addition, the interest rate on our line of credit with our bank was higher in 2005 due to increases in the prime rate.
The result of foreign currency translations fluctuated from gains of $1,091,000 and $488,000 for the second quarter and first six months of 2004, respectively, to gains of $198,000 and $493,000 for the same periods in 2005. These gains were primarily due to fluctuations in the Japanese Yen and the Euro against the U.S. Dollar during both periods and the resulting impact from the translation of the note payable to a supplier denominated in Yen.
In the second quarter of 2005, we recorded a provision for settlement of litigation of $1,125,000. See Note 6 to the Unaudited Consolidated Financial Statements included herein.
The provisions for income taxes in 2004 and 2005 represent foreign taxes only. Based on cumulative operating losses over prior years and uncertainty as to future profitability, we continue to reserve 100% of our deferred tax assets. We believe a 100% valuation allowance will be required until we attain a consistent and predictable level of profitability. See Note 8 to the Unaudited Consolidated Financial Statements included herein.
Basic and diluted loss per share was $0.04 for the second quarter of 2004 and $0.02 in the second quarter of 2005 and $0.08 and $0.03 for the first six months of 2004 and 2005, respectively. Included in the loss per share calculation for both periods of 2004 is a deemed dividend of $4,225,000 relating to the exchange of preferred stock, as discussed more fully in Note 4. Outstanding common shares increased throughout 2004 and 2005 due to the payment of dividends on preferred stock paid in common shares. The effect of convertible preferred stock and common stock options was antidilutive in all periods presented.
We have incurred losses for the past several years, including losses of $7,991,000 and $3,138,000 in the first six months of 2004 and 2005, respectively, and have limited liquidity as of June 30, 2005 and August 12, 2005. We continue to reassess our business and investigate various strategic alternatives that would increase liquidity and working capital. These alternatives may include one or more of the following:
We will continue to explore these and other options that would provide additional capital for current operating needs and longer-term objectives. Although we issued Series AA preferred stock in 2004 for total gross proceeds of $25,000,000, and since the Company has not yet achieved profitable
operations, it is now necessary for us to raise additional capital to provide sufficient funds to support our current operations including payments to vendors. If we are not successful in achieving one or more of the above actions, including raising additional capital, we may not be able to continue as a going concern. The Series AA proceeds were used primarily to repay our line-of-credit with our bank and meet other supplier requirements. In addition, during 2004, we successfully restructured the payment terms of a note payable to a supplier resulting in the deferral of payments into 2006 and 2007. In March 2005, we entered into a new line of credit with Wells Fargo Business Credit, Inc. replacing Silicon Valley Bank, which new line provides additional borrowing capacity for the Company. Currently, our primary sources of funding are our availability under our bank line of credit, notes payable to suppliers and others, and our ability to generate cash from operations. With respect to raising additional capital, we are currently emphasizing obtaining additional debt or equity capital and entering into a stragegic alliance or business combination with a business partner that would provide capital. The amount of capital to be raised depends upon market conditions and the proposed use of proceeds.
An inability to increase revenue to the level anticipated in our forecasts, a loss of a major customer for VXA or other products, an interruption in delivery of manufactured products from suppliers, increases in product costs, significant unbudgeted expenditures, or other adverse operating conditions could impact our ability to achieve our forecasted cash generated from operations, which may result in a need for additional funding from external sources. There is no assurance that additional funding will be available or available on terms acceptable to the Company. Additional debt would require the approval of our lender under the terms of our line of credit.
Cash Flows – Six Months Ended June 30, 2005
As of June 30, 2005, we have $342,000 in cash and cash equivalents and negative working capital of $4,205,000. During the first six months of 2005, we had $1,659,000 in cash used by operating activities, $1,289,000 used by investing activities and $2,846,000 provided by financing activities.
The components of cash provided by operations include our net loss of $3,138,000, adjusted for depreciation and amortization expense, provision for uncollectible accounts receivable and sales returns and programs, amortization of deferred revenue, provision for excess and obsolete inventory, provision for settlement of litigation, gain on foreign currency translation and other non-cash items, all of which totaled cash provided of $980,000. In addition, cash flows from operating activities in the first six months of 2005 were impacted by a decrease in accounts receivable of $1,034,000 resulting from improved collections and decreases in accounts payable and accrued liabilities totaling $1,421,000 resulting primarily from lower product purchases during the quarter and decreases in payment terms with vendors. Cash provided by financing activities is comprised primarily of net borrowings on the bank line-of-credit offset by payments on notes payable of $709,000. Cash used by investing activities relates to the purchase of equipment and tooling related to new product development activities.
