SYQUEST TECHNOLOGY INC (NASDAQ:SYQT) files SEC Form 10-Q
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS:
The Company continues to face significant risks associated with market
acceptance of new products. The Company faces additional risks associated with
technology and product development, risks relating to new product introduction,
changes in the Company's marketplace, liquidity issues, and risks associated
with competition from other companies. The Company has experienced delays in
development of the SyJet product and anticipates a continued decline in selling
volumes and average selling prices of its other products. As a result, the
Company is in the process of reviewing its operations with the objective to
reduce its internal cost structure. However, there can be no assurance that the
Company will be successful in overcoming the delays in delivering the SyJet
product, competing against the product offerings of companies with greater cash
and operating resources, or in securing the resources to aggressively ramp
production of the SyJet. The Company requires additional cash resources in the
near future to fund working capital requirements, meet its debt obligations and
to fund incurred losses. Management's plans with respect to meeting these cash
needs include additional equity funding, expansion of the asset-based loan
facility and restructuring of notes payable. There can be no assurance that the
Company will be able to secure additional cash resources when needed, if at all,
or on favorable terms. An inability to overcome these risk factors would have a
material adverse affect on the Company's financial performance and on its
liquidity.
Net Revenues
Net revenues for the quarter ended December 31, 1996 were $48.3 million,
compared to $78.7 million reported for the comparable prior year quarter.
Revenue continued to be affected by lower volumes on the Company's mature drive
and cartridge products not offset by new product offerings. The decline in
revenue was partially mitigated by the continued production and sale of the
EZFlyer 230 drive and associated cartridge products. While the Company continues
its efforts to increase its manufacturing output for SyJet to meet the sales
demand, there can be no assurances that the Company will be successful in
manufacturing the required unit volumes or that the product will be accepted in
the marketplace.
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Revenues to date for the Company's second fiscal quarter ending March 31, 1997
are significantly below the levels experienced in the prior quarter over the
same comparable time period. The Company believes that this is attributable to
a number of factors including its inability to meet the demand for its new SyJet
1.5 Gigabyte removable hard drive product, due to unexpected delays in ramping
up production, and a reduction in sales of the Company's mature products.
Should the current sell through rate continue, the revenues for the second
fiscal quarter will be adversely affected.
Absent a substantial increase in sales of the Company's products prior to the
end of the second fiscal quarter, the Company will incur losses in excess of
those incurred in the first fiscal quarter. Lower than expected revenues have
resulted in a reduction in the availability of cash reserves and will
necessitate that the Company raise additional equity capital in the near future.
There can be no assurances that the Company will be able to raise the capital
required. Additionally, factors such as the sell through rate in the channel,
price pressures on the Company's products, and the inability to ramp SyJet
production will have an adverse impact on revenues.
The Company is in the process of performing an extensive review of its operating
cost structure and will implement spending levels consistent with revenue
expectations.
Gross Profit (Loss)
The Company recorded a gross profit for the quarter ended December 31, 1996 of
$11.0 million, or 23 percent of net revenues, compared to a gross loss of $9.2
million, or 12 percent of net revenues, in the comparable prior year quarter.
The increase in margins is principally attributable to the realization of
significant production economies including reductions in scrap and rework. These
efficiencies have generated excess capacity.
Comparatively, prior year quarter margins were negatively affected by a $7.8
million provision recorded by the Company related to certain firm purchase
commitments to its component suppliers.
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 could have an adverse effect on margins.
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Consequently, there can be no assurances that the Company will achieve necessary
improvements in margins in the future.
Selling, General and Administrative Expenses
Selling, general and administrative expenses aggregated $11.3 million, or 23.5
percent of net revenues compared to $14.4 million, or 18.4 percent of net
revenues, for the comparable prior year quarter. The decrease in aggregate
spending of 21.5 percent over the comparable prior year quarter is primarily
attributable to the Company's ongoing attempts to control costs. There can be no
assurance that the Company can continue to decrease aggregate selling, general
and administrative expenses. Additionally, during the quarter, the Company
incurred professional fees related to potential merger and litigation
activities.
Research and Development Expenses
Research and development expenses for the quarter ended December 31, 1996
aggregated $5.1 million, or 10.6 percent of net revenues, compared to $7.1
million, or 9.1 percent of net revenues, for the comparable prior year quarter.
