As filed with the Securities and Exchange Commission on August 26, 2004
REGISTRATION NO. 333-116586
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 2 TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
EXABYTE CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 3573 84-0988566
(State or other jurisdiction of (Primary Standard Industrial (IRS Employer Identification No.)
incorporation or organization) Classification Code Number
2108 55th Street
Boulder, Colorado 80301
(303) 417-7292
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
Tom W. Ward
2108 55th Street
Boulder, Colorado 80301
(303) 417-7453
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
Mark Levy
Holland & Hart LLP
555 Seventeenth Street, Suite 3200
Denver, CO 80202-3979
(303) 295-8000
Approximate date of commencement of proposed sale to public: From time to time
after the effective date of this Registration Statement, as determined by the
Registrant.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act or until this Registration Statement shall become effective
on such date as the Commission, acting pursuant to said Section 8(a), may
determine.
PROSPECTUS
SUBJECT TO COMPLETION, DATED AUGUST 26, 2004
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THE
SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
EXABYTE CORPORATION
71,397,047 COMMON SHARES
This prospectus covers 71,397,047 shares of Common Stock of Exabyte
Corporation that may be issued to the selling stockholders upon conversion of
the Series AA preferred stock, par value $.001, of Exabyte held by such
stockholders, as payment on dividends for the Series AA preferred stock or upon
exercise of warrants held by such stockholders. Each Selling Shareholder may
sell none, some or all of the shares that are subject to sale pursuant to this
prospectus.
The persons identified under the heading "Selling Stockholders", and any
other person who obtains the right to sell the shares of Common Stock under this
Registration Statement, may sell the shares registered on this Registration
Statement from time to time.
Each of the selling stockholders may sell the shares in private
transactions at negotiated prices. The selling stockholders may sell the shares
directly or through underwriters, brokers or dealers. Underwriters, brokers or
dealers may receive discounts, concessions or commissions from the selling
stockholders or from the purchasers, and this compensation might be in excess of
the compensation customary in the type of transaction involved. See "Plan of
Distribution".
We will not receive any proceeds from the sale of shares by the selling
stockholders. We will not be paying any underwriting commissions or discounts in
the offering of these shares. We will, however, be paying for certain expenses
incurred in the offering of the shares.
Our Common Stock is traded on the OTC Bulletin Board under the trading
symbol "EXBT." On August 20, 2004, the closing sale price of the Common Stock on
the OTC Bulletin Board was $0.66.
INVESTING IN THE SECURITIES INVOLVES CERTAIN RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 2.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved the securities to be issued under this
prospectus or determined if this prospectus is truthful or adequate. Any
representation to the contrary is a criminal offense.
The date of this prospectus is_______, 2004.
PROSPECTUS TABLE OF CONTENTS
Page
----
Summary Information and Risk Factors................................................ 1
(a) Prospectus Summary......................................... 1
(b) Overview of Exabyte........................................ 1
(c) Offering................................................... 1
(d) Cautionary Note about Forward-Looking Statements........... 2
(e) Risk Factors............................................... 2
Use of Proceeds..................................................................... 7
Selling Security Holders............................................................ 7
Plan of Distribution................................................................ 16
Description of Securities to be Registered.......................................... 17
Information with Respect to the Registrant:
(a) Description of Business.................................... 19
(b) Description of Property.................................... 31
(c) Legal Proceedings.......................................... 33
(d) Market Price of and Dividends on the Registrant's
Common Equity and Related Stockholder Matters.............. 33
(e) Financial Statements....................................... 34
(f) Selected Financial Data.................................... 35
(g) Supplementary Financial Information........................ 37
(h) Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 42
(i) Quantitative and Qualitative Disclosures about Market
Risk....................................................... 60
(j) Directors and Executive Officers........................... 62
(k) Executive Compensation..................................... 65
(l) Security Ownership of Certain Beneficial Owners
and Management............................................. 69
(m) Certain Relationships and Related Transactions............. 71
Validity of Securities.............................................................. 73
Experts ........................................................................... 73
Where You Can Find More Information................................................. 73
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SUMMARY INFORMATION AND RISK FACTORS
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this
prospectus. This summary does not contain all of the information that you should
consider before investing in our Common Stock. You should read the entire
prospectus carefully, especially the risks of investing in our Common Stock
discussed under "Risk Factors."
OVERVIEW OF EXABYTE
We design, manufacture and market a range of VXA(R) and MammothTape(TM)
tape drives, as well as VXA(R), MammothTape(TM) and LTO(TM) (Ultrium(TM))
automated tape libraries. We also provide our own brand of recording media and
provide worldwide service and customer support to our customers and end users.
We were incorporated in June 1985 under the laws of the State of Delaware, and
are based in Boulder, Colorado.
OFFERING
We have entered into the Securities Purchase Agreement ("Purchase
Agreement"), dated as of April 30, 2004, by and among Exabyte and certain
purchasers pursuant to which we issued and sold to the purchasers in a private
placement (a) 25,000 shares of Series AA preferred stock of the Company and (b)
warrants to purchase in the aggregate 7.5 million shares of our Common Stock
(the "Common Stock"). We received in the aggregate gross proceeds of $25 million
from this financing on May 3, 2004. Participants in the financing included a
group of institutional investors and existing Exabyte shareholders, and all of
these purchasers are listed as selling stockholders for purposes of this
Registration Statement. The Purchase Agreement is attached hereto as Exhibit
10.37 and incorporated herein by reference.
The Series AA preferred shares were priced at $1,000 per share and are
convertible into 1,000 Common shares at $1 per share. The warrants to purchase
Common Stock expire after five years and carry an exercise price of $1.00 per
Common share. The conversion and exercise prices are subject to certain
anti-dilution adjustments.
All of the Common Stock underlying the Series AA preferred shares, the
Company's estimate of Common Stock payable for dividends on the Series AA
preferred shares for a period of four years, and Common Stock underlying
warrants received pursuant to the Purchase Agreement and the Private Placement
Agreement with the placement agent are being registered hereby for resale by the
selling stockholders.
In addition, in connection with the issuance of the Series AA preferred
stock, all holders of the Company's previously outstanding Series H and Series I
preferred stock exchanged those shares and accumulated dividends through
December 31, 2004, for shares of the Series AA preferred stock on an
as-converted common stock equivalent basis. All common stock underlying the
Series AA preferred shares and common stock purchase warrants received in this
exchange by former Series H holders who may be considered affiliates and then
are not able to utilize SEC Rule 144(k) for resales (i.e., Meritage Equity Fund,
L.P., Meritage Equity Parallel Fund, L.P. and Meritage Entrepreneurs Fund, L.P.)
are also being registered hereby for resale.
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CAUTIONARY NOTE ABOUT FORWARD-LOOKING STATEMENTS
In addition to the historical information contained in this document, this
report contains forward-looking statements that involve future risks and
uncertainties. We may achieve different results than those anticipated in these
forward-looking statements. The actual results that we achieve may differ
materially from any forward-looking statements due to such risks and
uncertainties. Words such as "believes," "anticipates," "expects," "intends,"
"plans" and similar expressions are intended to identify forward-looking
statements, but are not the exclusive means of identifying such statements. You
should carefully consider the risks described below, and other factors as may be
identified from time to time in our filings with the Securities and Exchange
Commission or in our press releases. If any of these risks should actually
occur, our business, prospects, financial condition or results of operations
would likely suffer. In such case, the trading price of Exabyte Common Stock or
other securities could fall, and you may lose all or part of your investment. We
are not undertaking any obligation to update these risks to reflect events or
circumstances after the date of this report or to reflect the occurrence of
unanticipated events.
RISK FACTORS
General information about these risk factors.
Following is a discussion of certain risks that may impact our business
and the value of our common stock. If any of the following risks actually
occurs, our business could be harmed and the value of our common stock could
decrease and you may lose all or part of your investment. The risks and
uncertainties described below are not the only ones we face. Additional risks
and uncertainties not presently known to us, or that we currently see as
immaterial, may also harm our business. You should carefully consider the risks
described below.
You should read these risk factors together.
You should look at all of the risk factors in total. Some risk factors may
stand on their own. Some risk factors may affect (or be affected by) other risk
factors. For example, the risk factor relating to our possible inability to
properly forecast our customer demand would likely result in excess inventory,
which is another risk factor. You should not assume we have identified these
connections.
We may not update these risk factors in a timely manner.
Exabyte intends to periodically update and describe these and future risk
factors in reports filed with the Securities and Exchange Commission. However,
you should not assume that we will always update these and future risk factors
in a timely manner. We are not undertaking any obligation to update these risk
factors to reflect events or circumstances after the date of this Registration
Statement or to reflect the occurrence of unanticipated events.
We need additional funding to support or expand our operations.
We have incurred operating losses over the past several years. As a
result, we have taken various actions to raise cash, including the sales of
preferred stock during the period from 2001 through 2004, revisions to our bank
line of credit with overadvance guarantees in 2003 and entering into the Media
and Distribution Agreement with Imation Corp. ("Imation") in November 2003.
However, we may require additional external funding to support and expand our
operations. Such funding, if available, may not be available on attractive
terms.
The uncertainty regarding our liquidity may affect the willingness of customers
and suppliers to deal with us which would have a material adverse effect on our
results of operations.
As a result of our lack of liquidity, the report of our former independent
registered public accounting firm on our consolidated financial statements, as
of and for the year ended January 3, 2004, contained an explanatory paragraph
regarding the uncertainty relating to our ability to continue as a going
concern. Ongoing concerns about our financial condition have impacted our
dealings with third
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parties, such as customers, suppliers and creditors, and any such concerns could
have a material adverse effect on our business and results of operations in the
future.
Our limited available cash could negatively impact our revenue if it impedes our
ability to obtain inventory and finished goods in a timely manner.
In 2002 and the first six month of 2003, we experienced liquidity
constraints which affected our ability to pay our vendors and suppliers for
products and meet our overall contractual obligations. This situation caused our
vendors to restrict shipments of key components we needed to build and sell our
products, including our media products. Although our liquidity improved
significantly as a result of our recent sale of preferred stock, future
liquidity constraints could prevent us from making timely payments to our
suppliers, which could restrict our ability to obtain products and meet our
customers' demands. This situation would materially and adversely impact our
revenue, results of operations and financial and competitive condition.
If we are unable to expand existing OEM customer relationships and develop new
OEM customers for our VXA products our business may not be successful.
Our product revenue depends heavily on OEM qualification, adoption and
integration. OEM sales are a key component of our revenue, and many reseller and
smaller OEM customers delay their orders until larger OEMs adopt and integrate
our products. We have established a number of relationships with OEM customers
for our VXA products, but the revenue from these OEMs has not grown as rapidly
as necessary for us to be profitable. Our competitive position and ability to
achieve future profitable operations may be negatively impacted unless we are
able to establish additional relationships with OEM customers and sell increased
volumes of our VXA products to these customers.
We may not achieve profitable operations unless we are able to decrease our
direct product costs.
We need to improve our gross margins and at the same time sell more of our
VXA products to OEM customers who generally pay lower prices than other
customers. In order to lower our product cost, we must either revise existing
supply agreements or transition our outsourced manufacturing to other suppliers,
or relocate such manufacturing to lower cost geographic locations. Although
certain of these actions have been completed and others are in process, all of
the actions necessary to decrease our costs to the appropriate levels have not
been completed. Any transition to a new outsourcing manufacturer or location
involves the risk of interruption of product supply and delays in meeting our
customers' demands.
We will not achieve profitability unless our media revenue is maintained or
increased.
We now sell all of our proprietary media products to our exclusive distributor,
Imation. Our sales prices to Imation are less than the prices we previously
realized for these products. As a result of these decreased prices, we must sell
a higher volume of media products to realize similar or increased revenue and
gross margins, and we depend on Imation to maintain or increase sales levels of
our media products.
We are subject to significant risks regarding foreign operations and
fluctuations in foreign currency.
Many of our key components and products are manufactured overseas in
countries such as Japan, Germany, China, Singapore, and Malaysia,. Because we
depend on foreign sourcing for our key components, products and subassemblies,
our results of operations may be materially affected by:
- fluctuations in foreign currencies versus the U.S. dollar;
- reduced intellectual property protections;
- foreign government regulations;
- foreign tax regulations;
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- foreign exchange control regulations;
- import/export restrictions;
- foreign economic instability;
- political instability; and
- tariffs, trade barriers and other trade restrictions by the
U.S. government in products or components shipped from or to
foreign sources.
In addition to the above factors, the sale of our products to domestic
federal or state agencies may be limited by the Buy America Act or the Trade
Agreement Act to the extent that we incorporate components produced overseas
into our products.
Certain supply agreements and a note payable to a supplier have been
denominated in the yen at fixed conversion rates. In addition, our foreign
subsidiaries incur significant operating costs that are payable in foreign
currencies. Although we have recently entered into an agreement with our primary
supplier of drive products that now provides for purchases to be made in U.S.
dollars, foreign currency fluctuations will continue to affect our results of
operations due to liabilities that continue to be payable in foreign currencies.
Our manufacturers may be unable to meet our product demand, implement product
engineering changes on a timely basis, or produce product at a commercially
reasonable cost which would have a material adverse effect on our business and
results of operations.
We currently outsource all of our manufacturing processes. Outsourcing our
manufacturing to a new third party takes many months and, due to the time and
expense involved and the inability to easily move the manufacturing to another
party or location, we heavily depend on our existing and proposed third party
manufacturers for our products. If our manufacturers cannot meet our product
demand, or cannot or will not implement product changes on a timely basis, we
would be unable to fill customer orders and our results of operations and
financial condition would be adversely impacted. In addition, should our
manufacturers be unable to produce our products at a commercially economic cost
to us, our margins would be negatively impacted. Our dependence on third party
manufacturers can also adversely affect our ability to negotiate the terms of
our future business relationships with these parties.
Our revenue is concentrated with a limited number of customers and the loss of a
single customer could have a material adverse effect on our results of
operations.
In 2003, our four largest customers accounted for 41% of our revenue, and
for the first six months of 2004, our five largest customers, including Imation,
accounted for 73% of our total revenue. We do not require minimum purchase
obligations from our customers, and they may also cancel or reschedule orders at
any time, prior to shipment, without significant penalty. Losing one or more key
customers would adversely affect our results of operations.
Our dependencies on sole-source suppliers may affect our control over delivery,
quantity, quality and cost of products.
We obtain all the components used by our outsourced third-party
manufacturers to make our products from third parties, and we rely heavily on
sole-source suppliers (one supplier providing us with one or more components) to
develop and/or manufacture critical components for our tape drives or libraries.
A shortage of any component would directly affect the ability of our
manufacturers to manufacture the product and therefore our ability to obtain
product to sell to our customers. In addition, by relying on sole-source
suppliers, we have limited control over many component items, including:
- delivering components on schedule;
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- manufacturing a high volume of components;
- maintaining the highest possible product quality when
manufacturing; and
- managing manufacturing costs.
Managing our inventory levels is important to our cash position and results of
operations.
Excessive amounts of inventory reduces our cash available for operations
and may result in charges for excess or obsolete materials. Inadequate inventory
levels may make it difficult for us to meet customer product demand, resulting
in decreased revenue. In the past we have experienced charges and write-downs
for excess and obsolete inventory. An inability to forecast future product
revenue or estimated life cycles of products may result in inventory related
charges that would negatively affect our results of operations and financial
condition.
The storage backup market is very competitive and such competition may cause us
to decrease our product pricing or affect our market share.
Many of our current and potential competitors have significantly greater
financial, technical, and marketing resources than us. We can expect our
competitors to aggressively market helical scan, mini cartridge, half-inch
cartridge, optical or other storage product technologies. These technologies may
be equivalent or superior to our own technologies, or may render some of our
products non-competitive or obsolete. In order to compete under these pressures,
we must adapt our technologies to competitive changes affecting speed, capacity
and costs of storage products, including price erosion.
Technology typically changes and advances quickly in the high technology
industry. In order to successfully compete in this industry, our future products
must apply and extend our current technology, as well as keep pace with new
technology developments. Factors which impact our ability to compete include:
- rapid development of tape drive technologies;
- customer and OEM adoption of VXA and MammothTape technology;
- integration of our VXA and MammothTape technologies into a
compelling tape drive platform;
- compatibility of tape drives to other data storage products;
- data storage density;
- data transfer rate;
- financial viability;
- customer confidence and familiarity;
- product reliability; and
- price.
If any new technology provides users with similar or increased benefits
than tape, tape technology could become obsolete.
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Our proprietary rights may not be fully protected which may adversely affect our
ability to use such technology and, as a result, our results of operations.
Although we file patent applications for our products when appropriate,
patents may not result from these applications, or they may not be broad enough
to protect our technology. Other parties may also challenge, invalidate or
circumvent our patents. Occasionally, third parties ask us to indemnify them
from infringement claims and defending these infringement claims may result in
long and costly litigation, which could potentially invalidate a patent. We may
attempt to secure a license from third parties to protect our technology but
cannot assure that we would succeed. Much of our third party manufacturing
utilizes proprietary technology, and we may extend licenses of this technology
to our third party manufacturers. However, we cannot assure that our third party
manufacturers will adhere to the limitations or confidentiality restrictions of
their license. Also, some foreign laws may not fully protect our intellectual
property rights. This may adversely affect our ability to use such technology
and, as a result, our results of operations.
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USE OF PROCEEDS
We will not receive any proceeds from the sale of the shares of our Common
Stock by the selling stockholders.
SELLING SECURITY HOLDERS
SELLERS AND BENEFICIAL OWNERSHIP
The table below sets forth the number of shares of Common Stock that may
be offered from time to time by each selling stockholder pursuant to this
prospectus upon conversion of Series AA shares, receipt of dividends in common
stock or exercise of warrants. The number of shares are as of June 15, 2004. The
table also shows the number of shares of Common Stock beneficially owned by each
selling stockholder and the number of shares of Common Stock that would be
beneficially owned by a selling stockholder if that selling stockholder sells
all of the shares of Common Stock offered by that selling stockholder under this
prospectus.
Each selling stockholder named below, any pledgee or donee of the selling
stockholder, and any person who may purchase shares covered by this prospectus
from the selling stockholder in a private transaction in which the selling
stockholder's registration rights are assigned to the person, are referred to in
this prospectus as "selling stockholders."
Each of the selling stockholders will determine the number of shares that
may be sold by the selling stockholder. The selling stockholders may sell all,
some, or none of the shares that are subject to sale pursuant to this
prospectus. The selling stockholders may sell, transfer, or otherwise dispose
of, at any time or from time to time, shares of stock beneficially owned by them
in transactions exempt from the registration requirements of the Securities Act
of 1933, as amended. We cannot provide you with an estimate of the number of
shares that a selling stockholder will hold in the future or upon the
termination of the offering. Information concerning the selling stockholders may
change from time to time and any changed information will be set forth in
supplements to this prospectus if and when necessary.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission that consider shares to be beneficially owned
by any person who has voting or investment power with respect to the shares.
Common stock subject to options or conversion rights that are currently
exercisable or exercisable within 60 days after June 15, 2004 are considered to
be outstanding and to be beneficially owned by the person holding the options or
conversion rights for the purpose of computing the percentage ownership of a
person in the table, but are not treated as outstanding for the purpose of
computing the percentage ownership of any other person.
Material relationships between the Company and Meritage Private Equity
Fund, L.P., Meritage Private Equity Parallel Fund, L.P., Meritage Entrepreneurs
Fund, L.P., Millennial Holdings LLC, The Millennial Fund and The Tankersley
Family Limited partnership are described in the "Directors and Executive
Officers" and "Security Ownership of Certain Beneficial Owners and Management"
sections of this registration statement.
C.E. Unterberg, Towbin is a registered broker-dealer, but is not acting as
an underwriter in the offering of shares covered by this prospectus. C.E.
Unterberg, Towbin has indicated to the Company that, at the time it received its
shares and warrants from the Company as compensation for its placement services,
it had no agreements, understandings or arrangements with any other persons,
either directly or indirectly, to dispose of such securities.
Of the following Selling Stockholders listed in the table below, Thomas
Unterberg, Crestview Capital Master, LLC, Enable Growth Partners, SF Capital
Partners Ltd., are affliates of broker-dealers but have indicated to the Company
that each acquired the Series AA Shares in the ordinary course of business, and
at the time of the acquisition of the Series AA Shares, had no agreements,
understandings or arrangements with any other persons, either directly or
indirectly, to dispose of the securities.
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Following is a description of material transactions and relationships
between the Company and each of the selling stockholders during the past three
years. The following description of the Series AA Shares and transactions is
qualified by reference to the transaction documents attached as exhibits, which
are incorporated herein by reference. Stockholders desiring a more complete
understanding of these securities and the transaction are urged to review all of
the attached exhibits.