Our cash from operations can be affected by the risks involved in our operations, including revenue growth, the successful introduction and sales of new product offerings, control of product costs and operating expenses, and overall management of working capital items. Cash required for capital expenditures is expected to total approximately $2,100,000 in 2005, and relates primarily to tooling for new product development activities and investment in information technology equipment.
Cash Flows – Six Months Ended June 30, 2004
As of June 30, 2004, we had $7,659,000 in cash and cash equivalents and working capital of $9,411,000. During the first six months of 2004, we had $7,603,000 in cash used by operating activities, $1,090,000 used by investing activities and $9,373,000 provided by financing activities.
The components of cash used by operations include our net loss of $3,766,000, decreased by depreciation and amortization expense, provision for uncollectible accounts receivable and sales returns and programs, and stock-based compensation and interest expense, and increased by gain on foreign currency translation, all of which totaled a net decrease in cash used by operations of $1,488,000. In
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addition, cash flows from operating activities in the first six months of 2004 were impacted by an increase in accounts receivable due to increased sales in the month of June 2004, and decreases in accounts payable and accrued liabilities due to the use of the Series AA proceeds to repay payables and settle various inventory purchase commitments during the quarter. Cash provided by financing activities is comprised primarily of net proceeds from the issuance of the Series AA preferred stock of $23,763,000 and net proceeds from the issuance of common stock of $187,000, partially offset by net payments on the bank line-of-credit and other notes payable of $14,577,000. Cash used by investing activities relates to the purchase of equipment and leasehold improvements, including the costs associated with the implementation of new accounting and management information software.
Borrowings
Line of Credit – Wells Fargo Business Credit, Inc.
On March 9, 2005, we entered into a new asset-based line-of-credit agreement with Wells Fargo Business Credit, Inc. (“Wells Fargo”) which provides for borrowings of up to $20,000,000 based on 80% of eligible accounts receivable (as defined), and 60% of eligible finished goods inventory (as defined). Accordingly, borrowing availability under the line of credit varies based on the balances of accounts receivable and inventory throughout the month, quarter or year. Borrowings are secured by substantially all of the Company’s assets. This agreement matures on March 31, 2008, and replaced the loan agreement with Silicon Valley Bank, as described below, which was terminated in March 2005. Interest under the new agreement with Wells Fargo has been charged at the lender’s prime rate plus 1% (7.0% at June 30, 2005) and the agreement includes financial covenants and other restrictions relating to, among other things, operating results, the maintenance of minimum levels of net worth or deficit, limits on inventory levels with product distributors, limits on capital expenditures, liens, indebtedness, guarantees, investment in others and prohibitions on the payment of cash dividends on common or preferred stock. Events of default include a change in control. As of June 30, 2005, we were in violation of covenants relating to our operating results and maintenance of specified levels of net worth or deficit and received a waiver of such violations in August 2005. In connection with the waiver, the agreement was amended to provide for revised financial covenants for the remainder of 2005, relating to operating results and the maintenance of minimum net worth or deficit, and an interest rate equal to the prime rate plus 3%, subject to decrease if debt or equity capital is obtained. The outstanding balance under the line of credit was $9,705,000 at June 30, 2005.
Line of Credit – Silicon Valley Bank
On June 18, 2002, we entered into a $25,000,000 line of credit agreement (the “Agreement”) with Silicon Valley Bank (“SVB”) that originally expired in June 2005. The agreement was modified several times during 2003 for violations of various financial covenants and to revise certain terms and conditions, including a decrease in maximum borrowings to $20,000,000 and to provide for interest to be charged at a rate of prime plus 5.25%. On October 10, 2003, the Agreement was modified to extend the term of the Agreement through September 30, 2005, under similar terms and conditions. In May, 2004, we entered into a revised agreement (the “Revised Agreement”), which provides for borrowings of up to $20,000,000 based on 75% of eligible accounts receivable (as defined). No borrowings were available based on inventory balances. Interest was generally charged at the prime rate plus 2.0%, and the Revised Agreement included financial covenants relating to operating results, limits on inventory levels with product distributors, the maintenance of minimum levels of net worth or deficit and prohibitions on the payment of cash dividends. As noted above, this agreement was terminated in March 2005.
