executive
Officer
10
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ACCOMPANYING
FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 16,559
<SECURITIES> 0
<RECEIVABLES> 33,072
<ALLOWANCES> 0
<INVENTORY> 36,154
<CURRENT-ASSETS> 94,282
<PP&E> 25,857
<DEPRECIATION> 0
<TOTAL-ASSETS> 120,368
<CURRENT-LIABILITIES> 82,007
<BONDS> 0
0
0
<COMMON> 8
<OTHER-SE> 29,655
<TOTAL-LIABILITY-AND-EQUITY> 120,368
<SALES> 79,089
<TOTAL-REVENUES> 79,089
<CGS> 92,874
<TOTAL-COSTS> 92,874
<OTHER-EXPENSES> 52,314
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,299)
<INCOME-PRETAX> (67,398)
<INCOME-TAX> 873
<INCOME-CONTINUING> (68,271)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (68,271)
<EPS-PRIMARY> (1.00)
<EPS-DILUTED> (1.00)
</TABLE>