The 28.2 percent decrease in research and development spending is principally
the result of the Company's ongoing strategic initiative to minimize expense
levels and focus engineering efforts on its primary core products. The Company
believes that it must continue to make significant investments in R&D in order
to effectively implement its product strategy and will continue to make these
investments commensurate with its revised operating cost structures.
Interest Income and Expenses
Net interest expense aggregated $1.4 million for the quarter ended December 31,
1996 compared to net interest income of $0.1 million for the comparable prior
year quarter. The increase in interest expense is principally the result of
lower average cash balances coupled with interest incurred on the Company's
borrowing.
Net Loss
Net Loss for the period was $6.8 million compared to $33.8 million for the
comparable prior year period. The change over the prior period is primarily
attributable to discontinuing production of mature products with negative gross
margins, combined with improvements from production efficiencies.
LIQUIDITY AND CAPITAL RESOURCES:
The Company is in a turnaround situation which necessitates certain actions on
behalf of the Company which affects the business
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environment in which the Company operates. Through much of fiscal 1996, the
Company was unable to obtain regular business terms with its suppliers as a
result of continued losses and liquidity issues. Consequently, the Company was
often in a position of conducting business with its suppliers on a C.O.D. basis.
During the second fiscal quarter to date, the Company has begun to experience a
return to regular business terms with key suppliers. In addition to the $9.2
million of supplier notes converted to equity in the first fiscal quarter of
1997 and the $2.3 million converted in the in the fourth quarter of fiscal 1996,
the Company intends to aggressively pursue a program to convert the remaining
supplier notes to equity. There can be no assurance that the Company will be
successful in its attempts to convert the existing notes which could have an
adverse affect on the Company's liquidity. Additionally, liquidity has been
affected by servicing debt, funding of operational losses, and SyJet development
costs. The Company intends, to raise additional capital to fund operations,
resize its operations and cost structures commensurate with revenue
expectations, and increase available lines of credit. However, there can be no
assurances that the Company will be successful in achieving these objectives.
At December 31, 1996 the Company had cash and short-term investments of $14.3
million, an increase of $10.6 million compared to $3.7 million at September 30,
1996. Borrowings under the Company's credit facilities amounted to $19.8
million at December 31, 1996 compared to $19.3 million at September 30, 1996.
Additionally, the Company increased its net worth from a deficit position of
$30.4 million at September 30, 1996 to an equity position of $9.7 million at
December 31, 1996. Working capital also increased from a negative position of
$37.4 million at September 30, 1996 to a negative position of $.3 million at
December 31, 1996. The increase in net worth and working capital is primarily
attributable to a significant increase in equity investments coupled with a
reduction in operating losses.
The Company may experience other effects in the future such as higher interest
rates, inability to borrow without collateral and higher financing costs with
regard to capital.
The Company has financed its working capital needs through a combination of
existing cash resources, asset-based borrowings, and a series of capital
financing transactions completed during calendar 1996.
Accounts receivable aggregated $34.9 million at December 31, 1996 compared to
$30.3 million at September 30, 1996, an increase of $4.6 million or 15.1
percent. The increase in accounts receivable is primarily due to an increased in
the aging as a result of slower collections. The
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Company has instituted an aggressive collections program. Inventories, net
of reserves, aggregated $22.3 million at December 31, 1996, an increase of $11.8
million, compared to the $10.5 million at September 30, 1996. The increase in
inventories is primarily attributable to production of the EZFlyer 230 and work
in process on the SyJet products.
On January 17, 1997, the Company renegotiated its line of credit with a
financial institution, continuing the existing terms and extending the line
through January 31, 1998. However, the new line provides for a limit on
borrowings of the lessor of $30 million or 80 percent of the Company's eligible
accounts receivable. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's annual
report on Form 10-K, as amended, for the year ended September 30, 1996.
The Company has raised significant financing during the quarter ended December
31, 1996. See Part II, item 2 of this Form 10-Q. The Company's current strategy
will necessitate additional equity which if successful will cause further
dilution of existing Stockholders.
The Company has deferred further negotiation of an equity investment with the
Legend group as further documented in the Company's annual report on Form 10-K,
as amended, for the year ended September 30, 1996.
During the quarter ended December 31, 1996, the Company used $20.2 million in
cash for operating activities and $1.0 million in capital expenditures.
