Basic and diluted loss per share was $0.36 for the third quarter of 2004 and $0.20 in the third quarter of 2005 and $1.15 and $0.47 for the first nine months of 2004 and 2005, respectively. Included in the loss per share calculation for the first nine months 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.
As indicated in Note 4 to the unaudited consolidated financial statement included herein, we are in the process of determining the amount of any deemed dividend related to the adjustment of the conversion and exercise price of the Series AA shares and related warrants and will record such deemed dividend, if any, in the fourth quarter of 2005.
We have incurred losses for the past several years, including losses of $2,296,000 and $5,434,000 in the third quarter and first nine months of 2005, respectively, and had limited liquidity as of September 30, 2005. We have continued to reassess our business and investigate various strategic alternatives that would increase liquidity and working capital. These alternatives have included one or more of the following:
We continue to explore these and other options that would provide additional capital for current operating needs and longer-term objectives. On October 31, 2005, we completed the sale of $9.5 million of 10% Convertible Subordinated Notes and warrants. The proceeds from this offering will be used for general working capital purposes, including new product development and marketing activities. In 2004 and in November 2005, 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 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.
Also on October 31, 2005, we entered into an Amendment of our Media Distribution Agreement (“MDA”) with Imation which results in increased gross margins on the sale of our media products, effective January 1, 2006. We believe the modification of the MDA, and the related increase in gross margins, improves our opportunity for future profitability. Increasing revenue from hardware products, increasing unit shipments of media products, and maintaining or decreasing operating costs are critical factors in achieving profitable operations. However, there can be no assurance that we will achieve profitable operations in the near term, and if we do not generate sufficient cash flow to support our operations, we may not be able to continue as a going concern.
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 provided by operations, which may result in a need for additional funding in the future from external sources. Any new indebtedness would require the consent of the lender under our line of credit and the holders of two thirds of the
outstanding principal amount of the Notes or an agreement acceptable to those parties for the subordination of the new indebtedness to the line of credit and the Notes. There is no assurance that additional funding will be available or available on terms acceptable to us.
Cash Flows – Nine Months Ended September 30, 2005
As of September 30, 2005, we have $283,000 in cash and cash equivalents and negative working capital of $8,105,000. During the first nine months of 2005, we had $1,169,000 in cash provided by operating activities, $1,623,000 used by investing activities and $293,000 provided by financing activities.
The components of cash provided by operations include our net loss of $5,434,000, 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 $1,608,000. In addition, cash flows from operating activities in the first nine months of 2005 were impacted by a decrease in accounts receivable of $1,719,000 resulting from improved collections, and a decrease in inventory of $2,794,000, as we decreased our finished goods inventory to improve liquidity. Cash provided by financing activities is comprised primarily of net borrowings on the bank line-of-credit offset by payments on notes payable to a supplier of $1,879,000. 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 the need for 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 – Nine Months Ended September 30, 2004
As of September 30, 2004, we had $842,000 in cash and cash equivalents and working capital of $6,710,000. During the first nine months of 2004, we had $11,236,000 in cash used by operating activities, $1,479,000 used by investing activities and $6,578,000 provided by financing activities.
The components of cash used by operations included our net loss of $7,647,000, decreased by depreciation and amortization expense, provisions for uncollectible accounts receivable and sales returns and programs, and stock-based compensation and interest expense, and increased by gain on foreign currency translation and amortization of deferred revenue, all of which totaled cash used by operations of $1,447,000. In addition, cash flows from operating activities in the first nine months of 2004 were impacted by a decrease in accounts receivable due to improved collections, and decreases in accounts payable and accrued liabilities due to the use of the Imation MDA and Series AA proceeds to repay payables and settle various inventory purchase commitments during the period. Cash provided by financing activities is comprised primarily of net proceeds from the issuance of the Series AA preferred stock of $23,635,000, partially offset by net payments on the bank line-of-credit of $6,498,000 and payments on other notes payable of $10,751,000. 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
Convertible Subordinated Notes
On October 31, 2005, we completed the sale of $ 9.5 million of 10% Convertible Subordinated Notes (“Notes”) and warrants to purchase 4,750,000 shares of common stock. The Notes are payable interest only through 2010, at which time the principal amount is due in total. Interest on the Notes is payable quarterly in our common stock. The principal amount of the Notes is convertible into common stock at the initial conversion price of $2.80 per share throughout the term of the Notes. On the 30 day anniversary of closing, the conversion price will be adjusted to equal an average price (as defined) of our common stock if such price is lower than $2.80 per share, but in no event less than $1.80 per share. The initial exercise price of the warrants, which have a five-year term, is also $2.80 per share; however, the exercise price will adjust to the adjusted conversion price of the Notes, as described above. The Notes are collateralized by a security interest in all of our assets and are, subordinate to the security interest granted, and our indebtedness, under our line-of-credit agreement with Wells Fargo. See Note 3 to the Unaudited interim consolidated financial statements included herein.