Merger and Series H Issuance
On November 9, 2001, Ecrix Corporation merged into a subsidiary of
Exabyte, and we issued a total of 10,000,000 shares of Exabyte common stock to
the former Ecrix stockholders. Additionally, in conjunction with merger, certain
investors of Ecrix purchased 9,650,000 shares of new Series H preferred stock of
Exabyte at $1.00 per share. These transactions were approved by our
stockholders. In the agreement for the Ecrix merger, we agreed that three
persons designated by Ecrix would be nominated for election to the Exabyte
board. As a result, Juan A. Rodriguez, G. Jackson Tankersley, and William J.
Almon, Sr. were elected to the Exabyte board. The vacancy created by Mr. Almon's
resignation in 2002 was filled by John R. Garrett in 2003. Exabyte also agreed
that Exabyte's board would continue to include three directors (or such greater
number of directors as shall constitute the maximum number of members that
represent a numerical minority of the board) who are nominated by the Ecrix
designees. Upon the death, resignation or removal of any Ecrix designee, Exabyte
will cause the vacancy to be filled by a subsequent designee recommended by the
remaining Ecrix designees then serving on the board. However, the total number
of directors that may be designated by the Ecrix designees is subject to the
following.
If at any time the holders of Series H preferred stock beneficially own
less than 30% of the voting power of all classes of Exabyte's voting securities,
the number of directors that Exabyte is obligated to include on the board of
directors will be reduced so that the number of these designees expressed as a
percentage of the entire board of directors is approximately equal to the
percentage of the outstanding voting power then beneficially owned by the
holders of Series H preferred stock rounded to the nearest whole directorship
but in any event not a majority; provided, that if the holders of Series H
preferred stock beneficially own less than 10% of the outstanding voting power
of all classes of Exabyte's voting securities, the number of Ecrix designees is
zero.
Series I Issuance
On May 17, 2002 we entered into the Series I preferred stock purchase
agreement with a number of purchasers. As amended, the agreement provided for
the sale of a total of 8,400,000 shares of Series I preferred stock at $1.00 per
share. The purchasers of Series I preferred stock included Meritage Private
Equity Fund, L.P. and SWIB, both of which are significant stockholders of
Exabyte. The purchasers of Series I preferred stock also included Mr. Ward and
an entity related to Mr. Rodriguez.
Under the terms of the Series I purchase agreement, Exabyte enlarged its
board of directors to a total of eight, and Meritage Private Equity Fund, L.P.,
was permitted to designate the new director. Meritage previously had a
representative on the board as a result of the merger of Ecrix Corporation into
an Exabyte subsidiary in November 2001.
Bank Guarantees
In April 2003, the Company entered into a Third Modification Agreement of
its line of credit agreement with Silicon Valley Bank ("SVB"). In connection
with the Third Modification, SVB notified the Company that it was in an "over
advance" state with respect to its line of credit, and that, in order for SVB to
continue to allow the Company to borrow under the line, the Company was required
to cause Tom Ward, the Company's Chief Executive Officer, and Meritage Private
Equity Funds, L.P., a significant beneficial owner (together the "Guarantors"),
to guarantee up to a maximum of $2,500,000 (with Mr. Ward and Meritage
guaranteeing 10% and 90%, respectively, of the amount) for advances in excess of
the Company's credit limit (the "Guaranties"). The Company, through an
independent committee of its Board, negotiated agreements with the Guarantors,
whereby the Guarantors agreed to such a guarantee in exchange for a specific
number of shares of the Company's common stock, as discussed below. In addition,
SVB required that each of the Guarantors enter into a subordination
8
agreement whereby each Guarantor agreed to subordinate to SVB: (1) all of the
Company's present and future indebtedness and obligations to the Guarantor; and
(2) all of the Guarantor's present and future security interests in the
Company's assets and property. Additional guaranties for $250,000 of excess
borrowings from other guarantors were obtained in July 2003 under similar terms.
As consideration for the Guaranties, the Company issued to the Guarantors
(pro-rata) 25,000,000 shares of its common stock on April 21, 2003, 12,500,000
shares on July 15, 2003, 8,793,252 shares on September 15, 2003, and 3,706,748
shares on March 11, 2004. During July 2003, the Company entered into agreements
with two additional shareholders to guarantee an additional $250,000 of
borrowings from SVB in exchange for 2,500,000 common shares issued in July and
an additional 1,500,000 shares issued in October 2003. The Company determined
the fair value of all of the shares based on the market price of the Company's
stock on the date the shares were earned by the Guarantors, and recorded
$10,146,000 of stock-based interest expense during 2003. All of the Guaranties
were terminated in November 2003. The excess borrowing availability was
substantially utilized by the Company during the period of time that the
Guaranties were in effect.
Series AA Issuance
On May 3, 2004, the following related parties purchased the number of
shares of Series AA preferred stock and warrants following their name pursuant
to the Purchase Agreement as described below:
SERIES AA COMMON SHARES
NAME SHARES UNDERLYING WARRANTS
Meritage Entrepreneurs Fund, L.P. 80 24,000
Meritage Private Equity Fund, L.P. 4,384 1,315,200
Meritage Private Equity Parallel Fund, L.P. 536 160,800
The Millennial Fund 50 15,000
Millennial Holdings LLC 100 30,000
Tankersley Family Limited Partnership 50 15,000
On April 30, 2004, Exabyte entered into the Purchase Agreement pursuant to
which the Company issued and sold to the purchasers in a private placement (a)
25,000 shares of Series AA preferred stock of the Company and (b) warrants to
purchase in the aggregate 7.5 million shares of Common Stock. The Company
received in the aggregate gross proceeds of $25 million from this financing on
May 3, 2004. Participants in the financing included a group of institutional
investors and existing Exabyte shareholders.
The Series AA preferred shares were priced at $1,000 per share and are
convertible into 1,000 Common shares at $1 per share. The warrants to purchase
Common Stock expire after five years and carry an exercise price of $1.00 per
Common share. The conversion and exercise prices are subject to certain
anti-dilution adjustments.
(1) Series AA Exchange
In conjunction with the Purchase Agreement, the Company also entered into
Exchange Agreements with all of the then existing holders of the Company's
Series H and Series I preferred stock, pursuant to which such holders exchanged
their preferred shares for Series AA preferred shares. The Series H preferred
shares were converted into Series AA preferred shares on a one share for one
share basis. The Series I preferred shares were converted as follows: one Series
AA preferred share for each share of Common Stock the Series I holder would have
received upon conversion, including the accrual of all dividends on the Series I
shares through December 31, 2004. Under the Exchange Agreements, the Company
issued a total of 19,909 Series AA Shares and warrants to purchase 5,972,712
shares of Common Stock. These warrants have the same terms as those issued to
the Purchasers.
9
The following related parties exchanged the number of shares indicated
with the Company:
SERIES H SHARES SERIES I SHARES SERIES AA
PARTY EXCHANGED EXCHANGED SHARES RECEIVED
Meritage Private Equity Fund, L.P. 3,896,890 2,411,200 13,736.000
Meritage Private Equity Parallel Fund, L.P. 476,444 294,800 1,679.345
Meritage Entrepreneurs Fund, L.P. 71,111 44,000 250.649
Millenial Holdings LLC 76,881 46,758 281.226
The Millenial Fund 21,773 13,242 101.000
Tankersley Family Limited Partnership 32,884 20,000 127.516
Tom W. Ward 1,320,000 2,945.717
(2) Terms of the Series AA
(a) Dividends
Holders of Series AA Shares are entitled to receive cumulative dividends
on the Series AA Shares at the rate per share of 5% per annum until the fourth
anniversary of the original issue date, 8% per annum from the fourth anniversary
of the original issue date until the fifth anniversary of the original issue
date, 10% per annum from the fifth anniversary of the original issue date until
the sixth anniversary of the original issue date and 12% per annum thereafter,
payable quarterly and on any conversion date or redemption date. The first
dividend payment date is September 1, 2004.
The Company is required to pay dividends in cash or Common Stock depending
on whether funds are legally and contractually available for the payment of
dividends and certain equity conditions are met. A detailed description of the
dividend payment option is described in "Market Price of and Dividends on
Exabyte's Common Equity and Related Stockholder Matters" below.
(b) Forced Conversion and Conversion Limitations
Upon the market price of the Company's shares achieving specified levels
and compliance with other requirements, the Company has the right to force
holders of Series AA Shares to convert their shares into Common Stock, except
that, if a holder has voluntarily elected to limit its beneficial ownership
amount, the Company may not force a conversion. If the volume weighted average
price, called the VWAP, for 20 consecutive trading days exceeds $4.00 (subject
to adjustment for reverse and forward stock splits, stock dividends and other
similar transactions) during the four year period following the original issue
date or $3.00 (subject to the same adjustments noted above) during the period
beginning on the four year anniversary of the original issue date until there
are no longer any Series AA Shares outstanding, the Company may force the
holders to convert all or part of the then outstanding shares of Series AA
Shares. The Company may only effect such a forced conversion if all of the
Equity Conditions (defined below in "Market Price of and Dividends on Exabayte's
Common Equity and Related Stockholder Matters") have been met. If a holder has
voluntarily elected to limit its beneficial ownership amount, the Company may
only force such a holder to convert that number of shares that would result in
such holder owning 9.99% of the Company's outstanding Common Stock, after giving
effect to such conversion. If Series AA Shares remain outstanding as a result of
such voluntary election to limit beneficial ownership, the Company may force
conversion of such Series AA Shares up to the 9.99% limitation on each 75th day
anniversary of the date that notice of the Company's forced conversion is sent
to holders of Series AA Shares. Under the terms of the Series AA Shares, each
such limited holder must us its best efforts to reduce its beneficial ownership
of Common Stock to enable all of its remaining unconverted Series AA Shares to
be converted on the next 75th day anniversary of the forced conversion notice.
(c) Voting Rights
Unless otherwise required by law, the Series AA Shares have no voting
rights. However, so long as any Series AA Shares are outstanding, the Company
may not, without the affirmative vote of
10
each of the holders of Series AA Shares holding at least 1,000 Series AA Shares
then outstanding, (a) alter or change adversely the powers, preferences or
rights given to the Series AA Shares or alter or amend the Certificate of
Designation, (b) authorize or create any class of stock ranking as to dividends,
redemption or distribution of assets upon a Liquidation senior to or otherwise
pari passu with the Series AA Shares, (c) amend the Company's certificate of
incorporation or other charter documents so as to affect adversely any rights of
the holders of Series AA Shares, (d) increase the authorized number of shares of
Series AA Shares, or (e) enter into any agreement with respect to the foregoing.
(d) Liquidation
Upon any liquidation, dissolution or winding-up of the Corporation,
whether voluntary or involuntary, the holders of Series AA Shares are entitled
to receive out of the assets of the Company for each Series AA Share an amount
equal to the stated value per share plus any accrued and unpaid dividends
thereon and any other fees or liquidated damages owing thereon before any
distribution or payment may be made to the holders of any Junior Securities. If
the assets of the Company are insufficient to pay in full such amounts, then the
entire assets to be distributed will be distributed among the holders of Series
AA Shares ratably.
(e) Redemption
Upon the occurrence of certain triggering events, holders of the Series AA
Shares have the right, exercisable at the sole option of such holder to cause
the Company to redeem the Series AA Shares. With respect to certain triggering
events (described below and all of which are conditional and under the sole
control of the Company) the holders may require the Company to redeem all of the
Series AA Shares then held by such holder for a redemption price, in cash, equal
to the Triggering Redemption Amount. With respect to other triggering events the
Company has the option to either (A) convert all of the Series AA Shares then
held by such holder into a number of shares of Common Stock equal to the
Triggering Redemption Amount divided by 80% (except that, if the shares issued
are registered for resale, 90%) of the average of the VWAP for the 10 days
immediately prior to the date of such election or (B) increase the dividend on
all of the outstanding Series AA Shares held by such holder to equal 12% per
annum thereafter.
The triggering events that permit holders to require the Company to redeem
Series AA Shares are:
- with respect to a holder, The Company's failure to deliver
certificates for the Common Stock received upon conversion of
the Series AA Shares within 10 trading after the required
delivery date, or the Company giving written notice of its
intention not to comply with requests for conversion;
- with respect to a holder, if the Company fails to pay the full
amount of cash due pursuant to a Buy-In (which occurs if the
Company fails to deliver certificates for shares received upon
conversion and a holder is forced to purchase Common Stock in
an open market transaction, or otherwise, in order to deliver
such shares in satisfaction of a sale by such holder) within
10 days after notice thereof, or if the Company fails to pay
all amounts owed to a holder on account of an Event (which
concerns various ways in which the Company may fail to have an
effective registration statement covering the shares which are
the subject of this Registration Statement) within five days
of the due date of such amount;
- with respect to a holder, if the Company fails to observe or
perform or otherwise breaches any agreement, covenant or
warranty contained in the Purchase Agreement or any agreements
entered into in connection with the Purchase Agreement, in any
case that materially and adversely affects the holder,
following a 30-day cure period;
- the Company redeems more than a de minimus number of junior
securities;
- a voluntary Bankruptcy Event occurs;or
11
- the Company fails to submit an application to list the Common
Stock on an alternative Trading Market within 10 days of the
Common Stock failing to be listed or quoted for trading on any
Trading Market for more than 25 consecutive trading days, or
the failure of the Company to use commercially reasonable
efforts to obtain such listing after the application is filed
with an alternative Trading Market.
The triggering events that require the Company to either convert the
Series AA Shares or increase the dividend payments with respect to the Series AA
Shares of a holder are:
- the failure to have an effective registration statement
covering the shares issuable upon conversion of the Series AA
Shares within 240 days after the original issue date of the
Series AA Shares;
- a lapse in effectiveness of the Registration Statement for
more than an aggregate of 90 calendar days during any 12 month
period or the holder being prohibited from reselling its
securities that are included in the Registration Statement for
more than an aggregate of 90 calendar days during any 12 month
period (which in either case need not be consecutive calendar
days);
- the failure of the Company to have a sufficient number of
authorized and unreserved shares of Common Stock to issue upon
conversion of the Series AA Shares;
- an involuntary Bankruptcy Event occurs;
- the Common Stock fails to be listed or quoted for trading on
any Trading Market for more than 25 consecutive trading days;
or
- the Company becomes a party to a change of control transaction
that is not a merger, sale of substantially all assets or
reclassification or exchange of the Common Stock in which
there is a successor to the Company or the Company is the
surviving entity immediately following such transaction.
(f) Registration Rights
The Purchasers of Series AA Shares entered into the Registration Rights
Agreement with the Company pursuant to which the Company is required to register
the Purchaser's Series AA Shares for resale with the Securities and Exchange
Commission and maintain such registration until shares are sold or can be freely
resold under an applicable SEC rule. The Company must pay liquidated damages if
the Registration Statement is not effective by the 120th day following the
closing for the sale of the Series AA Shares and upon the occurrence of certain
other events.
12
SELLING STOCKHOLDER BENEFICIAL OWNERSHIP OF COMMON STOCK
COMMON STOCK COMMON STOCK COMMON STOCK
OWNED BEFORE COMMON STOCK OWNED AFTER OWNERSHIP AFTER
SELLING STOCKHOLDER(4) OFFERING TO BE OFFERED (1) OFFERING OFFERING (%)(2)
---------------------- -------- ----------------- -------- ---------------
Builder Investment Partnership 1,665,842 165,842 1,500,000 1.38%
Crestview Capital Master, LLC 2,487,634 2,487,634 0 *
Enable Growth Partners 829,211 829,211 0 *
Jon D. Gruber & Linda W. Gruber 507,179 232,179 275,000 *
Gruber & McBaine International 288,565 288,565 0 *
Hexagon Investments, LLC 1,658,422 1,658,422 0 *
Islandia L.P. 8,292,114 8,292,114 0 *
Lagunitas Partners L.P. 1,137,678 1,137,678 0 *
Langley Partners, L.P. 829,211 829,211 0 *
Meritage Entrepreneurs Fund, L.P. 1,201,282 415,681 785,601 *
Meritage Private Equity Fund, L.P. 65,830,227 22,779,346 43,050,881 32.86%
Meritage Private Equity Parallel Fund, L.P. 8,048,583 2,785,063 5,263,520 4.74%
Midsummer Investment, Ltd. 9,950,537 9,950,537 0 *
The Millennial Fund 95,133 82,921 12,212 *
Millennial Holdings LLC 195,695 165,842 29,853 *
Omicron Master Trust 2,487,634 2,487,634 0 *
SF Capital Partners Ltd. 1,658,422 1,658,422 0 *
Tankersley Family Limited Partnership 104,325 82,921 21,404 *
Turkel Investments FBO Donald Wright 82,921 82,921 0 8
Turkel Partners, L.P. 414,605 414,605 0 *
Thomas I. Unterberg 248,763 248,763 0 *
Valley Ventures II, L.P. 414,605 414,605 0 *
Valley Ventures III, L.P. 1,658,422 1,658,422 0 *
C.E. Unterberg, Towbin 349,000 349,000 0 *
TOTAL(3) 59,497,539
*Less than one percent
13
(1) Includes the following common shares underlying the conversion of
Series AA Preferred Stock:
Common Shares Issuable
upon Conversion of AA
Investor Name Preferred Shares
------------- ----------------
Builder Investment Partnership 100,000
Crestview Capital Master, LLC 1,500,000
Enable Growth Partners 500,000
Gruber & McBaine International 174,000
Hexagon Investments, LLC 1,000,000
Islandia L.P. 5,000,000
Jon D. Gruber & Linda N. Gruber 140,000
Lagunitas Partners, L.P. 686,000
Langley Partners, L.P. 500,000
Meritage Entrepreneurs Fund, L.P. 250,649
Meritage Private Equity Fund, L.P. 13,735,547
Meritage Private Equity Parallel Fund, L.P. 1,679,345
Midsummer Investment, Ltd. 6,000,000
Millennial Holdings LLC 100,000
Omicron Master Trust 1,500,000
SF Capital Partners Ltd. 1,000,000
Tankersley Family Limited Partnership 50,000
The Millennial Fund 50,000
Tom I. Unterberg 150,000
Turkel Investments FBO Donald Wright 50,000
Turkel Partners, L.P. 250,000
C.E. Unterberg, Towbin 0
Valley Ventures II, L.P. 250,000
Valley Ventures III, L.P. 1,000,000
----------
TOTAL 35,665,541
Includes the following common shares underlying the exercise of warrants
issued pursuant to the Series AA Purchase Agreement:
Common Shares
Investor Name Underlying Warrants
------------- -------------------
Builder Investment Partnership 30,000
Crestview Capital Master, LLC 450,000
Enable Growth Partners 150,000
Gruber & McBaine International 52,200
Hexagon Investments, LLC 300,000
Islandia L.P. 1,500,000
Jon D. Gruber & Linda N. Gruber 42,000
Lagunitas Partners, L.P. 205,800
Langley Partners, L.P. 150,000
Meritage Entrepreneurs Fund, L.P. 75,194
Meritage Private Equity Fund, L.P. 4,120,664
Meritage Private Equity Parallel Fund, L.P. 503,803
Midsummer Investment, Ltd. 1,800,000
Millennial Holdings LLC 30,000
Omicron Master Trust 450,000
SF Capital Partners Ltd. 300,000
Tankersley Family Limited Partnership 15,000
The Millennial Fund 15,000
Tom I. Unterberg 45,000
Turkel Investments FBO Donald Wright 15,000
14
Turkel Partners, L.P. 75,000
C.E. Unterberg, Towbin 349,000
Valley Ventures II, L.P. 75,000
Valley Ventures III, L.P. 300,000
----------
TOTAL 11,048,661
Includes the following common shares issuable upon the payment of
dividends for a four-year period, assuming a 5% interest rate and issuance of
common stock at $0.558 per share:
Common Shares Issuable
Investor Name upon Payment of Dividends
------------- -------------------------
Builder Investment Partnership 35,842
Crestview Capital Master, LLC 537,634
Enable Growth Partners 179,211
Jon D. Gruber & Linda N. Gruber 50,179
Gruber & McBaine International 52,365
Hexagon Investments, LLC 358,422
Islandia L.P. 1,792,114
Lagunitas Partners, L.P. 245,878
Langley Partners, L.P. 179,211
Meritage Entrepreneurs Fund, L.P. 89,838
Meritage Private Equity Fund, L.P. 4,923,135
Meritage Private Equity Parallel Fund, L.P. 601,915
Midsummer Investment, Ltd. 2,150,537
The Millennial Fund 17,921
Millennial Holdings LLC 35,842
Omicron Master Trust 537,634
SF Capital Partners Ltd. 358,422
Tankersley Family Limited Partnership 17,921
Turkel Investments FBO Donald Wright 17,921
Turkel Partners, L.P. 89,605
Tom I. Unterberg 53,763
Valley Ventures II, L.P. 66,137
Valley Ventures III, L.P. 264,550
C.E. Unterberg, Towbin 0
----------
TOTAL 12,783,337
All common stock underlying the Series AA preferred shares and common
stock purchase warrants received in this exchange by former Series H holders who
may be considered affiliates and then are not able to utilize SEC Rule 144(k)
for resales (i.e., Meritage Equity Fund, L.P., Meritage Equity Parallel Fund,
L.P. and Meritage Entrepreneurs Fund, L.P.) are included in the shares offered.