Notes Payable - Suppliers
During the first quarter of 2003, we entered into agreements with four of our largest suppliers that converted certain accounts payable and accrued liability amounts outstanding at December 28, 2002, totaling $20,900,000, to unsecured notes payable. These amounts were due through 2005 and bore interest at rates ranging from zero to 5%. At June 30, 2005, the remaining balance of $5,897,000 is due to one
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supplier, Hitachi, Ltd. (Hitachi). In November 2004, the payment terms for this note were restructured to provide for repayment through March 31, 2007, with interest at 2.1% through March 31, 2006 and 3.1% thereafter. In September 2003, we entered into restructuring and note payable agreements with a fifth supplier, Solectron Corporation (“Solectron”), for $8,991,000 which converted accounts payable and current inventory purchase commitments to a note payable bearing interest at 9%. In May 2004, we made a $2,020,000 prepayment on the Solectron note and revised the payment schedule. As of June 30, 2005, all inventory purchase commitments had been satisfied, and the total amount due to Hitachi and Solectron under the remaining notes payable – suppliers is $7,926,000 which is payable as follows: 2005 - $2,382,000; 2006 - $4,905,000; 2007 - $639,000.
Note Payable - Lessor
In September 2003, we entered into a note payable in the amount of $3,060,000 with the lessor of certain of our former office and manufacturing facilities, in settlement of all past and future amounts due under the lease for such facilities. The note is unsecured, is payable interest only through September 2008, at which time the entire principal amount is due. The interest rate on the note at June 30, 2005 is 6.0% and this rate will continue until September 2007, at which time the rate increases to 10.0% for the final year of the note. Interest on the note was imputed at a rate of 9.0% over the term of the note and, accordingly, the note was recorded net of discount of $359,000. The 9.0% rate was considered to be a market interest rate based on other borrowings of the Company. The discount is being recognized over the term of the note as additional interest expense using the effective interest method.
Media Distribution Agreement
On November 7, 2003, we entered into a Media Distribution Agreement (“MDA”) with Imation whereby we granted Imation the exclusive worldwide marketing and distribution rights for the Company’s proprietary removable data storage media. In exchange for such rights, Imation paid us a one-time distribution fee of $18,500,000. Under the Media Agreement, we agreed to grant Imation a second security interest in our intellectual property to secure the Company’s obligations under the Media Agreement and a seat as an observer on our Board of Directors. The Media Agreement has an indefinite term, but provides for termination by Imation upon 180 days’ prior written notice to the Company, or upon a material default by either party. If Imation terminates the Media Agreement because of a material default by Exabyte, we must pay Imation a prorated portion of the distribution fee (based on 10 years from November 7, 2003). If the Media Agreement is terminated by Imation, we are not obligated to refund any portion of the distribution fee. The Media Agreement provides for discounted sales prices to Imation which, in turn, reduces our gross margin on media sales.
Other Non-Current Liabilities And Contractual Obligations
We are committed to make certain payments for non-current liabilities including notes payable. Our cash payments due under these contractual obligations as of June 30, 2005 are as follows:
(In thousands)
| Less than 1
year | 1 - 3
years | After
3 years |
Total
|
Notes payable | $4,835 | $3,018 | $3,060 | $10,913 |
Operating leases | 925 | 2,592 | 878 | 4,395 |
Capital lease obligations | 63 | -- | -- | 63 |
| $5,823 | $5,610 | $3,938 | $15,371 |
We expect to fund these obligations through cash generated from operations, borrowings under our bank line of credit and, if necessary, additional external debt or equity financings.
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In addition, as of June 30, 2005, we have issued irrevocable letters-of-credit in favor of certain suppliers totaling $750,000, which expire December 31, 2005.
Market Risk
In the ordinary course of our operations, we are exposed to certain market risks, primarily changes in foreign currency exchange rates and interest rates. Uncertainties that are either nonfinancial or nonquantifiable, such as political, economic, tax, other regulatory or credit risks are not included in this assessment of our market risks. We are primarily impacted by fluctuations in the dollar/yen exchange rate as a result of a note payable to a supplier and other liabilities denominated in Yen. Our borrowings under our line of credit agreement expose us to changes in interest rates.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information concerning the Company’s market risk is incorporated by reference from Item 2 above, ‘Management’s Discussion and Analysis of Financial Condition and Results of Operations,’ under the caption, ‘Market Risk.’