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The Notes may be prepaid at any time at the then outstanding principal amount. Under certain circumstances, including prepayment during a period of default (which includes a change of control) or in connection with a reorganization, a prepayment premium may be required; the premium is the greater of (1) 20% of the outstanding principal or (2) the excess over the principal amount of the product of the an average market price of the common stock at the time multiplied by the number of common shares issuable upon the conversion of the Notes. We are obligated to register the underlying common shares that would be issued upon conversion of the Notes and exercise of the warrants, as well as a specified number of shares that would be issued as interest on the Notes.
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 currently provides for borrowings of up to $20,000,000 based on 80% of eligible accounts receivable (as defined), and 25% 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 is currently being charged at the lender’s prime rate plus 3% (9.75% at September 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 and September 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 and October 2005. In connection with the waivers, 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, an interest rate equal to the prime rate plus 3%, subject to decrease if debt or equity capital is obtained, and a reduction in the borrowing advance rate for eligible inventory. The outstanding balance under the line of credit was $8,304,000 at September 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 September 30, 2005, the remaining balance of $4,892,000 is due to one supplier, Hitachi, Ltd. (Hitachi). In November 2004 and November 2005, 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 September 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 $6,657,000 which is payable as follows: 2005 - $1,206,000; 2006 - $4,824,000; 2007 - $627,000.
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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 September 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 MDA, we agreed to grant Imation a second security interest in our intellectual property to secure the Company’s obligations under the MDA and a seat as an observer on our Board of Directors. The MDA 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 MDA 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 MDA is terminated by Imation, we are not obligated to refund any portion of the distribution fee. The MDA provided for discounted sales prices to Imation such that Imation was able to obtain a gross margin of at least 25% on sales to third parties.
On October 31, 2005, we entered into an Amendment of the MDA (“Amendment”), whereby sales prices to Imation will be adjusted such that Imation will be able to obtain a gross margin of 8% for the period from January 1, 2006 to December 31, 2006, and 10% thereafter. As consideration for the revision of the gross margin, we agreed to provide the following to Imation; (1) a $5,000,000 note payable, bearing interest at 10% beginning January 1, 2006, with interest only payments through 2007 and equal quarterly principal and interest payments commencing on March 31, 2008 and continuing through December 31, 2009, (2) 1,500,000 shares of common stock and warrants to purchase 750,000 shares of common stock at $2.80 per share, subject to adjustment to the lower of $2.80 or $1.80 based on the sales price (as defined) of our common stock on the 30 day anniversary from the date of issuance, and (3) a $2,000,000 credit to be applied against product purchases by Imation subsequent to January 1, 2006. The Amendment also decreased the amount of the distribution fee that would be required to be repaid to Imation due to a termination of the MDA was reduced to $8,500,000. In addition, on October 31, 2005, Imation loaned $2,000,000 to the Company under a note payable which bears interest at 10% and is payable interest only through December 15, 2006, at which time the principal amount is due in total. In connection with the $5,000,000 and $2,000,000 notes, we granted Imation a security position in substantially all of our assets. These notes are subordinated to the security interests of, and our indebtedness to, Wells Fargo and the holders of the Notes. Events of Default under the Imation notes include, among others, a material default under the Media Distribution Agreement not cured within a specified time. See Note 7 to the Unaudited interim consolidated financial statements included herein.
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 September 30, 2005 are as follows:
(In thousands)
| Less than 1
year | 1 - 3
years | After
3 years |
Total
|
Notes payable | $ | 4,793 | $ | 4,827 | $ | -- | $ | 9,620 |
Operating leases | | 923 | | 2,583 | | 658 | | 4,164 |
Capital lease obligations | | 42 | | -- | | -- | | 42 |
| $ | 5,758 | $ | 7,410 | $ | 658 | $ | 13,826 |
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 September 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 September 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 September 30, 2005. There was no change in our internal control over financial reporting during the quarter ended September 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.
Through the Complaint, the Plaintiffs sought 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 sought 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 provided 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
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Company’s claim against the estate. The agreement was approved by the Bankruptcy Court in September 2005. The Company had recorded a provision for the settlement as of June 30, 2005.
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 customary for this type of proceeding, on November 18, 2004. In addition, in connection with this litigation, Matsushita Electric Industrial Co. Ltd. (Matsushita) filed a complaint against the Company asserting a claim for patent infringement related to another of the Company’s products. A subsidiary of Matsushita is the contract manufacturer of the product included in the Company’s initial complaint against Certance. Effective October 13, 2005, the Company entered into a Settlement and Compromise Agreement, whereby (1) the defendant agreed to modify certain features within its drive products, (2) both complaints were dismissed and (3) the defendant agreed to make a payment of $1,200,000, which was received by the Company on November 1, 2005.
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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 dated November 1, 2005 to the Memorandum of Understanding, by and between the Company and Hitachi, Ltd., originally dated February 14, 2003. |
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 three Reports on Form 8-K for the third quarter of 2005:
• | Current report filed September 14, 2005, regarding Item 1.01. |
• | Current report filed October 20, 2005, regarding Item 8.01. |
• | Current report filed November 1, 2005, regarding Items 1.01, 2.03, 3.02, and 3.03. |
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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 | November 9, 2005 | | By | /s/ Carroll A. Wallace |
| | | | Carroll A. Wallace
Chief Financial Officer
(Principal Financial and Accounting Officer) |
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