(2) Assumes, for a selling stockholder, only the acquisition and sale by
the selling stockholder of all shares offered by the selling stockholder. There
can be no assurance that any of the shares offered hereby will be sold.
(3) In accordance with the Registration Rights Agreement dated May 3,
2004, among the Company and the purchasers of Series AA preferred shares, the
Company is registering 120% of the securities listed in the table above which is
11,899,508 in excess of the total shares of common stock offered as shown in the
table, for a total of 71,397,047 shares. If any of these additional shares are
issued to any selling security holders, such additional shares will be shown in
a supplement to this prospectus.
15
(4) The following natural persons exercise sole or shared voting and/or
dispositive powers with respect the shares to be offered for resale by the
respective selling stockholders:
Persons with Power to Exercise
Selling Stockholder Voting/Dispositive Power
------------------- ------------------------
Builder Investment Partnership Allen A. Builder
C.E. Unterberg, Towbin Thomas I. Unterberg
Crestview Capital Master, LLC Stewart Flink
Richard Levy
Enable Growth Partners Mitch Levine
Gruber & McBaine International Jon D. Gruber
J. Patterson McBaine
Hexagon Investments, LLC Scott J. Reiman
Roy J. Reiman
Michael J. Hipp
Brian F. Fleischmann
Islanda, L.P. Richard O. Berner
Thomas R. Berner
Edgar R. Berner
Lagunitas Partners, L.P. Jon D. Gruber
J. Patterson McBaine
Langley Partners, L.P. Jeffrey Thorp
Meritage Enterpreneurs Fund, L.P. See explanation below in this note
Meritage Private Equity Fund, L.P. See explanation below in this note
Meritage Private Equity Parallel Fund, L.P. See explanation below in this note
Midsummer Investment, Ltd. See explanation below in this note
Millennial Holdings LLC G. Jackson Tankersley, Jr.
Omicron Master Trust See explanation below in this note
SF Capital Partners Ltd. Michael A. Roth
Brian J. Stark
Tankersley Family Limited Partnership See explanation below in this note
The Millenial Fund See explanation below in this note
Turkel Investments FOB Donald Wright Scott Turkel
Turkel Partners, L.P. Scott Turkel
Valley Ventures II, L.P. John M. Holliman, III
Greg E. Adkin
Valley Ventures III, L.P. Lawrence J. Aldrich
16
Meritage Investment Partners, LLC is the general partner of each of
Meritage Entrepreneurs Fund, L.P., Meritage Private Equity Fund, L.P., and
Meritage Private Equity Parallel Fund, L.P. (collectively, the "Meritage Funds")
and may be deemed to have voting and dispositive power over the shares which may
be offered for sale by the Meritage Funds. G. Jackson Tankersley, Jr. and Laura
I. Beller are the Managing Members of Meritage Investment Partners, LLC and may
be deemed to share voting and dispositive power over such shares but disclaim
beneficial ownership of such shares.
Midsummer Capital, LLC is the investment advisor to Midsummer Investment
Ltd. By virtue of such relationship, Midsummer Capital, LLC may be deemed to
have dispositive power over the shares owned by Midsummer Investment, Ltd.
Midsummer Capital, LLC disclaims beneficial ownership of such shares. Michel
Amsalem and Scott Kaufman have delegated authority from the members of Midsummer
Capital, LLC with respect to the shares of our Common Stock owned by Midsummer
Investment, Ltd. Messrs. Amsalem and Kaufman may be deemed to share dispositive
power over the shares of our Common Stock held by Midsummer Investment, Ltd.
Messrs. Amsalem and Kaufman disclaim beneficial ownership of such shares of
Common Stock, and neither person has any legal right to maintain such delegated
authority.
Omicron Capital, L.P., a Delaware limited partnership ("Omicron Capital"),
serves as investment manager to Omicron Master Trust, a trust formed under the
laws of Bermuda ("Omicron"), Omicron Capital, Inc., a Delaware corporation
("OCI"), serves as general partner of Omicron Capital, and Winchester Global
Trust Company Limited ("Winchester") serves as the trustee of Omicron. By reason
of such relationships, Omicron Capital and OCI maybe deemed to share dispositive
power over the shares of our Common Stock owned by Omicron, and Winchester may
be deemed to share voting and dispositive power over the shares of our Common
Stock owned by Omicron. Omicron Capital, OCI and Winchester disclaim beneficial
ownership of such shares of our Common Stock. Omicron Capital has delegated
authority from the board of directors of Winchester regarding the portfolio
management decisions with respect to the shares of Common Stock owned by Omicron
and, as of the date of the information set forth in the table above, Mr. Olivier
H. Morali and Mr. Bruce T. Bernstein, officers of OCI, have delegated authority
from the board of directors of OCI regarding the portfolio management decisions
of Omicron Capital with respect to the shares of Common Stock owned by Omicron.
By reason of such delegated authority, Messrs. Morali and Bernstein may be
deemed to share dispositive power over the shares of our Common Stock owned by
Omicron. Messrs. Morali and Bernstein disclaim beneficial ownership of such
shares of our Common Stock and neither of such persons has any legal right to
maintain such delegated authority. No other person has sole or shared voting or
dispositive power with respect to the shares of our Common Stock being offered
by Omicron, as those terms are used for purposes under Regulation 13D-G of the
Securities Exchange Act of 1934, as amended. Omicron and Winchester are not
"affiliates" of one another, as that term is used for purposes of the Securities
Exchange Act of 1934, as amended, or of any other person named in this
prospectus as a selling stockholder. No person or "group" (as that term is used
in Section 13(d) of the Securities Exchange Act of 1934, as amended, or the
SEC's Regulation 13D-G) controls Omicron and Winchester.
G. Jackson Tankersley, Jr. is the managing member of Millennial Holdings
LLC and sole general partner of Tankersley Family Limited Partnership and may be
deemed to possess voting and dispositive power over shares held by such
entities. Mr. Tankersley disclaims beneficial ownership of all such shares. The
Millennial Fund is not a separate legal entity, and Mr. Tankersley is the direct
beneficial of all shares held in that name.
PLAN OF DISTRIBUTION
Each selling stockholder of Common Stock and any of their pledgees,
assignees and successors-in-interest may, from time to time, sell any or all of
their shares of Common Stock on the Over-the-Counter Bulletin Board or any other
stock exchange, market or trading facility on which the shares are traded or in
private transactions. These sales may be at fixed, prevailing or negotiated
prices. A selling stockholder may use any one or more of the following methods
when selling shares. The selling stockholders will act independently of the
Company in making decisions with respect to the timing, manner and size of each
sale of the securities covered by this prospectus.
- ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
17
- block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the block
as principal to facilitate the transaction;
- purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
- an exchange distribution in accordance with the rules of the
applicable exchange;
- privately negotiated transactions;
- settlement of short sales entered into after the date of this
prospectus;
- broker-dealers may agree with the selling stockholders to sell a
specified number of such shares at a stipulated price per share;
- a combination of any such methods of sale;
- through the writing or settlement of options or other hedging
transactions, whether through an options exchange or otherwise; or
- any other method permitted pursuant to applicable law.
The selling stockholders may also sell shares under Rule 144 under the
Securities Act of 1933, as amended (the "Securities Act"), if available, rather
than under this prospectus.
Broker-dealers engaged by the selling stockholders may arrange for other
brokers-dealers to participate in sales. Broker-dealers may receive commissions
or discounts from the selling stockholders (or, if any broker-dealer acts as
agent for the purchaser of shares, from the purchaser) in amounts to be
negotiated. Each selling stockholder does not expect these commissions and
discounts relating to its sales of shares to exceed what is customary in the
types of transactions involved.
In connection with the sale of our Common Stock or interests therein, the
selling stockholders may enter into hedging transactions with broker-dealers or
other financial institutions, which may in turn engage in short sales of the
Common Stock in the course of hedging the positions they assume. The selling
stockholders may also sell shares of our Common Stock short and deliver these
securities to close out their short positions, or loan or pledge the Common
Stock to broker-dealers that in turn may sell these securities. The selling
stockholders may also enter into option or other transactions with
broker-dealers or other financial institutions or the creation of one or more
derivative securities which require the delivery to such broker-dealer or other
financial institution of shares offered by this prospectus, which shares such
broker-dealer or other financial institution may resell pursuant to this
prospectus (as supplemented or amended to reflect such transaction).
The selling stockholders and any broker-dealers or agents that are
involved in selling the shares may be deemed to be "underwriters" within the
meaning of the Securities Act in connection with such sales. In such event, any
commissions received by such broker-dealers or agents and any profit on the
resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act. Each selling stockholder has
informed us that it does not have any agreement or understanding, directly or
indirectly, with any person to distribute the Common Stock.
We are required to pay certain fees and expenses incurred by us incident
to the registration of the shares. We have agreed to indemnify the selling
stockholders against certain losses, claims, damages and liabilities, including
liabilities under the Securities Act, or to contribute with respect to payments
in connection with such liabilities.
Because selling stockholders may be deemed to be "underwriters" within the
meaning of the Securities Act, they will be subject to the prospectus delivery
requirements of the Securities Act. In addition, any securities covered by this
prospectus which qualify for sale pursuant to Rule 144 under the Securities Act
may be sold under Rule 144 rather than under this prospectus. Each selling
stockholder has advised us that they have not entered into any agreements,
understandings or arrangements with any underwriter or broker-dealer regarding
the sale of the resale shares. There is no underwriter or coordinating broker
acting in connection with the proposed sale of the resale shares by the selling
stockholders.
We agreed to keep this prospectus effective until the earlier of (i)
the date on which the shares may be resold by the selling stockholders without
registration and without regard to any volume limitations by reason of Rule
144(k) under the Securities Act or any other rule of similar effect or (ii) all
of the shares have been sold pursuant to the prospectus or Rule 144 under the
Securities Act or any other rule of similar effect. Our obligation to keep the
registration statement to which this prospectus
18
relates effective is subject to specified, permitted exceptions. In these cases,
we may suspend offers and sales of the securities pursuant to the registration
statement to which this prospectus relates. The resale shares will be sold only
through registered or licensed brokers or dealers if required under applicable
state securities laws. In addition, in certain states, the resale shares may not
be sold unless they have been registered or qualified for sale in the applicable
state or an exemption from the registration or qualification requirement is
available and is complied with.
Under applicable rules and regulations under the Exchange Act, any person
engaged in the distribution of the resale shares may not simultaneously engage
in market making activities with respect to our common stock for a period of two
business days prior to the commencement of the distribution. In addition, the
selling stockholders will be subject to applicable provisions of the Exchange
Act and the rules and regulations thereunder, including Regulation M, which may
limit the timing of purchases and sales of shares of our common stock by the
selling stockholders or any other person. We will make copies of this prospectus
available to the selling stockholders and have informed them of the need to
deliver a copy of this prospectus to each purchaser at or prior to the time of
the sale.
DESCRIPTION OF SECURITIES TO BE REGISTERED
AUTHORIZED CAPITAL STOCK
Our restated certificate of incorporation provides for authorized capital
stock of 350,000,000 shares of Common Stock, $.001 par value, and 30,000,000
shares of preferred stock, $.001 par value.
COMMON STOCK
The voting, dividend and liquidation rights of the holders of Common Stock
are subject to and qualified by the rights of holders of preferred stock of any
series as may be designated by the board of directors upon any issuances of the
preferred stock of any series.
Holders of the Common Stock are entitled to one vote for each share held
at all meetings of stockholders, including the election of directors. There is
no cumulative voting, and holders of the Common Stock do not have preemptive
rights.
Dividends may be declared and paid on the Common Stock from funds lawfully
available therefore as and when determined by the board of directors and subject
to any preferential dividend rights of any then outstanding preferred stock.
Upon dissolution or liquidation of the Company, whether voluntary or
involuntary, holders of Common Stock will be entitled to receive all assets of
the Company available for distribution, subject to any preferential rights of
any then outstanding preferred stock.
PREFERRED STOCK
Our board of directors is authorized to provide for the issuance of
preferred stock in one or more series and to fix the designation, preferences,
powers and relative, participating, optional and other rights, qualifications,
limitations and restrictions thereof, including the dividend rate, conversion
rights, voting rights, redemption price and liquidation preference and to fix
the number of shares to be included in any such series. Any preferred stock so
issued may rank senior to the Common Stock with respect to the payment of
dividends or amounts upon liquidation, dissolution or winding up, or both. In
addition, any such shares of preferred stock may have class or series voting
rights. We have issued and outstanding as of the date of this Registration
Statement 44,909.063 shares Series AA convertible preferred stock.
WARRANTS
We currently have outstanding warrants to purchase a total of 13,921,712
shares of Common Stock, of which 11,048,661 shares of Common Stock is included
in this registration statement. The warrants issued pursuant to the Series AA
preferred transaction expire after five years and carry an exercise price of
$1.00 per Common share. The exercise price is subject to certain anti-dilution
adjustments.
19
STAGGERED BOARD OF DIRECTORS
We have a staggered board of directors that is divided into three classes.
Directors serve for a term of three years each. A director may be removed for
cause by a majority of all of the outstanding shares of capital stock entitled
to vote generally in the election of directors. A director may only be removed
without cause by holders of at least 66 2/3% of all of the outstanding shares of
capital stock entitled to vote generally in the election of directors.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
Our certificate of incorporation expressly states that we have elected to
be governed by Section 203 of the Delaware General Corporation Law, which
prohibits a publicly held Delaware corporation from engaging in a "business
combination", as defined in clause (c)(3) of that section, with an "interested
stockholder", as defined in clause (c)(5) of that section, for a period of three
years after the date of the transaction in which the stockholder became an
interested stockholder.
STOCKHOLDERS MEETINGS
Only our Chairman of the Board, our President or a majority of our board
of directors may call a special meeting of our stockholders.
NO ACTION BY WRITTEN CONSENT
Our certificate of incorporation prohibits our stockholders from taking
any action by written consent in lieu of a meeting of stockholders.
LIMITATIONS ON LIABILITY OF OFFICERS AND DIRECTORS
Our certificate of incorporation limits the monetary liability of
directors to the fullest extent permitted by the Delaware General Corporation
Law ("DGCL").
Article 5 of our by-laws provides that to the fullest extent permitted
under the DGCL, Exabyte will indemnify its directors and executive officers,
including the advancement of expenses. The by-laws provide, however, that we are
not required to indemnify any director or executive officer in connection with
any proceeding initiated by such person against Exabyte or its directors,
officers, employees or agent, unless such indemnification is expressly required
by law, the proceeding was authorized by the Board of Directors or such
indemnification is provided by Exabyte in its sole discretion.
In addition, we have entered or will enter into contractual agreements
with all of our directors and executive officers whereby we agree to indemnify
them against any expenses, amounts paid in settlement or other amounts incurred
by them by reason of the fact that they were directors or officers of Exabyte.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to our directors, officers or controlling persons
pursuant to the foregoing provisions, we have been informed that in the opinion
of the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is therefore unenforceable.
CHANGE IN CONTROL
We have taken a number of actions that may deter a hostile takeover or
delay or prevent a change in control, including the following:
- classifying the board of directors into three classes;
- authorizing a significant amount of common and preferred stock
which we may issue without stockholder approval;
- authorizing the board of directors to determine voting rights
and other provisions of preferred stock;
20
- requiring that stockholder action take place at a meeting of
stockholders and not by written consent;
- requiring advance notice of stockholder proposals and director
nominations;
- providing that only the board of directors may increase the
authorized number of directors; and
- requiring that only our Chairman of the Board, President or a
majority of directors may call special stockholder meetings.
INFORMATION WITH RESPECT TO EXABYTE
DESCRIPTION OF BUSINESS
We design, manufacture and market a range of VXA(R) and MammothTape(TM)
tape drives, as well as VXA(R), MammothTape(TM) and LTO(TM) (Ultrium(TM))
automated tape libraries. We also provide our own brand of recording media and
provide worldwide service and customer support to our customers and end users.
We sell innovative tape storage products to our customers who have
indicated that they seek products that are easy to use and provide:
- Value;
- A high ratio of storage capacity to price;
- Speed; and
- Data reliability.
Our strategy is to offer a number of products to address a broad range of
these requirements.
We concentrate on the midrange application and database server market,
manufacturing tape backup and network storage solutions for small, medium and
large businesses. We provide cost-effective solutions incorporating VXA,
MammothTape and LTO(Ultrium) technologies. Our groundbreaking VXA Packet
Technology provides higher capacity, speed and data reliability than our
competition, while maintaining competitive prices.
We market our products through resellers, distributors and original
equipment manufacturers ("OEMs"). We have a worldwide network of OEMs,
distributors and resellers that share our commitment to value and customer
service, including partners such as IBM, HP, Fujitsu Limited, Fujitsu Siemens
Computers, Bull, Apple Computer, Toshiba, Logitec, Kontron, Imation, Tech Data,
Ingram Micro, CDW and Arrow Electronics.
We are managed by a team of executives with extensive experience leading
innovation in the data storage industry and driving growth in technology
companies. Details regarding our management team are provided at the end of this
Section.
1. Our Products
(1) VXA Packet Technology
We believe our VXA Packet Technology improves the design of tape storage
products, dramatically increasing their performance and reducing back-up storage
costs. VXA Packet Technology overcomes the limitations of conventional tape
storage technology by replacing mechanical components with digital technologies
that have been proven in a wide range of other mission-critical IT applications.
At a price that is comparable or even lower than any competitive tape drive in
its class, VXA Packet Drives provide:
21
- Significantly greater capacity;
- Superior speed;
- Superior data restore integrity; and
- Affordability.
(a) The Limitations of Conventional Tape Technology
Conventional tape storage technology, such as that used in linear and
helical scan tape drives, requires highly precise head-to-tape alignment.
Accurately recording and restoring data in long linear streams requires precise
control of the media as it passes over the head. Because of these limitations,
conventional tape storage solutions on the lower end of the price spectrum tend
to have limited data capacity, slow data transfer speeds, and less than
satisfactory restore integrity.
The complexity and fragility of these components have a number of negative
consequences including:
- Complex tracking requirements. Accurate read/write operations
in conventional tape storage technology depend on very precise
control of the tape drive head to sequentially follow the
geometry of each track on the tape media.
- Mechanical obstacles to improving speed, capacity and
reliability. Conventional tape storage technology can achieve
higher performance only by developing and utilizing
increasingly complex and fragile mechanical components to read
and write data in narrower, denser tracks.
- High cost of mechanized components. As the complexity of
mechanical components has increased in order to read/write
data to smaller and smaller tracks, the development and
manufacturing costs of conventional tape drives escalate,
keeping the price of tape storage products rising while other
storage and hardware products deliver year-to-year price
reductions to customers.
As a result, conventional tape storage products provide a lower
price-performance ratio compared to competing technologies.
(b) The Advantages of VXA Packet Technology
With an in-depth understanding of the limitations of conventional tape
products, Juan Rodriguez, our Chief Technologist, and a team of engineers set
out to address these issues - the result was our VXA Packet Technology, which
was first introduced to the market in 1998.
VXA Packet Technology provides a digital solution to the common mechanical
problems of tape drives. VXA Packet Drives are the only tape drives that read
data from tape in "packets." Unlike traditional tape drives that must read data
sequentially from each individual track on a data tape, VXA Packet Drives scan
the entire tape, writing and reading data in discrete packets that are
reassembled in the buffer. VXA uses buffer segmenting technology, error
correction technology, variable speed operation technology and overscan
operation technology to read, reassemble and write data in ways that overcome
the limitations of conventional tape technology.
- Buffer Segment. VXA Packet Technology employs four heads that
scan the entire tape (not an individual track) and read the
data packets into a buffer segment. Because each packet has a
unique address, the VXA buffer reassembles the packets in the
correct order, regardless of the order in which they were read
(received), similar to a Web browser reassembling data packets
that traveled over the Internet.
22
- Error Correction. VXA Packet Technology utilizes four-level
error correction applied in two phases.
- Variable Speed Operation. Variable Speed Operation is an
innovative design concept that enables VXA to continually
adjust the tape speed to match the actual data transfer rate
of the host. This real-time speed adjustment eliminates
backhitching, which causes delays, wear on media and the drive
mechanism, all leading to greater reliability of data.
- OverScan Operation. The VXA OverScan Operation, an operation
that effectively allows the heads to sweep greater than 100
percent of the tape surface area, eliminates the historical
dependence of tape storage on the critical alignment geometry
between the tape path and the recording head. (To either write
or read data, conventional tape devices depend on a constant
head-to-tape speed for linear recording, or a constant track
angle for helical scan recording.)