ITEM 4. CONTROLS AND PROCEDURES
As of June 30, 2005, the Company conducted an evaluation, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms as of June 30, 2005. There was no change in our internal control over financial reporting during the quarter ended June 30, 2005 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
The Company maintains a Disclosure Committee, consisting of members of management, who review financial statement and other disclosures included in regulatory filings for accuracy and completeness. In addition, members of the Company’s senior management team, who are responsible for all significant operational areas of the Company, meet regularly to discuss current business conditions and issues. Prior to the filing of the applicable Form 10-Q or Form 10-K, the senior management team also meets with the Board of Directors to review business issues impacting their area of responsibility and the Company as a whole. The information exchanged at these meetings is considered by the Board members and management in their review of the Company’s financial statements and SEC filings. As a result of these frequent meetings and interactions with members of management responsible for all significant operational areas of the Company, information is accumulated and communicated to senior management, including the CEO and CFO, on a comprehensive and timely basis to allow for appropriate disclosure in the Company’s consolidated financial statements and regulatory filings.
PART II.
ITEM 1. LEGAL PROCEEDINGS
On April 26, 2005, The D.I.C. Creditors’ Trust and J Gregg Pritchard, Trustee on behalf of the D.I.C. Creditors’ Trust, (together, the “Plaintiffs”) filed their Original Complaint against the Company to Avoid Transfers and Objection to Proof of Claim (the “Complaint”) in the United States Bankruptcy Court for the Northern District of Texas, Dallas Division (the “Bankruptcy Court”). The Complaint was filed in connection with the chapter 11 bankruptcy cases of Daisytek, Inc. and its affiliated debtors (collectively, the “Daisytek Debtors”), jointly administered Case No. 03-34762 pending before the Bankruptcy Court.
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Through the Complaint, the Plaintiffs seek to avoid and recover approximately $2,764,000 in payments allegedly made to the Company from one or more of the Daisytek Debtors prior to their respective bankruptcy filings, asserting that the payments constitute preferential transfers or fraudulent transfers. In addition, the Plaintiffs seek disallowance of the proof of claim filed by the Company in the amount of approximately $5,954,000 against the bankruptcy estate of Digital Storage, Inc., one of the Daisytek Debtors and a former distributor of the Company’s products. In July 2005, the Company reached an agreement with the Plaintiffs that provides for the settlement of the claim for a payment of $1,125,000 over a twelve month period, commencing September 1, 2005, and the relinquishment of the Company’s claim against the estate. The completion of the agreement is subject to Bankruptcy Court approval. The Company has recorded a provision for the settlement in the accompanying June 30, 2005 consolidated financial statements.
On October 5, 2004, the Company filed a complaint against Certance LLC (“Certance”) in the United States District Court for the District of Colorado asserting that Certance infringed upon certain of the Company’s patents. Certance subsequently filed its answer, which included routine defenses for this type of proceeding, on November 18, 2004. In addition, in connection with this litigation, on June 6, 2005, Matsushita Electric Industrial Co., Ltd. (Matsushita) filed a complaint in the United States District Court for the District of Delaware against the Company asserting a claim for patent infringement based on a design patent of Matsushita related to another of the Company’s products. Matsushita is the contract manufacturer of the product included in the Company’s initial complaint against Certance. The Company has not yet filed its answer. The lawsuit brought by the Company has recently entered the discovery phase and while the Company is actively negotiating a settlement of these matters, it intends to assert fully its patent rights in the litigation. It is not possible to predict the outcome of these actions and no contingent gain or loss has been recorded for the three and six months ended June 30, 2005.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Executive Bonuses And Director Compensation
On April 1, and May 1 2005, we issued a total of 207,374 shares of common stock to our outside directors as payment for 2004 and 2005 director fees. We believe that these parties met the standards for purchasers in a non-public offering, the Company made no general solicitation, and the Company also relied upon an exemption from securities registration for a non-public offering in issuing these shares.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On July 29, 2005, we held an Annual Meeting of Stockholders. At the meeting, we asked stockholders to vote upon four proposals:
Proposal 1: Elect 3 directors to hold office until the 2008 Annual Meeting.
Proposal 2: Ratify the appointment of Ehrhardt Keefe Steiner & Hottman P.C. as our independent registered public accountants for the year ending December 31, 2005.
Proposal 3: Approve an amendment to our employee stock purchase plan to increase the number of shares by 500,000.
Proposal 4: Approve amendments to our Restated Certificate of Incorporation to effect a reverse split of our outstanding common stock pursuant to which any whole number of outstanding shares between and including two and 15 would be combined into one share of our common stock, and to authorize our Board, in its sole discretion, to select and file one of these amendments to effect a reverse stock split or to determine not to effect, and thereby abandon, the reverse stock split.