The Company believes that, based on a number of events occurring, the current
sources of financing available to the Company will be sufficient to fund the
Company's operations into the near future. There can be no assurance, however,
that additional financing will be available when needed, if at all, or on
favorable terms. The Company is in the process of performing an extensive review
of its operating cost structure and will implement spending levels consistent
with revenue expectations.
NOTICE CONCERNING FORWARD LOOKING STATEMENTS AND FACTORS THAT MAY AFFECT FUTURE
RESULTS, FINANCIAL CONDITION AND LIQUIDITY:
Some of the statements made in this Form 10-Q are forward-looking in nature,
including but not limited to the Company's product introduction and financing
plans and other statements that are not historical facts. Forward-looking
statements in this
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Form 10-Q include without limitation language in the form of one or more of the
following words: "intend", "believe", "will", "may", "anticipate", "plan" and
"expect." The occurrence of the events described, and the achievement of the
intended results, are subject to the future occurrence of many events, some or
all of which are not predictable or within the Company's control; therefore,
actual results may differ materially from those anticipated in any forward-
looking statements. Many risks and uncertainties which could affect the possible
results described in forward-looking statements are inherent in the Company's
industry; others are more specific to the Company's business. Risks related to
the Company's business are described in the Company's Form 10-K, as amended,
including risks associated with technology and product development, risks
relating to new product introduction and acceptance of new products, changes in
the Company's marketplace, preferred stock issuances and dilution, intellectual
property matters, regulatory and manufacturing issues, liquidity issues, and
risks associated with competition from other companies, as well as the
following:
ONGOING RISK ISSUES
Market acceptability of the Company's product continues to be paramount in
ensuring a successful turnaround strategy. The Company's product is subject to
increasing competition from several other removable-media data storage devices.
Consequently, in order to secure adequate market share, the Company must ensure
that the functionality and quality of the product is effectively communicated to
the marketplace. As a result, the Company needs sufficient capital to implement
a marketing strategy that will adequately address the appropriate markets. The
Company is also dependent on the successful production and sale of the SyJet
product line. Additionally, the decline in volumes and pricing on mature
products will have an impact on the Company. The Company must also continue
implementing an operating cost structure that will ensure spending levels
consistent with revenue expectations. Critical to each of these factors is the
Company's ability to attract additional investment capital. There can be no
assurances that the Company will successfully achieve these objectives.
FUTURE PROFITABILITY
Although the Company continues to execute its turnaround plan, adjusting
operations to reduce losses and rebuild the business, the Company does not
expect to return to profitability in the near future. Although the Company
believes it will ultimately be successful in its turnaround attempts, and that
the Company will return to profitability in the future, there can be no
assurances that
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the Company will be successful or that it will have, or be capable of obtaining,
sufficient capital to withstand prolonged operating losses.
SHORTAGES OF CRITICAL COMPONENTS; ABSENCE OF SUPPLY CONTRACTS; SUPPLIER WORKOUTS
Many components incorporated in, or used in the manufacture of, the Company's
products are currently only available from sole source suppliers. During the
1996 fiscal year, the Company experienced disruption in its supply of certain
components for a number of reasons including the shortage of cash to pay
suppliers. The Company continues to experience component shortages due to
limited cash availability which affected the Company's ability to produce
its products and limited the Company's ability to implement certain cost
reduction and productivity improvement plans. Moreover, the Company may continue
to experience difficulty in the future in obtaining a sufficient supply of many
key components due to the shortage of cash to pay suppliers and other reasons. A
disruption in the supply of key components would have a material adverse affect
on the Company's ability to generate sales and the ability to successfully
launch the SyJet products.
QUARTERLY FLUCTUATIONS IN OPERATING RESULTS
The Company has experienced and in the future may continue to experience
significant fluctuations in its quarterly operating results. Factors such as
price reductions, the introduction and market acceptance of new products,
product returns, the availability of critical components and the lower gross
margins associated with the Company's newly introduced products could contribute
to this quarterly fluctuation. Moreover, the Company's expense levels are based
in part on expectations of future sales levels, and a shortfall in expected
sales could therefore result in a disproportionate decrease in the Company's
results of operations. As a result of these and other factors, including
possible further dilution, it is likely that the Company's operating may be
affected.
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