VXA Packet Technology overcomes the limited capacity, reliability and
speed of conventional tape technology by replacing the complex mechanical
components - those that have historically interfered with engineering efforts to
read and write data in denser tracks - with innovative digital solutions. VXA
has achieved dramatic increases in capacity and speed and will continue to
increase performance in future generations with only modest changes to the drive
design.
In addition, VXA Packet Technology lowers the cost of tape storage because
it eliminates the most costly elements of conventional tape drives - the complex
and expensive mechanized components needed to maintain tight tolerances between
the head and media. As a result, we believe VXA will maintain a very low price
point while providing higher and higher levels of capacity and performance -
reestablishing a significant price-performance advantage over competing storage
technologies.
(2) MammothTape Technology
We also produce MammothTape technology platforms, which are integrated
systems encompassing both a helical-scan tape drive and advanced metal
evaporated ("AME") media. All aspects of the technology work together to
optimize recording performance and to ensure the integrity of vital data.
Sales of our VXA and MammothTape technology tape drives, including
end-of-life products, represented the following percentages of total revenue
less sales allowances ("net revenue"):
Year or Period % of Revenue
- ---------------- ------------
2001 31%
2002 28%
2003 30%
Six Months Ended
June 30, 2004 32%
(3) General information regarding our automated tape drive libraries
In addition to our tape drives, we design, develop, manufacture, sell and
support automated tape drive libraries. These libraries incorporate one or more
tape drives and multiple media cartridges to provide much higher data capacities
than using a single drive and, with more than one drive, higher data transfer
rates.
We offer library products incorporating VXA, MammothTape and LTO(Ultrium)
tape drives. Our libraries are designed to be scalable, allowing us to develop
different sized libraries based on the same model, with room inside each box for
expansion. This capability enables our designs to accommodate increases in
customers' data storage needs and allows our end users to protect their library
investment.
23
We engineer our library products to satisfy the reliability,
service-ability and management requirements of storage networking. They combine
the reliability of our robotics with features such as optional Ethernet ports,
hot-pluggable tape drive carriers designed to be serviced during library
operation, optional bar code scanners and removable magazines.
Sales of our VXA, MammothTape, and LTO technology library products,
including end-of-life products, represented the following percentages of net
revenue:
Year or Period % of Revenue
- ---------------- ------------
2001 26%
2002 24%
2003 14%
Six Months Ended
June 30, 2004 24%
24
(4) Table of Our Tape Drive and Automated Library Products
TRANSFER RATE*
PRODUCT CAPACITY* TAPE DRIVES NOTES MEDIA
- ------------------------------------------------------------------------------------------------------------------------------------
VXA-2 Up to 81 GB (native) Up to 6 MB/sec. (native) Provides 4x the capacity, 2x the VXATape: V23,
Up to 160 GB (compressed) Up to 12 MB/sec. (compressed) speed and 180x the restore integrity of V17, V10, V6
DDS-4 at a comparable price
VXA-1 Up to 33 GB (native) Up to 3 MB/sec. (native) Sets new standard for data restore VXATape: V17,
Up to 66 GB (compressed) Up to 6 MB/sec. (compressed) and interchange while offering V10, V6
extraordinary tape drive performance
VXA RAKPAK ONE VXA-1 DRIVE ONE VXA-1 DRIVE RakPak design combines VXA-1 tape Same as VXA-1
1U DRIVE Up to 33 GB (native) Up to 3 MB/sec. (native) drives with a convenient rack-mount
ENCLOSURE Up to 66 GB (compressed) Up to 6 MB/sec. (compressed) chassis that fits security into
TWO VXA-1 DRIVES TWO VXA-1 DRIVES standard 19-inch racks.
Up to 66GB (native) Up to 6 MB/sec. (native)
Up to 132 GB (compressed) Up to 12 MB/sec. (compressed)
MAMMOTH-2 Up to 60 GB (native) Up to 12 MB/sec. (native) Embedded serverless backup AME w/ Smart-
(M2) Up to 150 GB (compressed) Up to 30 MB/sec. (compressed) w/native Fibre Channel interface and Clean 75m,
automated drive cleaning 150m, 225m
AUTOMATION - HIGH END LIBRARIES
- ------------------------------------------------------------------------------------------------------------------------------------
MAGNUM20 FULLY LOADED LTO-1 Up to FULLY LOADED LTO-1 Accommodates up to 8 LTO-1 or LTO- Exabyte LTO
14.3 TB (native) Up to 432 GB/hr. (native) 2 drives and up to 143 cartridges. (Ultrium) data
Up to 29.6 TB (compressed) Up to 864 GB/hr. (compressed) Supports LTO-1, LTO-2, SCSI or cartridges
FULLY LOADED LTO-2 FULLY LOADED LTO-2 Fibre Channel drives, all within the
Up to 28.6 TB (native) Up to 1 TB/hr. (native) same library unit, at the same time
Up to 57.2 TB (compressed) Up to 2 TB/hr. (compressed)
AUTOMATION - MID-RANGE LIBRARIES
- ------------------------------------------------------------------------------------------------------------------------------------
215M FULLY LOADED FULLY LOADED Accommodates up to 2 M2 drives and Exabyte AME or
Up to 900 GB (native) Up to 86.4 GB/hr. (native) 15 data cartridges. AME with
Up to 2.25 TB (compressed) Up to 216 GB/hr. (compressed) Most cost-effective, high capacity SmartClean
library in its class
430 FULLY LOADED VXA-2 Up to FULLY LOADED VXA-2 Up to 86.4 Accommodates up to 4 VXA-2 or M2 Exabyte AME
2.4 TB (native) GB/hr. (native) drives and 30 cartridges. w/Smartclean or
Up to 4.8 TB (compressed) Up to 173 GB/hr. (compressed) Barcode capability, ethernet VXATape
FULLY LOADED M2 FULLY LOADED M2 connectivity and native Fibre Channel
Up to 1.8 TB (native) Up to 173 GB/hr. (native) interface
Up to 4.5 TB (compressed) Up to 432 GB/hr. (compressed)
221L FULLY LOADED LTO-1 FULLY LOADED LTO-1 Up to 108 Accommodates up to 2 LTO-1 or LTO- Exabyte LTO
Up to 2.1 TB (native) GB/hr. (native) 2 drives and 21 cartridges. (Ultrium) data
Up to 4.2 TB (compressed) Up to 216 GB/hr. (compressed) Only library in its class to offer cartridges
FULLY LOADED LTO-2 FULLY LOADED LTO-2 native Fibre Channel interface to tape
Up to 4.2 TB (native) Up to 252 GB/hr. (native) drives and robotics
Up to 8.4 TB (compressed) Up to 504 GB/hr. (compressed)
AUTOMATION - AUTOLOADERS
- ------------------------------------------------------------------------------------------------------------------------------------
EZ17 FULLY LOADED FULLY LOADED Accommodates 1 M2 tape drive and Exabyte AME
Up to 420 GB (native) Up to 43.2 GB/hr. (native) up to 7 cartridges. w/SmartClean
Up to 1.05 TB Up to 108 GB/hr. (compressed) Affordable alternative to standalone
(compressed) tape drives
VXA-2 FULLY LOADED FULLY LOADED Accommodates 1 VXA-2 tape drive VXATape
PACKETLOADER Up to 800 GB (native) Up to 21.6 GB/hr. (native) and up to 10 cartridges.
1X10 1U Up to 1.6 TB (compressed) Up to 43.2 GB/hr. (compressed) Uses a compact 1U rack-mounted
design to accommodate space
constraints
VXA FULLY LOADED VXA-2 FULLY LOADED VXA-2 Accommodates 1 VXA-1 or VXA-2 VXATape
PACKETLOADER Up to 800 GB (native) Up to 21.6 GB/hr. (native) tape drive and up to 10 cartridges.
1X10 2U Up to 1.6 TB (compressed) Up to 43.2 GB/hr. (compressed) Compact 2u form factor design
FULLY LOADED VXA-1 FULLY LOADED VXA-1
Up to 330 GB (native) Up to 10.8 GB/hr. (native)
Up to 660 GB(compressed) Up to 21.6 GB/hr. (compressed)
VXA-2 FULLY LOADED FULLY LOADED Accommodates 1 VXA-2 tape drive VXATape
PACKETLOADER Up to 1.1 TB (compressed) Up to 43.2 GB/hr. (compressed) and up to 7 cartridges.
1X7 DESKTOP Best combination of speed and
capacity available in any comparable
autoloader
110L FULLY LOADED LTO-2 FULLY LOADED LTO-2 Accommodates 1 LTO-1 or LTO-2 Exabyte LTO
Up to 2.0 TB (native) Up to 126 GB/hr. (native) tape drive and up to 10 cartridges. (Ultrium) data
Up to 4.0 TB (compressed) Up to 252 GB/hr. (compressed) Combines mid-range capacity and cartridges
FULLY LOADED LTO-1 FULLY LOADED LTO-1 performance with entry-level
Up to 1.0 TB (native) Up to 54 GB/hr. (native) affordability for robust, high-
Up to 2.0 TB (compressed) Up to 108 GB/hr. (compressed) performance data storage
* Specifications are compressed. VXA, Mammoth and LTO assume a 2:1 compression
ratio; M2 assumes a 2.5:1 compression ratio; LTO (Ultrium) assumes a 2:1
compression ratio. Compression, capacity and throughput will vary dependent upon
type of data and system configuration. All specifications are subject to change
without notice.
25
(5) Anticipated Future Tape Drive and Library Products
Below is a list of our products that we are currently developing. We
cannot assure that any of the products we have announced or are developing will
be successfully developed, made commercially available on a timely basis or
achieve market acceptance.
VXA-3: We expect to introduce the VXA-3 tape drive by the first half of
2005. We are currently anticipating that the tape drive will have a 160 GB
native capacity and a 12 MB per second native transfer rate.
VXA-4: We expect to introduce the VXA-4 tape drive in 2007. Current
specifications for this drive anticipate a 320 GB native capacity and a 24 MB
per second native transfer rate.
(6) Media Products
As shown in the above tables, we provide various types of media
cartridges, as well as cleaning cartridges and data cartridge holders, for our
tape drive products. The high-quality media, produced by multiple third parties,
is available in different lengths to handle various data storage requirements.
Beginning on November 7, 2003, we market our media products exclusively through
Imation Corp., which arrangement is discussed in greater detail below.
Sales of media and media related products represented the following
percentages of net revenue:
Year or Period % of Revenue
- ---------------- ------------
2001 37%
2002 44%
2003 47%
Six Months Ended
June 30, 2004 38%
Media sales represent a significant portion of our total revenue. The
decrease in media revenue in 2004 as a percentage of total net revenue is due
primarily to discounted sales prices to Imation. We depend on a continuous
supply of Advanced Metal Evaporative ("AME") media to use with our VXA and
MammothTape products. We cannot sell our products, or grow our product lines
without a sufficient supply of AME media. We transact business with one supplier
through a supply agreement that will terminate at the end of 2005 unless
terminated earlier by either party, with the supplier being required to provide
at least nine months prior written notice. We transact business with our other
media suppliers through purchase orders and expect to negotiate terms and
conditions of a supply agreement with each such supplier in the future.
(a) AME Media
Formulated specifically for our VXA and MammothTape tape drives, AME tape
(also called VXATape for use with VXA tape drives) offers expanded recording
capacity and low abrasivity, which reduces mechanical wear. AME magnetic
material is vertically aligned. This unique orientation and the absence of
binder components on the media gives AME higher capacity and superior signal
strength. AME's specially formulated backcoating dramatically reduces the
buildup of static electricity and debris, greatly reducing the chance of
read/write errors.
(b) AME with SmartClean(TM)
AME media with SmartClean technology is only available for use with M2
tape drives and includes a section of cleaning tape at the beginning of each
data cartridge. We specifically designed this cleaning tape to remove chemical
films that can build up on recording heads. These films are caused by organic
compounds and cannot be removed by other cleaning methods. The M2 drive keeps
statistics on its own operation and activates the SmartClean technology when the
drive needs cleaning. With normal use, extra cleaning cartridges are needed less
frequently.
26
2. Outsourcing Philosophy
As discussed in greater detail below, we currently outsource:
- all of our manufacturing;
- all of our repair and onsite service; and
- the distribution of all of our media products.
We believe that outsourcing such functions helps us operate in a more
efficient and cost-effective manner. Outsourcing enables us to focus on our core
mission: to design innovative products that meet our customers' evolving needs.
3. Service and Support
We offer a full range of warranty and post-warranty repair services for
our tape drive, library and media products. We deliver these services pursuant
to an agreement with Teleplan Service Logistics, Inc., which is the exclusive
provider of our repair services. Teleplan performs all in-warranty and
out-of-warranty depot repairs of our storage products. Pursuant to this
agreement, we receive royalties relating to all out-of-warranty repair services.
According to Teleplan, it is a leader in reverse supply chain management
solutions, with facilities worldwide. These locations offer commodity logistics,
testing and repair capabilities that match the service requirements of leading
OEMs and systems integrators.
Our agreement with Teleplan terminates in June of 2006, unless otherwise
extended by the parties. Either of the parties may terminate the agreement
earlier upon a material default by the other party.
Revenue from service and support programs and sales of spare parts
represented the following percentages of net revenue:
Year or Period % of Revenue
- ---------------- ------------
2001 7%
2002 7%
2003 10%
Six Months Ended
June 30, 2004 9%
4. Our Customers
We market our products worldwide through distributors, resellers and OEMs.
We sell our new products initially to distributors and resellers who are quicker
to evaluate, integrate, and adopt new technology. OEM sales generally increase
(relative to reseller sales) if the new product successfully completes the
necessary qualification process. Over the last several years, our sales have
been principally to distribution and reseller customers as our sales to OEM
customers decreased. In the past year, this trend has been reversed and we now
see increasing sales to OEMs. We believe this is a direct result of our
long-term strategy to increase the number of our OEM customers as well as the
volume of products we sell to them. We believe that a successful business model
includes in excess of 50% of our revenue being derived from OEM customers.
(1) Imation
We distribute our media products pursuant to an agreement with Imation
Corp. ("Imation"), which is our exclusive worldwide distributor of our media
products. We sell our media products
27
exclusively to Imation, and Imation manages our media brand and provides sales,
marketing and distribution services. Our agreement with Imation has an
indefinite term, but provides for termination by Imation upon 180 days prior
written notice to us, or upon a material default by either party. If Imation
terminates the agreement due to our material default, we must pay Imation a
prorated portion of the distribution fee we received from Imation.
Imation is a developer, manufacturer and supplier of magnetic and optical
removable data storage media. Imation believes it has one of the broadest
product lines in the industry-spanning from a few megabytes to hundreds of
gigabytes of capacity in each piece of media. It serves customers in more than
60 countries, in both business and consumer markets, has more than 300 data
storage patents in the U.S. alone and employs approximately 2,800 people
worldwide, including more than 300 technology scientists.
As noted below in "Significant Customers," Imation was our largest
customer in the six months ended June 30, 2004 and will continue to be our
largest customer for the foreseeable future.
(2) OEM Customers
OEM customers incorporate our products as part of their own systems, which
they then sell to their customers under their own brand name. We work closely
with our OEM customers during early product development stages to help ensure
our products will readily integrate into the OEM's systems.
Product sales to OEMs represented the following percentages of net
revenue:
Year or Period % of Revenue
- -------------- ------------
2001 24%
2002 19%
2003 20%
Six Months Ended
June 30, 2004 20%
We believe our success depends on OEMs adopting our products, particularly
the VXA-2 packet tape technology, as well as OEMs with whom we have an existing
relationship increasing their purchases of current products.
(3) Distributor and Reseller Customers
Our distributor and reseller customers purchase products for resale.
Reseller customers may provide various services to their customers, such as:
- distribution;
- financial terms and conditions;
- pre-sales, sales and/or post-sales system upgrades; or
- other value-added products and/or services.
Sales to distributors and resellers represented the following percentages
of net revenue:
Year or Period % of Revenue
- -------------- ------------
2001 71%
2002 76%
2003 64%
Six Months Ended
June 30, 2004 74%
28
(4) Sales to the Government
We do not sell our products directly to federal, state and local
governments. We support our reseller customers that sell directly to the
government with various government-directed programs and other sales and
marketing services. We believe that the government business generally represents
approximately 25% of our non-OEM total revenue.
(5) International Customers
We market our products overseas directly to international OEMs and
resellers. We also serve OEMs and end users through our international resellers.
International resellers, which have rights to sell our products in a country or
group of countries, serve each of our international markets. Direct
international sales will likely continue to represent a significant portion of
our revenue for the foreseeable future. In addition, many of our domestic
customers may ship a significant portion of our products to their overseas
customers.
Direct international sales accounted for the following percentages of net
revenue:
Year or Period % of Revenue
- -------------- ------------
2001 29%
2002 27%
2003 31%
Six Months Ended
June 30, 2004 25%
(6) Significant Customers
A partial list of our customers includes Apple Computer, Arrow
Electronics, Bull, Digital Storage Inc., Fujitsu Siemens Computers, Hewlett
Packard, IBM, Imation, Ingram Micro, Tech Data, and Toshiba. We have customers
who are also competitors, such as IBM with their LTO(Ultrium) tape drive. We
have several customers whose sales account for 10% or more of our net revenue.
The chart below sets forth the percentages of revenue for customers that
exceeded 10% of revenue, and other significant customers, over the past three
years:
Fiscal Year Six Months
------------------ Ended June 30,
2001 2002 2003 2004
---- ---- ---- -------------
Imation 1% 2% 9% 39%
Ingram Micro 18% 18% 16% 11%
Tech Data 12% 16% 16% 13%
IBM 10% 8% 7% 11%
Fujitsu Siemens 0% 3% 6% 7%
Digital Storage 11% 16% 2% --
5 Manufacturing
We are currently outsourcing all of our manufacturing process, including
manufacturing of our tape drives, library products and media.
(1) Tape Drives and Libraries
We have entered into an agreement with ExcelStor ESGW International
Limited ("ExcelStor") to manufacture some of our automation products. The term
of the supply agreement with ExcelStor is
29
three years and automatically renews for 2-year terms unless terminated by one
of the parties. Either party may terminate the agreement without cause upon 180
days' prior written notice to the other party.
We began transitioning the manufacture of products to ExcelStor's
manufacturing facility in China in January 2004. In addition, we may transition
the manufacture of some of our drive products to China in 2004 and 2005.
ExcelStor was founded in 2000 to manufacture and sell hard disk drives and
is a subsidiary of Great Wall Technology Ltd. ExcelStor has state-of-the-art
testing and production facilities in China and is managed by a team of
professionals with at least a decade of disk drive manufacturing experience.
Based on the location of the manufacturing facilities, and lower-cost quotes
received from ExcelStor for the manufacture of our products, we believe that the
transition to Excelstor will reduce overhead costs, optimize our inventory
control and make our manufacturing processes more efficient.
Until such time as the transition of our manufacturing to Excelstor is
completed, Shinei International, a Solectron company ("Shinei"), continues to
supply us with our libraries, and Hitachi Ubiquitous Company ("Hitachi")
continues to supply us with our tape drives. As such, our tape drives and
libraries will be supplied in accordance with the agreements we have with
Hitachi and Shinei.
(2)Media
Currently, we obtain AME media pursuant to supply agreements from three
suppliers
- Matsushita Electric Industrial Co. Ltd. ("MEI");
- TDK Corporation ("TDK"); and
- Sony Corporation ("Sony").
(3)Components
We obtain components for our products from sole-source suppliers. We have
executed master purchase agreements with some of our sole-source suppliers and
conduct business with the rest of our suppliers on a purchase order basis. We
rely heavily on our suppliers to produce the components for our products, or the
products themselves. The following chart shows the parts manufactured for us by
our sole-source suppliers.
Hitachi M2 /VXA-1/VXA-2 plus spare parts and deck components for service
ExcelStor VXA PacketLoader as well as ramping up for other library
products in conjunction with transition
BDT AUTOPAK 1X 10, Rack Mount Kits, and Barcode Readers
Shinei 110L/215/221L/430/EZ17/AUTOPAK
1x7/MAGNUM20/Durango CEI's plus fru's/cru's/spare parts
Solectron M2 PWBA's as well as all Library PWBA's
CI Design VXA enclosures
Matsushita 225m Exabyte branded media, 225m OEM branded media, V23 Exabyte
branded V23 OEM branded media.
Sony Exabyte branded: 112m, 160m, MP cleaner; M1 Cleaner, 22m, 125m,
170m; VXA V6, V10, V17.
TDK V23, 225m, 170m, 150m and 75m Exabyte branded, 75m and 150m OEM
branded, LTO and LTO Cleaner Exabyte branded.
6. Our Research and Development
The market for data storage devices is highly competitive. We believe that
this competition is based largely on the improvements in technology, which
increase speed and reliability of storage
30
products and at the same time reduce the cost of those products. With this in
mind, we have concentrated our research and development on enhancing existing
products and developing new products that will improve the performance and cost
of current tape drives we offer. Our research and development expenses were
approximately $25.2 million, $23.7 million, and $9.8 in 2001, 2002 and 2003,
respectively and $4.6 million in the six months ended June 30, 2004. The
decreases in 2003 and 2004 are the result of significant headcount reductions,
lower costs for external engineering and a decrease in costs incurred in
developing VXA and related automation products. We believe that we will continue
to have the necessary resources in place to meet all technology development
related milestones in 2004.