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A total of 95,155,013 shares of Common Stock, representing approximately 81.93% of the total votes of shares eligible to vote at the meeting, were represented at the meeting. The number of votes cast for, against or withheld, as well as abstentions and broker non-votes as to each proposal, are as follows:
|
Votes For
| Votes Against or Withheld | Abstentions and Broker Non-Votes |
Proposal 1 – Election of Directors | | | |
John R. Garrett | 94,688,328 | 466,685 | N/A |
Thomas E. Pardun | 94,688,839 | 466,174 | N/A |
Juan A. Rodriguez | 88,228,115 | 6,926,898 | N/A |
| | | |
Proposal 2 – Ratification of appointment of Ehrhardt Keefe Steiner & Hottman P.C. | 94,593,860 | 316,212 | 244,941 |
| | | |
Proposal 3 – Amendment to employee stock purchase plan | 64,477,650 | 1,077,220 | 102,147 |
| | | |
Proposal 4 -- Amendment of Exabyte’s Restated Certificate of Incorporation to effect a reverse split | 93,589,963 | 1,477,581 | 87,469 |
Each of these proposals was passed by the stockholders. The continuing directors whose terms expire in 2006 are Leonard W. Busse, Stephanie L. Smeltzer McCoy and Thomas W. Ward. Two continuing directors whose terms expire in 2007 are A. Laurence Jones and G. Jackson Tankersley, Jr.
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ITEM 6. EXHIBITS
Exhibit Number |
Description
|
2.1 | Agreement and Plan of Merger among Exabyte Corporation, Bronco Acquisition, Inc., Ecrix Corporation, Certain Lenders, and Certain Investors, Dated as of August 22, 2001 (4) |
3.1 | Restated Certificate of Incorporation. (1) |
3.2 | Amendment to Restated Certificate of Incorporation. (2) |
3.3 | By-laws of the Company, as amended. (3) |
3.4 | Certificate of Designation of Preferences, Rights and Limitations of Series AA Convertible Preferred Stock (5) |
4.1 | Article 4 of the Restated Certificate of Incorporation (included in Exhibit 3.1) |
4.2 | Article 1 of the By-laws of Exabyte Corporation, as amended (included in Exhibit 3.3) |
4.3 | Specimen stock certificate of Exabyte (4) |
10.1 | Amendment No. 1 dated August 12, 2005 to the Credit and Security Agreement, by and between the Company and Wells Fargo Business Credit, Inc., dated March 9, 2005 |
31.1 | Rule 13a-14(a) Certification for Chief Executive Officer |
31.2 | Rule 13a-14(a) Certification for Chief Financial Officer |
32.1 | Section 1350 Certification |
(1) | Filed as an Exhibit to the Company’s Registration Statement on Form S-1 (Registration No. 33-30941) filed with the Securities and Exchange Commission (the “SEC”) on September 8, 1989 or Amendments Nos. 1 and 2 thereto (filed on October 12, 1989 and October 16, 1989 respectively), and incorporated herein by reference. |
(2) | Filed as an Exhibit to the Company’s Registration Statement on Form 8-A/A filed with the SEC on June 7, 2002 and incorporated herein by reference. |
(3) | Filed as an Exhibit to the Company’s Registration Statement on Form 8-A/A filed with the SEC on June 7, 2002 and incorporated herein by reference. |
(4) | Filed as an Exhibit to Amendment No. 1 to the Company’s Registration Statement on Form S-4, filed with the SEC on September 21, 2001, as amended by Amendment Nos. 1 and 2 filed with the SEC on October 5, 2001 and October 9, 2001, respectively, and incorporated herein by reference. |
(5) | Filed as an Exhibit to the Company’s Current Report on Form 8-K, as filed with the SEC on May 4, 2004, and incorporated herein by reference. |
| |
| (b) | Reports on Form 8-K | |
| | | | |
The Company filed one Report on Form 8-K for the second quarter of 2005:
• | Current report filed April 29, 2005, regarding Item 8.01. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant had duly caused this amendment to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | EXABYTE CORPORATION |
| | | | Registrant |
| | | | |
| | | | |
| | | | |
Date | August 15, 2005 | | By | /s/ Carroll A. Wallace |
| | | | Carroll A. Wallace
Chief Financial Officer
(Principal Financial and Accounting Officer) |
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