(1)Information Regarding Our Patents and Proprietary Information
We rely on a combination of patents, copyright and trade secret
protections, non-disclosure agreements, and licensing arrangements to establish
and protect our proprietary rights. As of March 8, 2004, we held a total of 106
patents and 9 pending applications in the United States, of which 4 were issued
in 2003, all relating to technologies and other aspects of our tape drive and
automated tape library products. However, we believe that, because of the rapid
pace of technological change in the tape storage industry, factors such as
knowledge, ability and experience of our employees, new product introductions
and frequent product enhancements may be more significant than patent and trade
secret protection.
(2)Licenses
Our VXA-1 tape drive was previously manufactured by AIWA. As part of the
transfer of that manufacturing relationship, we entered into a technology
transfer and license agreement with AIWA, whereby AIWA granted us a
non-exclusive license to utilize certain AIWA related VXA technologies related
to design and production of the VXA-1 and VXA-2 tape drives for a royalty based
on the invoice price to us of each VXA-1 and VXA-2 drive we purchase from
another manufacturer.
We additionally entered into a software license agreement for the use of a
new business and financial management system to replace our existing system. We
believe that the new system is a better fit for a company of our size and
structure and implemented the system on April 1, 2004. The term of the software
license agreement is perpetual.
(3)Information Regarding Our Backlog
For the reasons indicated below, we believe that the backlog of purchase
orders at the end of any quarter or year is not a meaningful indicator of future
sales. Our customers typically are not obligated to purchase minimum quantities
of our products. Lead times for the release of purchase orders depend upon the
scheduling practices of each customer. We believe that, based upon past order
histories, the rate of new orders may vary from month to month. Customers may
cancel or reschedule orders without penalty. In addition, while our actual
shipments depend upon our production capacity and component availability, we
currently do not have our third-party suppliers manufacture products until a
purchase order has been received by a customer and we endeavor to fill purchases
orders within three weeks. This policy may change in the second half of 2004, as
we build inventory of certain products in order to meet customer demands on a
timely basis.
(4)Information Regarding our Inventory Levels
We strive to maintain appropriate levels of inventory. Excessive amounts
of inventory reduce cash available for operations and may cause us to incur
charges for excess or obsolete inventory. Inadequate inventory levels due to
forecasting variances or lack of liquidity may make it difficult for us to meet
customer product demand, resulting in decreased revenue.
Our goal is to maintain flexibility in our inventory control systems in
order to meet customer request dates for product shipments. As such, we
generally build our products to customer forecasts and point-of-sale data
provided to us by our distributors and resellers. We attempt to maintain
approximately two weeks worth of inventory at any given time and believe that
this is an appropriate
31
level which allows us to meet these goals. In striving to maintain the proper
inventory levels, we go through a process each month to assist in evaluating our
inventory levels and maintaining them at the appropriate levels. We review sales
forecasts and past sales data and evaluate any OEM inventory level requirements
for their hubs in determining a rolling monthly inventory forecast.
Additionally, we restrict purchases of inventory to conform with our inventory
forecast and long lead-time inventory products.
In addition to our inventory controls, we believe that we must accurately
time the introduction and end-of-life of our products into and out of the data
storage market due to the related effects on our revenue and inventory levels.
Accurately timing the release of new products is important to the sales of
existing products. Taking an existing product into an end-of-life cycle
prematurely could result in decreased revenue from that product, and delaying
the withdrawal of a product could result in excess product inventory and
subsequent inventory write-downs. We continually evaluate our product life
cycles. Timing or an inability to successfully introduce a new product could
adversely affect our results of operations.
7. Our Competition
The data storage market is extremely competitive and subject to rapid
technological change. We believe that competition in the data storage market
will continue to be intense, particularly because manufacturers of all types of
storage technologies compete for a limited number of customers.
The success of any future drive or automation products depends on:
- timely development;
- customer acceptance;
- supply capacity;
- customer transition to these future products;
- OEM qualification and adoption; and
- media availability.
Although tape has historically been the preferred medium for data storage
backup, companies are developing new technologies for this market. Some of the
new technologies are:
- Optical Disk
- Optical Tape
- DVD
- Holographic Storage
- Magneto-optics
- Magnetic Disk
We may also experience competition from new storage architectures, such as
SANs, network attached storage and virtual storage.
Our VXA and M2 tape drives face significant competition from current and
announced tape drive products manufactured by Quantum, Hewlett Packard,
Certance, Sony and the LTO Consortium. The specifications of some of these
drives show greater data capacities and transfer rates than our tape drive
products. We believe that our VXA tape drives are a low cost, competitive
alternative to
32
competing products when compared on the basis of performance, functionality and
reliability. In turn, we offer LTO(Ultrium) technology through our library
products.
Our library products face competition from companies such as Advanced
Digital Information Corporation ("ADIC"), Quantum, Overland Data, StorageTek and
QualStar. Significant competition may also develop from companies offering
erasable and non-erasable optical disks, as well as other technologies.
Our media products are generally proprietary and are only sold by us
through Imation. However, Sony does manufacture certain legacy media products
and we compete with them based on price and product availability.
8. Our Employees
As of July 22, 2004, we had full-time, part-time and temporary employees
(worldwide), consisting of:
BUSINESS GROUP EMPLOYEES
-------------- ---------
Corporate and Business 27
Supply Chain 82
Customer Unit 44
Sales 85
----
238
Our success continues to depend significantly upon our ability to attract,
retain and motivate key engineering, marketing, sales, supply, support and
executive personnel.
DESCRIPTION OF PROPERTY
Our corporate offices, including our research and development and limited
manufacturing facilities, are located in Boulder, Colorado, in leased buildings
aggregating approximately 55,726 square feet. As discussed more fully in
Management's Discussion and Analysis of Financial Condition and Results of
Operations , we ceased use of several other leased facilities during the third
quarter of 2003 and settled our remaining obligations under the related leases.
In addition, we closed our European sales office located in The Netherlands
during 2003. The lease terms on our present facilities expire in 2005 and 2006.
Although we do not currently anticipate expanding our operations, we believe we
have adequate space available if further expansion becomes necessary. The
following chart identifies the location and type of each Exabyte property:
OFFICE TYPE DOMESTIC INTERNATIONAL
----------- -------- -------------
R&D & Mfg. Boulder, CO
Procurement Boulder, CO Tokyo, Japan
Service Boulder, CO Singapore
Sales & Support Boulder, CO Singapore
Frankfurt, Germany
Shanghai, China
Hong Kong, China
Paris, France
Gloucestershire, England
33
LEGAL PROCEEDINGS
We are subject to incidental litigation risks in the ordinary course of
our business. We are not currently the subject of any material pending legal
proceeding.
MARKET PRICE OF AND DIVIDENDS ON EXABYTE'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Exabyte's common stock is traded on the Over-the-Counter Bulletin Board
under the symbol "EXBT". From October 19, 1987 until February 26, 2003,
Exabyte's common stock was traded on the Nasdaq National Market and from
February 26, 2003 until March 24, 2003 on the Nasdaq SmallCap Market.
For the calendar quarters indicated, the following table shows the high
and low bid prices of our common stock as reported on Nasdaq or the OTC Bulletin
Board, as applicable.
Fiscal Year High Low
----------- ---- ---
2002
First Quarter $1.45 $0.45
Second Quarter 1.18 0.50
Third Quarter 1.20 0.55
Fourth Quarter 0.88 0.51
2003
First Quarter $0.65 $0.10
Second Quarter 0.17 0.06
Third Quarter 0.71 0.09
Fourth Quarter 1.31 0.31
2004
First Quarter $1.76 $0.68
Second Quarter 0.97 0.71
On August 6, 2004, we had 569 holders of record of our common stock. The
reported closing price of the common stock was $0.67. We have never paid cash
dividends on our Common Stock. We presently intend to retain any earnings for
use in our business and do not anticipate paying any cash dividends on our
Common Stock in the foreseeable future. We are prohibited under the terms of our
line of credit agreement with Silicon Valley Bank from declaring or setting
aside any cash dividends.
Our Series AA preferred stock accrues dividends at the rate per share of
5% per annum until the fourth anniversary of the original issue date, 8% per
annum from the fourth anniversary of the original issue date until the fifth
anniversary of the original issue date, 10% per annum from the fifth anniversary
of the original issue date until the sixth anniversary of the original issue
date and 12% per annum thereafter, payable quarterly on March 1, June 1,
September 1 and December 1, and on any conversion date or redemption date as
described in the Certificate of Designation for the Series AA Shares. We are
required to pay dividends on the Series AA preferred stock in cash or Common
Stock depending on whether (i) funds are legally and contractually available for
the payment of dividends and (ii) the Equity Conditions (as defined below) are
met. We will pay the dividends in cash or stock as follows:
1. If funds are legally and contractually available for payment of
dividends then:
- if the Equity Conditions have not been met, we shall pay
dividends only in cash; or
- if the Equity Conditions have been met, we shall pay the
dividends in either (i) cash or (ii) Common Stock valued
at the Dividend Price (as defined below), at our sole
election.
34
2. If funds are not legally and contractually available for payment of
dividends then:
- if the Equity Conditions have been met, we shall pay the
dividends in Common Stock valued at the Dividend Price;
- if the Equity Conditions have been met, except for
condition 1 below, we shall pay the dividend in Common
Stock valued at 80% of the volume weighted average price
for the 20 days immediately prior to the dividend
payment date;
- if the Equity Conditions have been waived as to a holder
of Series AA preferred stock, we shall pay dividend as
to this holder in Common Stock valued at the Dividend
Price;
- if the Equity Conditions have not been met or waived,
then at the election of each holder of Series AA
preferred stock, these dividends shall accrue to the
next dividend payment date or accrete to the outstanding
stated value of the Series AA Preferred Stock.
The Dividend Price is defined as 90% of the volume weighted average price
of our Common Stock for the 20 days immediately prior to the dividend payment
date. The Equity Conditions are met if:
1. (i) there is an effective registration statement for the resale of
the Common Stock received pursuant to the dividend or (ii) a holder
of Series AA preferred stock may sell all of the Common Stock
received pursuant to the dividend under Rule 144(k) without volume
restrictions;
2. the Common Stock is listed for trading on the American Stock
Exchange, the New York Stock Exchange, the Nasdaq National Market,
the Nasdaq SmallCap Market or the OTC Bulletin Board;
3. there is a sufficient number of authorized but unissued shares of
Common Stock for payment of the dividend; and
4. payment of the dividend will not result in a holder of Series AA
preferred stock who has elected to not beneficially own more than
4.99% of our outstanding Common Stock calculated in accordance with
Section 13(d) of the Exchange Act, exceeding this limitation.
Any dividend not paid within three trading days following a dividend
payment date entails a late fee of 12% per annum through the date of payment. We
expect that dividends will be paid in Common Stock for the foreseeable future.
So long as any Series AA preferred stock remains outstanding, we are
prohibited from paying dividends on any junior securities, including
Common Stock, so long as any dividends due on the Series AA preferred
stock remain unpaid.
STOCK PLANS
Information regarding the Company's equity compensation plans, which
consist of Exabyte's Incentive Stock Plan, 1997 Non-Officer Stock Option Plan,
2004 Stock Option Plan and options granted to the Company's CEO outside of the
Incentive Stock Plan as of June 30, 2004 is included below under "Equity
Compensation Plan Information". The Company also has an employee stock purchase
plan which invests only in common stock of the Company, but which is not
included in the equity compensation plan information.
FINANCIAL STATEMENTS
Financial statements are presented on pages F-1 through F- 41
hereof.
SELECTED FINANCIAL DATA
The following selected consolidated statement of operations data and
balance sheet data as of and for the years ended January 3, 2004, December 28,
2002, December 29, 2001, December 30, 2000 and January 1, 2000 have been derived
from the audited consolidated financial statements of the
35
Company. Selected consolidated statement of operations data for the six months
ended June 30, 2004 and consolidated balance sheet data as of June 30, 2004 have
been derived from unaudited consolidated financial statements of the Company
and, in the opinion of management, include all adjustments necessary for fair
presentation. The selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Company's consolidated financial statements
and the notes thereto. There were 52 weeks in 1999, 2000, 2001 and 2002 and 53
weeks in 2003. Beginning with the three months ended March 31, 2004, the Company
is reporting its operating results on a calendar month, quarter and annual
basis.
36
Six Months
As of or For Fiscal Years Ended Ended
------------------------------------------------------------ ----------
(In thousands, except per share data) Jan. 1, Dec. 30, Dec. 29, Dec. 28, Jan. 3, June 30,
Consolidated Statements of Operations Data: 2000 2000 2001 2002 2004 2004
- --------------------------------------------- -------- -------- -------- -------- --------- --------
Net revenue $222,827 $221,742 $158,438 $133,191 $ 94,169 $ 52,759
Cost of goods sold 182,875 172,085 132,143 110,948 78,576 39,226
-------- -------- -------- -------- --------- --------
Gross profit 39,952 49,657 26,295 22,243 15,593 13,533
Operating expenses:
Selling, general and administrative 56,650 54,709 36,759 27,316 30,084 12,133
Research and development 35,725 36,530 25,184 23,713 9,826 4,643
Lease terminations and related costs -- -- -- -- 4,707 --
-------- -------- -------- -------- --------- --------
Loss from operations (1) (52,423) (41,582) (35,648) (28,786) (29,024) (3,243)
Other income (expense):
Gain from sale of investment -- -- 1,719 1,500 -- --
Sale of technology -- -- -- 1,200 -- --
Interest income 2,646 1,057 86 27 -- --
Interest expense (3) (477) (686) (1,715) (2,051) (12,859) (955)
Gain (loss) on foreign currency
translation -- -- 124 (803) (1,851) 488
Other, net (934) (1,213) 338 (561) 130 (27)
-------- -------- -------- -------- --------- --------
Loss before income taxes and equity in loss
of investee (51,188) (42,424) (35,096) (29,474) (43,604) (3,737)
Income tax (expense) benefit (2) (37,219) 1,570 6 402 (88) (29)
Equity in loss of investee -- (414) (343) -- -- --
-------- -------- -------- -------- --------- --------
Net loss (88,407) (41,268) (35,433) (29,072) (43,692) (3,766)
Deemed dividend related to beneficial
conversion features and exchange of
preferred stock -- -- -- (4,557) (556) (4,225)
-------- -------- -------- -------- --------- --------
Net loss available to common stockholders $(88,407) $(41,268) $(35,433) $(33,629) $ (44,248) $ (7,991)
======== ======== ======== ======== ========= ========
Basic and diluted loss per share $ (3.97) $ (1.83) $ (1.47) $ (1.02) $ (0.70) $ (0.08)
======== ======== ======== ======== ========= ========
Weighted average common shares used in
calculation of basic and diluted loss per
share 22,256 22,560 24,052 33,022 63,617 101,103
======== ======== ======== ======== ========= ========
June 30,
Consolidated Balance Sheet Data: 2004
- -------------------------------------------- --------
Working capital (deficit) $ 59,594 $ 27,023 $ 11,266 $ (5,199) $ (6,561) $ 9,411
Total assets 127,276 103,792 83,230 72,125 46,129 46,847
Notes payable, less current portion -- -- -- -- 13,960 8,217
Accrued warranties, deferred revenue and
other non-current liabilities, less
current portions 6,570 8,146 9,594 3,424 18,419 17,694
Stockholders' equity (deficit) 78,756 39,058 24,754 4,532 (28,416) (5,625)
(1) The Company recorded restructuring charges in 2000, 2001, and 2002
totaling $3,899,000, $498,000 and $4,791,000, respectively, and $549,000 of
charges relating to workforce reductions in 2003. See Note 8 to the Consolidated
Financial Statements for information regarding restructuring and workforce
reduction charges included in loss from operations.
(2) The Company recorded a full valuation allowance on all existing
deferred tax assets in 1999. See Note 7 to the Consolidated Financial Statements
for information on income tax expense or benefit and net operating loss carry
forwards.
(3) Interest expense in 2003 includes $10,146,000 of stock-based
interest expense as discussed in Note 4 to the Consolidated Financial Statements
37
QUARTERLY RESULTS OF OPERATIONS /
SUPPLEMENTARY FINANCIAL INFORMATION
The following tables set forth unaudited quarterly operating results for
fiscal 2002, 2003 and the first two quarters of 2004 in dollars and as a
percentage of net revenue. This information has been prepared on a basis
consistent with the audited consolidated financial statements included elsewhere
herein and, in the opinion of management, contains all adjustments consisting
only of normal recurring adjustments, necessary for a fair presentation thereof.
These unaudited quarterly results should be read in conjunction with the
consolidated financial statements and notes thereto also appearing elsewhere
herein. The operating results for any quarter are not necessarily indicative of
results for any future period. The sum of the quarterly earnings per share may
not total annual amounts reported in the consolidated financial statements as a
result of the fluctuation in the amount of weighted average common shares used
in the calculation of basic and diluted loss per share.
Quarters Ended
----------------------------------------------------------------------------------
March 30, June 29, September 28, December 28,
2002 2002 2002 2002
------------------ ------------------- ---------------------- ----------------
(In thousands except per share data) $ % $ % $ % $ %
--------- ----- --------- ------ ------------- ------ -------- ------
Net revenue $ 36,605 100.0 $ 35,649 100.0 $ 36,905 100.0 $ 24,032 100.0
Cost of goods sold 35,896 98.1 27,196 76.3 26,320 71.3 21,536 89.6
--------- ----- --------- ------ ------------- ----- -------- -----
Gross profit 709 1.9 8,453 23.7 10,585 28.7 2,496 10.4
Operating expenses (1):
Selling, general and
administrative 8,796 24.0 7,070 19.8 5,969 16.2 5,481 22.8
Research and development 7,368 20.1 6,273 17.6 5,700 15.4 4,372 18.2
--------- ----- --------- ------ ------------- ----- -------- -----
Loss from operations (15,455) (42.2) (4,890) (13.7) (1,084) (2.9) (7,357) (30.6)
Other income (expense):
Gain from sale of investment -- -- 1,500 4.2 -- -- -- --
Sale of technology 1,200 3.3 -- -- -- -- -- --
Interest expense (308) (0.8) (1,007) (2.8) (379) (1.0) (357) (1.5)
Other, net 98 0.2 (1,311) (3.7) 252 0.7 (376) (1.6)
--------- ----- --------- ------ ------------- ----- -------- -----
Loss before income taxes (14,465) (39.5) (5,708) (16.0) (1,211) (3.2) (8,090) (33.7)
Income tax (expense) benefit 342 0.9 104 0.3 (27) (0.1) (17) --
--------- ----- --------- ------ ------------- ----- -------- -----
Net loss (14,123) (38.6) (5,604) (15.7) (1,238) (3.3) (8,107) (33.7)
Deemed dividend related to
beneficial conversion feature
of preferred stock -- -- (2,639) (7.4) (1,918) (5.2) -- --
--------- ----- --------- ------ ------------- ----- -------- -----
Net loss available to common
stockholders $ (14,123) (38.6) $ (8,243) (23.1) $ (3,156) (8.5) $ (8,107) (33.7)
========= ===== ========= ====== ============ ===== ======== =====
Basic and diluted loss per share $ (0.43) $ (0.25) $ (0.10) $ (0.24)
========= ========= ============ ========
38
Quarters Ended
--------------------------------------------------------------------------------
March 29, June 28, September 27, January 3,
2003 2003 2003 2004
(as restated (3))
------------------ ------------------- ------------------ ----------------
(In thousands except per share data) $ % $ % $ % $ %
-------- ------ -------- -------- --------- ----- -------- -----
Net revenue $ 22,594 100.0 $ 22,736 100.0 $ 22,955 100.0 $ 25,884 100.0
Cost of goods sold 26,024 115.2 16,378 72.0 14,986 65.3 21,188 81.9
-------- ----- -------- ----- --------- ----- -------- -----
Gross profit (3,905) (15.2) 6,358 28.0 8,855 34.7 4,696 18.1
Operating expenses (1):
Selling, general and administrative 11,409 52.8 5,716 25.1 5,540 24.1 6,419 24.8
Research and development 3,126 13.8 2,462 10.8 1,979 8.6 2,259 8.7
Lease terminations and related costs - - - - 4,707 20.5 - -
-------- ----- -------- ----- --------- ----- -------- -----
Loss from operations (18,965) (83.9) (1,820) (7.9) (4,257) (18.5) (3,982) (15.4)
Other income (expense):
Interest expense (2) (467) (2.1) (3,231) 14.2) (7,933) (34.6) (1,228) (4.7)
Loss on foreign currency translation (55) (0.2) (157) (0.7) (1,228) (5.3) (411) (1.6)
Other, net (65) (0.4) 213 0.9 (26) (0.1) 8 -
-------- ----- -------- ----- --------- ----- -------- -----
Loss before income taxes (19,552) (86.6) (4,995) (21.9) (13,444) (58.5) (5,613) (21.7)
Income tax (expense) benefit (31) (0.1) (54) (0.2) (18) (0.1) 15 0.2
-------- ----- -------- ----- --------- ----- -------- -----
Net loss $(19,583) (86.7) $ (5,049) (22.1) $ (13,462) (58.6) $(5,598) (21.5)
======== ===== ======== ===== ========= ===== ======= =====
Deemed dividend related to beneficial
conversion feature of preferred stock - - - - - - (556) (2.1)
-------- ----- -------- ----- --------- ----- -------- -----
Net loss available to common
stockholders $(19,583) (86.7) $ (5,049) (22.1) $ (13,462) (58.6) $ (6,154) (23.6)
======== ===== ======== ===== ========= ===== ======= =====
Basic and diluted net loss per share $ (0.59) $ (0.09) $ (0.18) $ (0.07)
======== ===== ======== ===== ========= ===== ======= =====
(1) See Note 8 to the Consolidated Financial Statements for information
regarding restructuring and workforce reduction charges included in loss from
operations in 2002 and 2003.
(2) Interest expense in 2003 includes $10,146,000 of stock-based
interest expense as discussed in Note 4 to the Consolidated Financial
Statements.
(3) In connection with the preparation of its fiscal 2003 annual
financial statements, the Company re-evaluated its accounting for the sale of
service inventory and parts to its outsourced service provider, Teleplan, in the
third quarter of 2003. Upon completion of such evaluation, it was determined
that the transaction should be treated for accounting purposes as a consignment
of inventory and the proceeds from the transaction should be deferred and
recognized as a reduction of warranty expense as the inventory and parts are
utilized by Teleplan in providing warranty services to the Company, rather than
recognized as revenue at the time of sale. At the time the inventory is
utilized, the cost will be recognized as an increase to warranty expense within
costs of goods sold. Accordingly, the statement of operations for the three
months ended September 27, 2003 has been restated to reflect this revised
accounting treatment as follows (in thousands, except per-share data):
39
As Previously Reported As Restated
---------------------- -----------
Net revenue $ 24,555 $ 22,955
Cost of goods sold $ 15,700 14,986
Loss from operations (3,371) (4,257)
Net Loss (12,576) (13,462)
Basic and diluted loss per share (0.17) (0.18)
Quarters Ended
-----------------------------------------------
March 31, June 30,
2004 2004
----------------------- --------------------
(In thousands except per share data) $ % $ %
----------------------- --------------------
Net revenue $ 26,139 100.0 $ 26,620 100.0
Cost of goods sold 20,053 76.7 19,173 72.0
--------- ------ --------- ------
Gross profit 6,086 23.3 7,447 28.0
Operating expenses (1):
Selling, general and administrative 6,069 23.2 6,064 22.8
Research and development 2,130 8.1 2,513 9.4
--------- ------ --------- ------
Loss from operations (2,113) (8.0) (1,130) (4.2)
Other income (expense):
Interest expense (528) (2.0) (426) (1.6)
Gain (loss) on foreign currency
translation (603) (2.3) 1,091 4.1
Other (28) (0.2) - -
--------- ------ --------- ------
Loss before income taxes (3,272) (12.5) (465) (1.7)
Income tax (expense) benefit (38) (0.1) 9 -
--------- ------ --------- ------
Net loss $ (3,310) $(12.6) $ (456) $ (1.7)
========= ====== ========= ======
Deemed dividend related to
exchange of preferred stock - - (4,225) (15.9)
--------- ------ --------- ------
Net loss available to common stockholders $ (3,310) (12.6) $ (4,681) (17.6)
========= ====== ========= ======
Basic and diluted net loss per share $ (0.03) $ (0.04)
========= =========
40
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Exabyte is a leading provider of information storage products, including
tape drive products, automated tape libraries and recording media. Our strategic
focus is data backup, restoration and archival applications for workstations,
midrange computer systems and networks. Computer manufacturers and resellers
require a variety of storage products, which vary in price, performance,
capacity and form-factor characteristics to meet their needs for reliable data
backup, restoration and archival storage increase. Our strategy is to offer a
number of products to address a broad range of these requirements. Our tape
drive products are based on VXA(R) and MammothTape(TM) technologies and our tape
library products are based upon VXA(R), MammothTape(TM) and LTO(TM)
(Ultrium(TM)) technologies.
We market our products worldwide to resellers and original equipment
manufacturers ("OEMs") through offices located in the United States, Europe and
Asia Pacific. As discussed below, our proprietary media products are now
marketed and distributed by our exclusive worldwide distributor, Imation Corp.
("Imation"). We have also provided repair services directly to OEMs and to our
resellers' customers. Beginning in the third quarter of 2003, our outsourcing
partner, Teleplan Service Logistics, Inc. ("Teleplan") has provided such
services.
In connection with our sales agreements with our reseller channel
customers, we may provide inventory price protection, stock rotation rights and
short-term marketing and consumer rebate programs. For our largest reseller
customers, we generally provide all of the above items. The cost of these rights
and programs are significant and are a direct reduction of our revenue, but are
necessary to realize increased revenue through this segment of our customers.
OEM customers incorporate our products as part of their own systems, which
they then sell to their customers under their own brand name. We work closely
with our OEM customers during early product development stages to help ensure
our products will readily integrate into the OEMs systems. We expect that a
significant portion of future revenue growth will relate to increased sales to
OEMs. Accordingly, expansion of these relationships is a key strategic
initiative in the future. In general, sales to OEMs are at lower prices and
lower gross margins. Because our purchase prices for products designated for
sale to OEMs are generally lower, it is imperative that we continue to obtain a
lower cost of products from suppliers for OEM sales to achieve future
profitability.
Our business is directly impacted by overall growth in the economies in
which we operate and, in particular, in the technology industry sector and
business purchasing of technology related products. The downturn in the economy
and the resulting decrease in capital investment directly impacted our revenue
and operating results in 2002 and 2003. We believe the improving economic
climate in 2004 and our increased penetration into OEM customers will provide us
with improving business opportunities. However, there can be no assurance that
these factors will result in improved operating results or financial condition.
One of our most significant challenges in 2004 and thereafter will be to
continue to reduce our product costs to improve our gross margins. In that
regard, we are working with existing hardware and media suppliers to obtain
reduced product costs, as well as exploring opportunities to re-locate existing
third-party manufacturing to new suppliers and/or geographic locations that will
result in decreased costs. We recently began manufacturing certain automation
products through a supplier located in China and anticipate sourcing more of our
products from China-based suppliers in the future. Cost estimates from these
suppliers relating to future product manufacturing have been more competitive
than cost estimates from certain of our existing suppliers. Obtaining these
overall cost reductions is an integral factor in our becoming profitable in the
future. However, there can be no assurance that we will indeed achieve such cost
reductions in the future.
Expense control was a key business initiative for us in 2003, and has
continued to be so in 2004. As we continue to focus on improving our gross
margins, constant or decreasing operating costs is an important issue in
improving our operating results. While we believe our cost structure is
currently appropriate to support our operations, an increase in operating costs,
particularly as a percentage of revenue in the future would negatively impact
our operating results.
41
Our key performance metrics are revenue, gross margin, and operating
income or loss, and related operating expenses. As noted above, increasing sales
to OEM customers, achieving reduced product costs from existing and new
suppliers, and disciplined operating expense control measures are critical
components of our overall business strategy. In addition, providing timely and
responsive product service and repair services to our customers is also a
standard by which we measure our performance. We believe the outsourcing of our
service and repair function during 2003, as discussed below, will be a key
component in meeting this performance standard and creating future customer
loyalty for our products. Finally, meeting our new product and technology
development milestones on a timely basis is also an indication of our
performance and ability to meet market and customer product requirements.
Recent Developments
(a) Receivable and Inventory Related Charges
During the first quarter of 2003, the Company's largest customer, Digital
Storage, Inc. ("DSI") filed for bankruptcy protection and we fully reserved our
accounts receivable balance from DSI totaling $5,962,000. We do not expect any
recovery of this balance in the future will be significant.
Also during 2003, we recorded charges for obsolete and excess inventory
and physical inventory adjustments of $9,814,000 related to revisions in certain
product sales forecasts, the expected discontinuance of older tape drive and
automation products and the consolidation of inventory locations.
Based on our evaluation of our credit exposure for accounts receivable and
the composition of inventory at June 30, 2004, we do not expect to incur such
charges in the future. However, there can be no assurance that economic or other
external factors will not result in such charges.
(b) Notes Payable to Suppliers and Inventory Shortages
As a result of the Company's lack of liquidity during the first quarter of
2003, we were unable to pay certain suppliers for existing accounts payable and
accrued liabilities and we converted these balances to notes payable with such
suppliers, as discussed more fully in "Liquidity and Capital Resources". In
addition, due to these liquidity constraints, we were unable to obtain
sufficient quantities of certain inventory items (including finished goods) to
meet customer demand and our revenue forecasts for the first two quarters of
2003. As a result, our operating results were negatively impacted during these
periods. Although we currently have adequate inventory to meet customer demand,
a lack of liquidity in the future and an inability to remain current under the
terms of the notes payable to suppliers would negatively impact the supply of
product, revenue and future operating results.
(c) Workforce Reduction
Throughout 2003, we terminated employment of approximately 170 full- and
part-time employees. These reductions in force affected employees in all
functional areas of the Company, including employees located in Europe, and were
necessary to reduce our current cost and personnel structure based on forecasted
revenue. In addition, certain of these reductions were directly related to the
outsourcing of our service and repair functions to a third-party. We believe we
are now appropriately cost structured, but we cannot ensure that we will not
reduce our workforce again in the future due to continued losses.
(d) Operating Agreements
As noted above, in November 2003, we entered into a Media and Distribution
Agreement with Imation, whereby we granted Imation exclusive worldwide marketing
and distribution rights for our proprietary removable data storage media. In
exchange for such rights, Imation paid us a one-time distribution fee of
$18,500,000 and also purchased 1,500,000 shares of Series I Preferred stock for
42
$1,500,000. See "Liquidity and Capital Resources" and Note 10 to the
Consolidated Financial Statements in this Registration Statement.
In July 2003, we entered into an agreement to outsource our repair and
service functions to an outside third party, Teleplan Service Logistics, Inc.
("Teleplan"). The agreement provided for the Company to sell parts and service
inventory to Teleplan and provides for the payment of future royalties to us by
Teleplan for certain out-of-warranty repair services. In addition, we will
reimburse Teleplan for specified product warranty related services.
(e) Lease Terminations
During the second and third quarters of 2003, we were in default under
three lease agreements for facilities due to delinquent rental payments. For the
first property, which included the Company's headquarters, the lessor terminated
the original lease and a subsequent short-term lease on June 30, 2003, and we
ceased use of the building on that date. Remaining lease payments under the
original lease totaled approximately $1,600,000. The lessor under this lease had
commenced litigation against us and claimed damages relating to the rental
default and an alleged failure to maintain the leased premises.
In October 2003, we reached a settlement with the lessor for the payment
of the remaining lease payments over a one-year period commencing in November
2003. As discussed in "Liquidity and Capital Resources", we settled the default
under a second lease for facilities through the issuance of a note payable in
the amount of $3,060,000. We also settled our obligation under a lease for our
former San Diego, California sales office space for approximately $170,000.
As a result of the lease terminations and settlements and the Company
ceasing to use the leased facilities, we recorded lease termination expense and
related costs totaling $4,707,000 in 2003. Included in this amount is $4,498,000
of past and future rental payments and $972,000 of accelerated amortization of
leasehold improvements, less $763,000 of related deferred rent concessions.
(f) Fluctuations in Foreign Currency Exchange Rates
The supply agreement with one of our Japan-based suppliers, as well as a
note payable to that supplier, provided for payments in Yen based upon a fixed
conversion rate of 120 Yen/dollar. During the last four months of 2003, the
dollar weakened against the Yen, resulting in a loss on foreign currency
translation relating to the note payable of $1,634,000, and increased product
costs totaling $1,381,000 during that period. In addition, during the first
quarter of 2004, we recorded a loss of $293,000 relating to the note and
increased product costs of $488,000. During the second quarter of 2004, the
dollar strengthened against the yen, and we recorded a gain of $685,000 relating
to the note payable. Effective April 1, 2004, we revised the supply agreement
with the supplier, and all subsequent product purchases are in U.S. dollars at
fixed prices. Payments on the note payable continue to be in Yen at the fixed
conversion rate. Accordingly, the Company may be exposed to the financial
statement impact of additional fluctuations in foreign currency exchange rates
in the future and the impact could be significant.
(g) New Business and Financial Management System
Effective April 1, 2004, we implemented Peoplesoft EnterpriseOne (formerly
JD Edwards 5), a new business and financial management system. We believe the
system will provide increased operating efficiencies and is more compatible to a
company of our size and operating structure.
Critical Accounting Policies and Estimates
The accounting policies noted below are critical to determining our
operating results, and represent those policies which involve significant
judgments and estimates. For a detailed discussion on the application of these
and other accounting policies, see Note 1 to the Consolidated Financial
Statements in this Registration Statement.
43
REVENUE RECOGNITION AND UNCOLLECTIBLE ACCOUNTS RECEIVABLE
Our revenue recognition policy is significant because the amount and
timing of revenue is a key component of our results of operations. We follow the
guidance of Staff Accounting Bulletin No. 104 ("SAB 104"), which requires that a
series of criteria are met in order to recognize revenue related to product
shipment or the performance of repair services. If these criteria are not met,
the associated revenue is deferred until the criteria are met. Generally, these
criteria require that there be an arrangement to sell the product, we have
delivered the product in accordance with that arrangement, the sales price is
determinable, and collectibility is reasonably assured. Revenue results are
difficult to predict, and any shortfall in revenue or delay in recognizing
revenue could cause our operating results to vary significantly from year to
year. Additionally, revenue from sales to certain resellers is subject to
agreements allowing certain limited rights of return, marketing related rebates
and price protection on unsold merchandise held by those resellers. Accordingly,
reserves for estimated future returns, marketing rebates and price protection
are provided in the period of sale based on contractual terms and historical
data. These reserves are subject to estimates by management in accordance with
SAB 104 and, should actual results differ from these estimates, the impact on
our operations could be significant.
In addition, we incurred significant bad debt expense in 2003 relating to
the bankruptcy of a major customer. Our adherence to our established credit
policies, including the monitoring of the financial condition of our customers
is critical to minimizing future bad debts. We currently estimate our allowance
for uncollectible accounts based on known exposure for specific accounts, as
well as historical bad debt experience.
INVENTORY VALUATION AND RESERVES
Our inventory is a significant component of our total assets. In addition,
the carrying value of inventory directly impacts our gross margins and operating
results. Our inventory is recorded at the lower of cost or market, cost being
determined under the first-in, first-out method. In addition, we must determine
if reserves are required for excess or obsolete inventory or future sales which
may result in a loss. This determination requires significant judgment by
management relating to future revenue by product and the estimated life cycles
of certain products in a rapidly changing technology marketplace. Our ability to
make accurate estimates regarding inventory usage and valuation is integral to
minimizing inventory related charges in the future. Charges for excess and
obsolete inventory were significant in 2003 due to revisions in sales forecasts,
the estimated discontinuance of certain products and physical inventory
adjustments. Although we do not expect such charges to be as significant in the
future, the extent of future charges could be impacted by unknown events or
circumstances and the effect on our estimates.
GOODWILL
Our business combination with Ecrix in November 2001 resulted in a
significant amount of goodwill. Under FAS 142, "Goodwill and Other Intangible
Assets," goodwill is not amortized to operations, but is assessed periodically
for potential impairment based on estimates by management. An impairment may be
indicated by a significant decrease in the trading price of our Common Stock and
if such a decrease occurs, additional procedures are required to determine if
the carrying value of the goodwill exceeds its implied fair value. Any
impairment charge indicated by these tests could be significant to future
operating results. As of January 3, and June 30, 2004, we have concluded that we
have no goodwill impairment.
Recent Accounting Pronouncements
The Financial Accounting Standards Board has recently issued certain
accounting pronouncements that may impact our business. For a complete
discussion of these accounting pronouncements, see Note 18 to the Consolidated
Financial Statements in this Registration Statement.
44
RESULTS OF OPERATIONS
The following table presents the components of the Company's Consolidated
Statements of Operations in dollars, and as a percentage of revenue, and the
percentage increase or decrease in each component from period to period for the
three years ended December 29, 2001, December 28, 2002 and January 3, 2004 and
the six months ended June 28, 2003 and June 30, 2004.
Consolidated Statements Of Operations
Fiscal Years Ended
-------------------------------------------------------------------------------
December 29, December 28, January 3,
2001 2002 2004
------------------ ------------------- -------------------
% of % % of % % of
(In thousands except per share data) $ Revenue Change $ Revenue Change $ Revenue
--------- ------- ------ --------- ------- ------ ---------- -------
Net revenue $ 158,438 100.0 (15.9) $ 133,191 100.0 (29.3) $ 94,169 100.0
Cost of goods sold 132,143 83.4 (16.0) 110,948 83.3 (29.2) 78,576 83.4
--------- ----- --------- ----- ---------- -----
Gross profit 26,295 16.6 (15.4) 22,243 16.7 (29.9) 15,593 16.6
Operating expenses:
Selling, general and administrative 36,759 23.2 (25.7) 27,316 20.5 10.1 30,084 31.9
Research and development 25,184 15.9 (5.8) 23,713 17.8 (58.6) 9,826 10.4
Lease terminations and related costs -- -- -- -- -- -- 4,707 5.1
--------- ----- --------- ----- ---------- -----
Total operating expenses 61,943 39.1 (17.6) 51,029 38.3 (12.6) 44,617 47.4
--------- ----- --------- ----- ---------- -----
Loss from operations (35,648) (22.5) 19.2 (28,786) (21.6) (0.8) (29,024) (30.8)
Other income (expense):
Gain from sale of investment 1,719 1.1 (12.7) 1,500 1.1 (100.0) -- --
Sale of technology -- -- -- 1,200 0.9 (100.0) -- --
Interest expense (1,715) (1.1) (19.6) (2,051) (1.5) (527.0) (12,859) (13.7)
Loss on foreign currency translation 124 0.1 (747.6) (803) (0.6) (130.5) (1,851) (2.0)
Other 424 0.2 (225.9) (534) (0.4) 124.3 130 0.1
--------- ----- --------- ----- ---------- -----
Loss before income taxes and
equity in loss of investee (35,096) (22.2) 16.0 (29,474) (22.1) (47.9) (43,604) (46.3)
Income tax (expense) benefit 6 -- -- 402 0.3 (121.9) (88) (0.1)
Equity in net loss of investee (343) (0.2) 100.0 -- -- -- -- --
--------- ----- --------- ----- ---------- -----
Net loss (35,433) (22.4) 18.0 (29,072) (21.8) (50.3) (43,692) (46.4)
Deemed dividend related to beneficial
conversion features of preferred
stock -- -- -- (4,557) (3.4) 87.8 (556) (0.6)
--------- ----- --------- ----- ---------- -----
Net loss available to Common
Stockholders $ (35,433) (22.4) 5.1 $ 33,629) (25.2) (31.6) $ (44,248) (47.0)
========= ===== ========= ===== ========== ======
Basic and diluted loss per share $ (1.47) 30.6 $ (1.02) 31.4 $ (0.70)
========= ========= ==========
45
Six months ended (unaudited)
--------------------------------------------------------
June 28, 2003 June 30, 2004
-------------------- --------------------
% of % % of
(In thousands except per share data) $ Revenue Change $ Revenue
-------- ------- ------ -------- -------
Net revenue $ 45,330 100.0 16.4 $ 52,759 100.0
Cost of goods sold 42,403 93.5 (7.5) 39,226 74.3
-------- ----- ------ -------- -------
Gross profit 2,927 6.5 362.4 13,533 25.7
Operating expenses:
Selling, general and administrative 18,124 40.0 (33.1) 12,133 23.0
Research and development 5,588 12.3 (16.9) 4,643 8.8
-------- ----- ------ -------- -------
Total operating expenses 23,712 52.3 (29.2) 16,776 31.8
Loss from operations (20,785) (45.8) (84.4) (3,243) (6.1)
Other income (expense):
Interest expense (3,698) (8.2) (74.2) (955) (1.8)
Gain (loss) on foreign currency
translation (212) (0.5) 330.2 488 0.9
Other, net 148 0.3 (118.2) (27) (0.1)
-------- ----- ------ -------- -------
Loss before income taxes (24,547) (54.2) (84.8) (3,737) (7.1)
Income tax (expense) benefit (85) (0.2) 0.2 (29) (0.1)
-------- ----- ------ -------- -------
Net loss $(24,632) (54.4) (84.7) $ (3,766) (7.1)
Deemed dividend related to exchange of
preferred stock -- -- -- (4,225) (8.0)
-------- ----- ------ -------- -------
Net loss available to common
stockholders $(24,632) (54.4) (82.7) $ (7,991) (15.1)
======== ======= ====== ======== =======
Basic and diluted net loss per share $ 0.56) (94.9) $ (0.08)
======== ========
46
Net Revenue by Product Type
The following tables present our revenue by product in dollars (in
thousands) and as a percentage of net revenue for each period presented:
Fiscal Year Ended Six Months Ended
------------------------------------ -----------------------
June 28, June 30,
2001 2002 2003 2003 2004
---- ---- ---- ---- ----
Drives $ 48,440 $ 36,675 $ 28,415 $ 12,512 $ 16,653
Libraries 40,436 31,551 13,444 7,507 12,697
Media 58,691 58,777 44,457 21,248 19,912
Service, spares and other 11,842 9,445 9,077 4,771 4,781
Sales allowances (971) (3,257) (1,224) (708) (1,284)
--------- --------- --------- --------- ---------
$ 158,438 $ 133,191 $ 94,169 $ 45,330 $ 52,759
========= ========= ========= ========= =========
Fiscal Year Ended Six Months Ended
--------------------------- ------------------
June 28, June 30,
2001 2002 2003 2003 2004
---- ---- ---- ---- ----
Drives 30.6% 27.5% 30.2% 27.6% 31.6%
Libraries 25.5 23.7 14.3 16.6 24.1
Media 37.0 44.1 47.2 46.9 37.7
Service, spares and other 7.5 7.1 9.6 10.5 9.0
Sales allowances (0.6) (2.4) (1.3) (1.6) (2.4)
----- ----- ----- ----- -----
100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
Six Months Ended June 30, 2004 Compared to Six Months Ended June 28, 2003
Our net revenue increased 16.4% from $45,330,000 for the six months ended
June 28, 2003 to $52,759,000 for the six months ended June 30, 2004. In addition
to a general downturn in business spending, during 2003 we experienced delays in
inventory shipments from suppliers due to limited liquidity, particularly for
libraries and other automation products. In addition, sales of Mammoth drives
and products continued to decline at an increasing rate in 2003 and in the first
six months of 2004, prior to significant sales of VXA related products,
including automation, which increased in the fourth quarter of 2003 and in the
first six months of 2004. In particular, the introduction of a new VXA-based
automation product in the first quarter of 2004 contributed significantly to the
revenue growth in the second quarter of 2004. As a percentage of total net
revenue, revenue from drives increased in the first six months of 2004, as
compared to the same period in 2003, as revenue from increased unit shipments of
VXA drives continued to replace declining sales of Mammoth drives at an
increasing rate. Net revenue from libraries/automation products for the first
six months of 2004 represented 24.1% of total revenue, as compared to 16.6% for
the first six months of 2003. This increase was due to reduced product shipments
in 2003 and the impact of the new automation product in 2004, which contributed
$6,467,000 in revenue. Media revenue decreased as a percentage of total revenue
in 2004 as compared to 2003, primarily due to increased hardware sales, lower
average sales prices resulting from the Imation agreement, and decreased revenue
from Mammoth related media, partially offset by an increasing installed base of
VXA drives and the related sales of media products. Total revenue from service,
spares and other decreased as a percentage of total net revenue for the first
six months of 2004, as compared to 2003, due to the outsourcing of a significant
portion of our service business to Teleplan in the third quarter of 2003. Total
service revenue, and related costs, will likely continue to decrease as a
percentage of revenue in the future due to the Teleplan arrangement. Sales
allowances increased for both periods in 2004, as compared to 2003, due to
increased marketing and advertising program costs in 2004.
Fiscal 2003 Compared to 2002
Our net revenue decreased by 29.3% from $133,191,000 in 2002 to
$94,169,000 in 2003. This decrease is primarily due to the continued downturn in
business spending, the bankruptcy of a significant customer in the second
quarter of 2003, the delay in achieving increased revenue from OEM
47
customers due to longer than anticipated sales lead times with these customers,
and decreased inventory shipments throughout the first six months of 2003 due to
limited liquidity. As percentages of total net revenue, revenue from drives
increased in 2003 over 2002. For 2003, revenue from VXA-1 and VXA-2 drives
continued to replace declining sales of M2 drives but did not offset the decline
in M2 sales. We began shipping VXA-2 drives to the OEM channel in the fourth
quarter of 2002. As a percentage of total net revenue, revenue from libraries
decreased from 23.7% in 2002 to 14.3% in 2003. This decrease is primarily the
result of our inability to fulfill sales orders due to reduced library shipments
from our supplier during 2003 because of liquidity issues. Media revenue
increased as a percentage of total revenue in 2003, as compared to 2002,
primarily due to the increasing installed base of VXA drives and the related
sales of media products. Total revenue from service, spares and other remained
relatively constant in 2003 as compared to 2002. Although our installed base of
products increased, the installed base of higher service and warranty cost M2
drives continued to decrease. Total service revenue, and related costs, will
likely decrease in the future as a result of the outsourcing of this function to
Teleplan.
Sales allowances decreased in 2003 by $2,033,000, due primarily to
decreased stock rotation activity in the last three quarters of the year.
Fiscal 2002 Compared to 2001
Our net revenue decreased by 15.9% from $158,438,000 in 2001 to
$133,191,000 in 2002. We believe this decrease was due to a general slowdown in
the technology industry, competition, decreasing OEM sales and declining sales
of Mammoth and earlier generation tape drives and older library products. In
particular, OEM sales of these products continued to decline as the products
entered the later stages of their life cycles and because of M2 reliability
issues. Revenue from sales of VXA-1 and VXA-2 drives and library products
continued to increase as these products began to gain customer acceptance of
these relatively new technologies but did not offset the decline of older
products. Sales of service and spare parts decreased $2,396,000, which relates
to a decreasing installed base of our legacy hardware products and, accordingly,
there were fewer drives and libraries outside of their three-year warranty
period to service in 2002 compared to 2001. In addition, we believe that outside
competition in the repair business adversely affected sales of service and spare
parts.
Media sales remained relatively constant from 2001 to 2002, due to the
fact that media demand remained strong for previously sold drives and libraries.
We believe that customers were purchasing media for existing products as they
deferred investments in new equipment. Additionally, media sales included VXA
tape sales in 2002, with little or no comparable amounts in 2001.
In addition, 2002 revenue was negatively impacted by a significant
decrease in fourth quarter sales in our government sector business and the
deferral into the first quarter of 2003 of revenue for product we were not able
to ship at the end of the fourth quarter.
Sales allowances increased in 2002 by $2,287,000 due to charges related to
stock rotations during 2002, while we had a credit for these programs during
2001 and certain marketing related programs for 2002. Exposure to qualifying
sales under this program remained relatively stable in 2002 compared to 2001.
However, during 2001, exposure to qualifying sales decreased.
Net Revenue by Customer Type
The following table presents our revenue from different types of customers
as a percentage of net revenue for each of the following years:
Fiscal Year Ended Six Months Ended
------------------------ -------------------------------
2001 2002 2003 June 28, 2003 June 30, 2004
---- ---- ---- ------------- -------------
Distributor/Reseller 70.8% 75.6% 63.6% 73.4% 74.1%
OEM 23.6 18.6 20.4 16.2 19.8
End user and other 5.6 5.8 16.0 10.4 6.1
----- ----- ----- ----- -----
100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
48
Six Months Ended June 30, 2004 Compared to Six Months Ended June 28, 2003
Revenue from distributor/reseller customers remained relatively constant
as a percentage of net revenue in the first six months of 2004, as compared to
the first six months of 2003, while revenue from OEM customers increased for the
first six months of 2004. Sales of VXA drive and library/automation products to
our two largest OEM customers, IBM and Fujitsu-Siemens, increased in 2004, while
sales of Mammoth related products continued to decrease. Our ongoing effort to
sell VXA products to OEMs is an important part of our business plan and return
to profitability and such sales continued to increase in the second half of 2003
and into 2004. Revenue from end user customers (primarily, service, repair and
spare parts) decreased as a percentage of total revenue in 2004 due to increases
in revenue from distributors/resellers and OEM customers and our outsourcing
agreement with Teleplan. Fiscal 2003 Compared to 2002
Revenue from distributor/reseller customers decreased as a percentage of
net revenue from 2002, as compared to 2003, while revenue from OEM and end-user
customers (primarily service, repair and sales of spare parts) increased as a
percentage of net revenue in 2003. Our ongoing effort to sell VXA products to
OEMs is an important part of our business plan and return to profitability and
such sales, as well as sales of Mammoth products, continued to increase as a
percentage of net revenue throughout 2003.
Fiscal 2002 Compared to 2001
Revenue from distributor/reseller and end user customers increased as a
percentage of sales from 70.8% in 2001 to 75.6% in 2002. Sales to OEM customers
decreased as a percentage of sales from 23.6% in 2001 to 18.6% in 2002. We
believe these fluctuations were a result of wider acceptance of our newer
generation products through the reseller channel, and delayed acceptance of the
VXA technologies in the OEM channel. OEM customers have an extended
qualification, adoption and integration time before purchasing new products.
Net Revenue by Geographic Region
Geographically, revenue is attributed to the customer's location. The
following table summarizes our revenue by geographic region as a percentage of
total net revenue:
Fiscal Year Ended Six Months Ended
-------------------------- ----------------------------
2001 2002 2003 June 28, 2003 June 30, 2004
---- ---- ---- ------------- -------------
United States 71.4% 72.5% 69.1% 68.6% 74.8%
Europe/Middle East 20.3 20.1 22.7 22.1 20.2
Asia Pacific 6.9 6.8 7.7 8.8 3.4
Other 1.4 0.6 0.5 0.5 1.6
----- ----- ----- ----- -----
100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
Six Months Ended June 30, 2004 Compared to Six Months Ended June 28, 2003
In the first quarter of 2004, substantially all media was sold and shipped
to Imation domestically. Imation then distributed the media to its customers in
countries throughout the world. This process resulted in a decrease in revenue
from locations other than the United States. In the second quarter of 2004,
media sold to Imation was shipped to designated domestic and international
distribution centers and a distribution center in Europe. No media has been
shipped to the Imation distribution center in Asia Pacific as of June 30, 2004.
Accordingly, the geographic representation of the associated revenue is
reflected in the appropriate region based upon the distribution center location.
Fiscal 2003 Compared to 2002
Revenue from customers in Europe and Asia Pacific increased in 2003 from
26.9% to 30.4% of total revenue, due to increased sales of library products to
OEM customers and increased market penetration of the VXA technology in these
regions. Revenue from European customers decreased by $5,379,000 and revenue
from Asia Pacific customers decreased by $1,766,000. These decreases were
related to worldwide economic issues, as well as inventory shortages due to our
lack of liquidity during
49
2003. We expect international revenue, which totaled $29,094,000 in 2003, to
continue to increase as a percentage of total net revenue as these marketing
activities expand.
Fiscal 2002 Compared to 2001
Revenue from domestic customers increased from 71.4% of net revenue in
2001 to 72.5% in 2002, with a corresponding decrease in revenue from
international customers in 2002. Comparing 2001 to 2002, sales to domestic
customers decreased by $16,348,000, sales to European customers decreased by
$5,381,000 and sales to Asia Pacific customers decreased by $1,925,000. We
believe these decreases resulted from a worldwide economic slowdown,
particularly in the technology industry, as well as the other factors listed
above.
Significant Customers
The following table summarizes customers who accounted for 10% or more of
revenue, and other significant customers, for the years or periods presented:
Fiscal Year Ended Six Months Ended
------------------------ -----------------------------
2001 2002 2003 June 28, 2003 June 30, 2004
---- ---- ---- ------------- -------------
Imation 1.2% 1.8% 8.8% 1.6% 38.7%
Tech Data 12.2 15.8 16.2 18.8 12.6
Ingram Micro 17.6 17.9 16.0 16.5 11.4
IBM 10.1 7.9 6.8 6.8 10.7
Digital Storage 10.6 16.1 1.9 6.1 --
Fujitsu Siemens 0.1 3.3 5.9 5.0 6.5
No other customers accounted for 10% or more of sales in any of the above
periods. We cannot guarantee that revenue from these or any other customers will
continue to represent the same percentage of our revenue in future periods. Our
customers also sell competing products and continually review new technologies,
which causes our sales volumes to vary from period to period.
Cost of Sales and Gross Margin
Our cost of goods sold includes the actual cost of all materials, labor
and overhead incurred in the manufacturing and service processes, as well as
certain other related costs, which include primarily provisions for warranty
repairs and inventory reserves.
Six Months Ended June 30, 2004 Compared to Six Months Ended June 28, 2003
Our gross margin percentage increased from 6.5% in the first six months of
2003 to 25.7% in the first six months of 2004. Cost of goods sold for the first
six months of 2003 included additional inventory reserves of $6,849,000, which
had a 15.0% impact on our gross margin. Gross margins in 2004 were positively
impacted by overall lower drive product costs and increased sales of
library/automation products which have higher gross margins. Margins for the
first six months of 2004 also improved due to decreased service and warranty
costs, primarily due to a decrease in the number of units under warranty,
overall decreases in M2 drives returned for service and a decrease in the
related warranty cost per unit. In addition, gross margin for the first six
months of 2004 was negatively impacted by the effect of foreign currency
fluctuations for product purchases denominated in Yen at a fixed conversion rate
and lower average selling prices for media resulting from the Imation
distribution agreement, as compared to 2003.
Fiscal Year 2003 Compared to 2002
Our cost of goods sold decreased from $110,948,000 for 2002 to $78,576,000
in 2003 due to decreased revenue. Our gross margin percentage remained constant
at 16.7% in 2002 and 16.6% in 2003. In 2002, cost of goods sold included
restructuring charges of $3,857,000. In 2003, cost of goods sold included
additional inventory reserves of $6,849,000. The restructuring charges in 2002
had an approximate 3.1% impact on our gross margin percentage. In 2003, the
additional inventory reserves had an approximate 7.3% impact on our gross
margins. In 2003, gross margins were positively
50
impacted by decreases in fixed costs due to headcount reductions in 2002 and
early 2003, decreased warranty reserves, primarily resulting from the decrease
in the number of units under warranty for Mammoth and M2 products, an overall
decrease in standard warranty cost per unit, and lower freight costs. Gross
profit in 2003 was negatively impacted by a higher percentage of sales to OEM
customers at lower gross margins and the effect of foreign currency fluctuations
for product purchases denominated in yen at a fixed conversion rate, which
totaled $1,381,000. Gross profit for 2002 was negatively impacted by increased
inventory reserves, the write-off of an in-process capital asset project and
additional reserves recorded for vacated excess facilities.
Fiscal Year 2002 Compared to 2001
Our cost of sales decreased from $132,143,000 in 2001 to $110,948,000 in
2002. Our gross margin percentage increased from 16.6% in 2001 to 16.7% in 2002.
Restructuring charges in 2001 and 2002 were approximately 0.1% and 3.1% of the
total costs, respectively. Gross margins for 2002 included restructuring charges
of $3,857,000, but were favorably impacted by decreases in fixed costs due to
reduced headcount, lower warranty expense due to the decreasing M2 installed
base under warranty, product cost improvements and a VAT refund of $580,000.
Partially offsetting these favorable impacts were increased inventory reserves
related to manufacturing outsourcing and product roadmap decisions and the
write-down of certain assets, primarily M3 tooling.
Selling, General and Administrative
Selling, general and administrative ("SG&A") expenses include salaries,
sales commissions, advertising expenses and marketing programs.
Six Months Ended June 30, 2004 Compared to Six Months Ended June 28, 2003
SG&A expenses decreased from $18,124,000 and 40.0% of total revenue in the
first six months of 2003 to $12,133,000 and 23.0% of total revenue in the first
six months of 2004. In 2003, SG&A expenses included $5,962,000 for bad debt
expense related to the bankruptcy of a major customer. Decreased SG&A expenses
in the first six months of 2004 is a result of cost control measures, which
included limitations on expense increases and new hiring.
Fiscal Year 2003 Compared to 2002
SG&A expenses increased from $27,316,000 in 2002 to $30,084,000 for 2003.
SG&A expenses included restructuring charges of $688,000 in 2002, and in 2003
included $5,962,000 for bad debt expense related to a major customer. SG&A for
2003 also included decreases due to headcount reductions in 2002 and 2003, the
impact of which was primarily realized in 2003, and overall cost control
measures implemented in 2003, which included limitations on expenses and new
hiring, although such expenses did not decrease in proportion to the decrease in
revenue.
Fiscal Year 2002 Compared to 2001
SG&A expenses decreased from $36,759,000 and 23.2% of revenue in 2001 to
$27,316,000 and 20.5% of revenue in 2002. Included in 2001 and 2002 were
$179,000 and $688,000 of restructuring charges, respectively. Fiscal 2002
included decreases as a result of headcount reductions as part of our
restructurings in the first and third quarters of 2002 and continued cost
control efforts during the year. In addition, advertising expenses decreased in
2002 due to fewer product launches. Partially offsetting these expense decreases
were restructuring charges during the first quarter of 2002.
Research and Development
Research and development expenses include salaries, third-party
development costs and prototype expenses.
51
Six Months Ended June 30, 2004 Compared to Six Months Ended June 28, 2003
Research and development expenses decreased from $5,588,000 and 12.3% of
total revenue for the first six months of 2003 to $4,643,000 and 8.8% of total
revenue for the first six months of 2004. The decrease in 2004 is the result of
headcount reductions and lower costs for external engineering. However,
engineering costs for future new product introductions and costs related to
expanded manufacturing activities in China for certain products partially offset
these decreases in the first six months of 2004. Management believes that the
Company continues to have the necessary resources in place to meet all
technology development related milestones.
Fiscal Year 2003 Compared to 2002
Research and development expenses decreased from $23,713,000 in 2002 to
$9,826,000 for 2003. The decreases in 2003 are the result of significant
headcount reductions, lower costs for external engineering, and a decrease in
costs incurred in developing VXA and related automation products. Management
believes that the Company continues to have the necessary resources in place to
meet all technology development related milestones in 2004.
Fiscal Year 2002 Compared to 2001
Research and development expenses decreased from $25,184,000 in 2001 to
$23,713,000 in 2002, but as a percentage of revenue, increased from 15.9% to
17.8% for the same years. Included in research and development expenses for 2001
and 2002 were restructuring charges of $97,000 and $245,000, respectively.
Research and development expenses were favorably impacted by lower automation
development costs in 2002 as compared to 2001, due to a larger number of product
introductions in 2001. Partially offsetting the decrease in expenses was the
write-down of certain assets during the first quarter of 2002
Lease Terminations and Related Costs
During the third quarter of 2003, we were in default under three lease
agreements for facilities due to delinquent rental payments. For the first
property, which included the Company's headquarters, the lessor terminated the
original lease and subsequent short-term lease on June 30, 2003, and we ceased
use of the building on that date. Remaining lease payments under the original
lease total approximately $1,600,000. The lessor under this lease commenced
litigation against the Company and claimed damages relating to the rental
default and an alleged failure to maintain the leased premises. In October 2003,
we reached a settlement with the lessor for the payment of the remaining lease
payments over a one-year period commencing in November 2003.
In September 2003, we entered into a note payable in the amount of
$3,060,000 with the lessor of certain of our 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 and bears
interest at the prime rate for the first year (4.0% at September 27, 2003), 6.0%
for years two through four and 10.0% for year five. 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 will
be recognized over the term of the note as additional interest expense using the
effective interest method. We also settled our obligation under a third lease
for our former San Diego, California sales office space, which totaled
approximately $170,000.
As a result of the lease terminations and settlements and the Company
ceasing to use the leased facilities, we recorded lease termination expense and
related costs totaling $4,707,000 in 2003. Included in this amount is $4,498,000
of past and future rental payments and $972,000 of accelerated amortization of
leasehold improvements, less $763,000 of related deferred rent concessions.
52
Other Income (Expense), Net
Other income (expense), net consists primarily of income from the sales of
our ownership interests in other companies, a one-time sale of technology,
interest income and expense, foreign currency fluctuation gains and losses and
other miscellaneous items.
Six Months Ended June 30, 2004 Compared to Six Months Ended June 28, 2003
For the first six months of 2003, we incurred interest expense of
$3,698,000, of which $2,571,000 was non-cash interest related to the issuance of
common stock in exchange for investor guarantees on our bank line of credit and
common stock purchase warrants issued to our bank, with the remaining $1,127,000
representing cash interest expense. In 2004, interest expense totaled $955,000,
with the decrease in cash interest expense being primarily due to lower average
balances outstanding on our bank line of credit. Interest rates on our line of
credit with our bank were comparable in both periods.
Foreign currency translation gains and losses fluctuated from a loss of
$212,000 to a gain of $488,000 for the first six months of 2003 and 2004,
respectively. This fluctuation was primarily due to a significant strengthening
of the Japanese Yen and the Euro against the U.S. dollar in the fourth quarter
of 2003 and continuing into the first quarter of 2004, and a strengthening of
the dollar in the second quarter of 2004, which resulted in a net gain for the
six months in 2004.
Fiscal Year 2003 Compared to 2002
In 2003, other income (expense) includes interest expense of $12,859,000
of which $10,146,000 was stock-based interest related to the issuance of Common
Stock in exchange for investor guaranties on our bank line of credit (discussed
in detail below under "Borrowings"). The remaining interest expense was cash
interest and fees incurred on our bank line of credit. In 2002 we recognized
interest expense of $2,051,000, of which $541,000 related to the beneficial
conversion feature of a bridge loan and the value of related stock warrants.
Interest incurred on our bank line of credit was higher in 2003 compared to 2002
due to an interest rate of 9.5% for 2003 as compared to 5.5% for 2002.
During 2002, we sold our remaining ownership interest in CreekPath
Systems, Inc., resulting in a gain of $1,500,000. Also, during 2002, we
recognized income of $1,200,000 related to the sale of a manufacturing license
agreement. Both of these items are included in other income for 2002.
The result of foreign currency translations fluctuated from a loss of
$803,000 to a loss of $1,851,000 for 2002 and 2003, respectively. These
fluctuations resulted primarily from a significant strengthening of the Japanese
Yen and the Euro against the U.S. dollar in both 2002 and 2003, particularly in
the last four months of 2003.
Fiscal Year 2002 Compared to 2001
Interest income decreased from $86,000 for 2001 to $27,000 in 2002, due to
the disposition of substantially all of our interest bearing assets by the end
of the second quarter of 2002. Interest expense increased from $1,715,000 for
2001 to $2,051,000 for 2002, which included a non-cash interest charge of
$541,000 related to the beneficial conversion feature of a bridge loan and the
value of the related warrants. Other income (expense) items other than interest
income and expense decreased from income of $2,181,000 for 2001 to income of
$1,336,000 for 2002. A $1,719,000 gain on the sale of our investment in Sun
Microsystems favorably impacted 2001. In June 2002, Exabyte sold its remaining
ownership interest in CreekPath Systems, Inc. for total proceeds and a gain of
$1,500,000 due to the interest in CreekPath Systems, Inc. previously being
written down to zero. During the first quarter of 2002, we received and
recognized $1,200,000 related to a sale of a manufacturing license agreement.
Fluctuations in the dollar/Yen and dollar/Euro exchange rates resulted in a gain
of $124,000 in 2001 and a loss of $803,000 in 2002.
53
Taxes
In 2003 and the first six months of 2004, we recognized tax expense
related solely to our foreign operations. In 2002, we recorded a benefit from
income taxes in the amount of $402,000, primarily as a result of a Federal
income tax refund received in the amount of $453,000. This refund was for a
prior year filing and related to issues for which tax expense had previously
been recorded. In 2001, we recognized $6,000 of income tax benefit. Based on
cumulative operating losses over the prior five years and the uncertainty
regarding future profitability, we continue to reserve 100% of our deferred tax
assets. We believe a 100% valuation allowance will be required until the Company
achieves a consistent and predictable level of profitability.
At January 3, 2004, we had domestic net operating loss carry forwards
available to offset future taxable income of approximately $216,000,000, which
expire between 2005 and 2023. Under the Tax Reform Act of 1986, the amount of
and the benefit from net operating losses that can be carried forward may be
limited in certain circumstances. Due to a cumulative ownership change of more
than 50% over a three-year period which occurred in November 2001 in connection
with the Ecrix merger, the portion of Exabyte's and Ecrix's pre-business
combination tax carryovers totaling $153,000,000 that can be utilized in any one
taxable year for federal tax purposes is limited to approximately $1,200,000 per
year through 2021. Ownership changes after January 3, 2004 could further limit
the utilization of our remaining net operating loss carry forward of
$63,000,000, in addition to any losses incurred subsequent to January 3, 2004.
As of January 3, 2004, we had approximately $85,000,000 of total net operating
loss carry forwards to offset future taxable income.
Loss Per Share
Basic and diluted loss per share was $0.56 for the first six months of
2003 and $0.08 in 2004. Outstanding common shares increased significantly
subsequent to the first quarter of 2003 due to common shares issued for loan
guaranties, which impacted the loss per share calculation in 2004. In addition,
2004 included a $4,225,000 deemed dividend relating to the exchange of preferred
stock. Basic and diluted loss per share was $0.70 in 2003 compared to $1.02 in
2002. Included in the 2003 loss per share is $556,000, or $0.01 per share,
related to the value of the consideration granted for the beneficial conversion
of the Company's Series G preferred stock. In addition, outstanding common
shares increased significantly in 2003 due to shares issued for loan guaranties.
Basic and diluted loss per share decreased from $1.47 per share in 2001 to $1.02
per share for 2002. Included in the 2002 per share loss amount is a deemed
dividend in the amount of $4,557,000, or $0.14 per share, related to the
beneficial conversion feature of the Company's Series I preferred stock.
Included in the 2001 and 2002 per share loss amounts are restructuring charges
of $0.02 and $0.15 per share, respectively.
Liquidity And Capital Resources
Liquidity Issues
We have incurred losses for the past several years and realized losses in
the first six months of 2003 and 2004. In addition, at June 30, 2004, we had a
stockholders' deficit of $5,625,000, and a working capital surplus of
$9,411,000. We have evaluated various strategic alternatives that would increase
working capital and liquidity.
On May 3, 2004, we completed the sale of newly authorized Series AA
preferred shares and common stock purchase warrants for total net proceeds of
approximately $23.8 million in cash. These proceeds were, used to repay our
line-of-credit with our bank and general working capital purposes. In addition,
in November 2003, we entered into a Media and Distribution Agreement with, and
sold preferred stock to, Imation and we received proceeds of $20 million in
cash. These proceeds were also used primarily to repay our line-of-credit and
meet other supplier requirements. During 2003, we also successfully negotiated
and restructured the payment terms for certain amounts due to suppliers and
settled our obligations due to various lessors for facilities. These
negotiations and settlements resulted in the deferral of the payment of a
portion of these amounts into 2005 and thereafter. Currently, our primary
sources of liquidity are the Series AA offering proceeds, the Imation proceeds,
availability under our line of credit with Silicon Valley Bank, notes payable to
suppliers and others, and our ability
54
to generate cash from operations. Based on current operating forecasts, we
believe that cash from these sources, including the proceeds from the Series AA
offering will be adequate to meet our cash needs until we achieve positive cash
flows from operations and profitable operating results.
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, significant unbudgeted
expenditures, or other adverse operating conditions could impact our ability to
achieve our forecasted operating results, 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.
Cash Flows
Six Months Ended June 30, 2004
As of June 30, 2004, we have $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, reduced 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 $1,488,000, net. In 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, offset by net payments on our 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.
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 $1,500,000 in 2004 with
$1,090,000 incurred in the first six months.
Six Months Ended June 28, 2003
As of June 28, 2003, we had $1,348,000 in cash and cash equivalents and
negative working capital of $24,266,000. During the first six months of 2003,
$7,684,000 was provided by operating activities, $2,026,000 was used by
investing activities and $4,974,000 was used by financing activities. Cash
provided by operating activities was primarily related to the net reductions in
inventory of $14,433,000 and accounts receivable of $5,819,000, net of our net
loss of $24,632,000. Inventory decreased as a result of both reduced inventory
quantities and increased inventory reserves on certain end of life and older
products. The reduction in accounts receivable is a combination of an increase
in the allowance for doubtful accounts of $5,962,000 as a result of the
bankruptcy of a major customer, and improved cash collections during the period.
Cash used by investing activities is due to capital expenditures, primarily
incurred for tooling for VXA products, and cash used by financing activities
represent net payments on our line of credit with our bank.
Fiscal 2003
As of January 3, 2004, we had $6,979,000 in cash and cash equivalents
and negative working capital of $6,256,000. In January 2004, we used a
substantial portion of our cash balance to repay our bank line-of-credit balance
of $6,498,000. During 2003, we had $23,258,000 in cash provided by
55
operating activities, $2,393,000 used by financing activities and $14,550,000
used by investing activities.
The components of cash provided by operations include our net loss of
$43,692,000, reduced by depreciation and amortization expense, stock-based
interest expense, provision for uncollectible accounts receivable and sales
returns and programs, lease termination expense and loss on foreign currency
translation, all of which totaled $27,573,000. In addition, cash flows from
operating activities in 2003 was impacted by (1) a decrease in accounts
receivable of $9,711,000 resulting from a reduction in days-sales-outstanding
from 127 days at December 28, 2002 to 56 days at January 3, 2004, as well as the
write-off of a $5,962,000 receivable balance from a significant customer that
filed bankruptcy in 2003, (2) an increase in deferred revenue related to the
$18,500,000 distribution fee received from Imation, (3) a decrease in inventory
of $12,497,000 due to increased usage and disposition of inventory items during
2003, and (4) a decrease in accounts payable and accrued liabilities of
$2,770,000 due in part to the use of the proceeds from the Media Distribution
Agreement to pay aged payables and accrued liabilities. Cash used by financing
activities is comprised primarily of net payments on the bank line-of-credit and
other notes payable of $16,065,000 and the proceeds from the sale of preferred
stock of $1,500,000. Cash used by investing activities relates to the purchase
of equipment and leasehold improvements.
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 $1,000,000 in 2004. This amount
is significantly less than prior years due to decreased new product development
activities and our overall lack of liquidity.
2002
As of December 28, 2002, we had $664,000 in cash and cash equivalents and
negative working capital of $5,199,000. From 2001 to 2002, our cash and cash
equivalents decreased $1,533,000 due to $13,267,000 used by operating
activities, $2,054,000 used by investing activities and $13,788,000 provided by
financing activities. Cash used by operating activities was primarily
attributable to our net loss of $29,072,000, but positively impacted from a
$13,843,000 increase in accounts payable. Cash used by investing activities was
primarily from capital expenditures of $3,903,000 offset by $1,590,000 in cash
proceeds from sales of investments. Cash provided by financing activities was
primarily a result of $7,081,000 from the issuance of stock, $1,000,000 from a
bridge loan, net borrowings of $6,269,000 on our line of credit and principal
payments of $1,013,000 on long-term debt obligations.
Borrowings
Line of Credit-Bank
On June 18, 2002, the Company entered into a $25,000,000 line of credit
agreement (the "Agreement") with Silicon Valley Bank ("SVB") that originally
expired in June 2005. The purpose of the Agreement is to provide funds for
general working capital needs. As of December 28, 2002, we were not in
compliance with certain financial covenants included in the Agreement which
constituted an event of default. In February 2003, SVB agreed to forbear from
exercising its remedies as a result of the default, and in April 2003, we
entered into the Third Modification Agreement ("Third Modification"). The Third
Modification provided for borrowings of up to $20,000,000, based on a specified
percentage of eligible accounts receivable, as defined, and a percentage of
specified inventory balances, also as defined in the Agreement. Collateral for
all borrowings included substantially all assets of the Company and the maturity
date of the Agreement was revised to September 30, 2003. Interest under the
Third Modification was charged at a rate equal to the prime rate plus 5.25%. The
Fourth Modification Agreement increased the overadvance guaranties from
$2,500,000 to $2,750,000 effective July 18, 2003.
On October 10, 2003, we entered into the Fifth Modification Agreement
which extended the Agreement through September 30, 2005, under similar terms and
conditions. In April, 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 adjusted). Eligible accounts receivable
56
excludes balances greater than 60 days past due, certain foreign receivables and
other items defined in the Revised Agreement. No borrowings are available based
on inventory balances. Interest is being charged at the prime rate plus 2.0%
(6.0%) retroactive to January 1, 2004 and the Revised Agreement also includes
financial covenants relating to operating results, limits on inventory levels
with product distributors, the maintenance of minimum levels of net worth or
deficit and prohibits the payment of cash dividends. The Revised Agreement also
includes certain acceleration clauses that may cause any outstanding balance to
become immediately due in the event of default. As of January 3, 2004, we were
in violation of the covenant relating to operating results for the fourth
quarter of 2003. We obtained a waiver of such covenant violation in March 2004.
As of March 31, 2004, we were in violation of the covenant relating to the
maintenance of specified levels of net worth or deficit and received a waiver of
such violation in April 2004. As of June 30, 2004, we were in compliance with
the financial covenants included in the Revised Agreement. At June 30, 2004, we
had no borrowings outstanding under the line of credit and $10,300,000 of
borrowing availability under the revised Agreement.
In connection with the Third Modification, SVB had notified the Company
that it was in an "over advance" state with respect to its line of credit, and
that in order for SVB to continue to allow the Company to borrow against the
line, the Company was required to cause its CEO and a significant investor
("Guarantors") to agree to guarantee up to a maximum of $2,500,000 for advances
in excess of the Company's credit limit (the "Guaranties"). The Company, through
an independent committee of its Board, negotiated agreements with the
Guarantors, whereby the Guarantors agreed to such a guarantee in exchange for a
specific number of shares of the Company's Common Stock. In addition, the
Company agreed to issue a warrant to SVB as compensation for allowing access to
the extended line of credit while the Guaranties were being negotiated. In
addition, SVB required that each of the Guarantors enter into a subordination
agreement ("Subordination Agreement"), whereby each Guarantor agreed to
subordinate to SVB: (1) all of our present and future indebtedness and
obligations to the Guarantor; and (2) all of the Guarantor's present and future
security interests in our assets and property. Additional guaranties for
$250,000 of excess borrowings were obtained in July 2003 under similar terms.
The Guaranties were terminated in November 2003. The excess borrowing
availability was substantially utilized by the Company during the period of time
that the Guaranties were in effect. Similar guaranties are not expected to be
needed in the future.
Notes Payable - Suppliers
During 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, which are due through 2005 and bear interest at rates ranging from zero
to 5%. In September 2003, we entered into restructuring and note payable
agreements (the Agreements) with a fifth supplier, Solectron Corporation
("Solectron"), for $8,991,000 which converted accounts payable and inventory
purchase commitments to a note payable. Of this balance, $3,020,000 represented
a current inventory purchase commitment which is non-interest bearing. In May
2004, we amended the Agreements and made a $2,020,000 prepayment on the note and
revised the payment schedule. As of June 30, 2004, all inventory purchase
commitments had been satisfied. The remaining balance of the note is unsecured
and is due monthly through 2007 with interest at 9.0%. As of June 30, 2004, the
total amount due under all notes payable - suppliers is $15,722,000, which is
payable as follows: 2004 - $6,881,000; 2005 - $7,410,000; 2006 - $1,335,000;
2007 - $96,000.
Through a lawsuit filed in February 2004, Solectron notified us that they
were declaring the Company to be in default under the Agreements due to
non-compliance with the inventory purchase provision of the Agreements, which
required the purchase of a specified amount of inventory by December 31, 2003.
We disputed this assertion and, based on consultation with our legal counsel, we
were advised that we had meritorious defenses related to this claim. On March 5,
2004, we entered into an agreement with Solectron that modified certain
provisions of the Agreement and cured the alleged default. As a result,
Solectron agreed to dismiss the lawsuit pending the extension of certain letters
of credit provided to Solectron by the Company, which was completed on March 8,
2004. In connection with the litigation, Solectron ceased production of products
for us during the period between March 1, 2004 and the date of settlement, at
which time production resumed.
57
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, and bears
interest at the prime rate for the first year (4.0% at January 3, 2004), 6.0%
for years two through four and 10.0% for year five. 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 our other borrowings. The discount will be
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
("Media Agreement") 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 revenue. On November 7, 2003, Imation also purchased 1,500,000 shares of
the Company's Series I Preferred Stock for $1,500,000, which was exchanged for
Series AA preferred shares in May 2004.
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, 2004 are as follows:
Less than 1 1 - 3 After
(In thousands) year years 3 years Total
---- ----- ------- -----
Notes payable $10,421 $5,163 $3,054 $18,638
Operating leases 946 2,592 43 3,581
Capital lease obligations 80 63 -- 143
------- ------ ------ -------
$11,447 $7,818 $3,097 $22,362
======= ====== ====== =======
We expect to fund these obligations through cash generated from operations
and the proceeds from the sale of the Series AA preferred shares in May 2004.
In addition, as of June 30, 2004, we have issued irrevocable
letters-of-credit in favor of certain suppliers totaling $750,000, of which
$250,000 expires on August 31, 2004, $250,000 expires on December 31, 2004, and
$250,000 expires March 1, 2005.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the ordinary course of our operations, we are exposed to certain market
risks, primarily fluctuations 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
the following assessment of our market risks.
58
Foreign Currency Exchange Rates
We have foreign subsidiaries whose operations expose us to foreign
currency exchange rate fluctuations (See Note 1 to the Consolidated Financial
Statements). Fluctuations in foreign currency exchange rates could impact
remeasurement of our foreign denominated assets and liabilities into U.S.
dollars and our future earnings and cash flows from transactions denominated in
different currencies. At June 30, 2004, 29.8% of our total liabilities,
consisting primarily of a note payable to a supplier, were denominated in
foreign currencies. During 2003 and the first six months of 2004, 12.2% and
17.6%, respectively, of operating expenses were denominated in foreign
currencies. Assets and revenue denominated in foreign currencies were not
significant in 2003 or 2004. We have subsidiaries in Europe, Japan and Singapore
whose accounting records are maintained in their local currency. Our exposure to
currency exchange rate fluctuations is diversified due to the number of
different countries in which we conduct business, although our most significant
exposure relates to the Yen due to certain product supply agreements with, and a
note payable to, a Japanese supplier. These agreements and note payable provided
for payments at a fixed conversion rate of 120 Yen/dollar. Foreign currency
gains and losses will continue to result from fluctuations in the exchange rates
of these subsidiaries' operations compared to the U.S. dollar thereby impacting
future operating results. We incurred a loss of $1,634,000 in 2003 and a gain of
$392,000 the first six months of 2004 due to the foreign currency translation of
the note payable to a supplier denominated in Yen at the fixed conversion rate.
In addition, our cost of goods sold increased in 2003 and the first quarter of
2004 by $1,381,000 and $488,000, respectively, due to the fluctuation in the
exchange rate of the Yen.
Effective April 1, 2004 we revised the supply agreement with the Japanese
supplier whereby subsequent product purchases are made in U.S. dollars at fixed
prices. This agreement does not apply to payments under the note payable which
will continue to be made in Yen at the fixed conversion rate.
We purchase certain inventory components and services, denominated in Yen,
from Japanese suppliers. We settle such payments at the prevailing spot rate. We
prepared sensitivity analyses of our exposure from foreign assets and
liabilities as of January 3, 2004, and our exposure from anticipated foreign
revenue and operating expenses in 2004 using historical data and anticipated
future activity to assess the impact of hypothetical changes in foreign currency
exchange rates. Based upon the results of these analyses, we estimate that a
hypothetical 10% unfavorable change in foreign currency exchange rates from the
2003 year end rates could have a $2,084,000 impact on liabilities. The expected
impact on net revenue and operating expenses is not considered significant.
As a result of the Revised Agreement with the Japanese supplier noted
above, we believe our financial statement exposure for foreign currency
fluctuations related to product purchases is not significant subsequent to June
30, 2004.
Interest Rates
At June 30, 2004, we had no borrowings outstanding on our line of credit,
and our interest rate on the line was prime plus 2.0% (6.25%). Fluctuations in
rates during 2004 could impact our interest expense related to this line of
credit. Other notes payable are at fixed rates throughout 2004.
We prepared sensitivity analyses of our exposure to interest rate
fluctuations to assess the impact of a hypothetical change in interest rates.
Based on the results of these analyses, we estimate that a hypothetical 10%
unfavorable change in interest rates with respect to our current rate of prime
plus 2.0% could have a $52,000 impact on results of operations assuming an
estimated average borrowing level of $8,000,000 during 2004. This risk is
similar to the interest rate risk in 2003.
59
DIRECTORS AND EXECUTIVE OFFICERS
There are currently eight directors on the Board. The Board is divided
into three classes. One class is elected at each annual meeting of stockholders
for a three-year term. Any vacancy on the Board (including a vacancy created by
an increase in the size of the Board) can be filled by either a majority vote of
the stockholders or a majority vote of the remaining directors. Any director
elected to fill a vacancy serves for the remainder of the term of the class in
which he or she was elected.
In connection with the merger of Ecrix Corporation with a subsidiary of
ours in November, 2001, three directors joined the Board of Directors as
required by the Agreement and Plan of Merger dated August 22, 2001 (the "Ecrix
agreement"). We agreed to take all actions necessary so that our Board of
Directors at all times includes three directors who are nominated by the three
directors designated in accordance with the Ecrix agreement. Any vacancy in one
of the designated positions is to be filled by the remaining designated
directors. If the investors (as defined in the Ecrix agreement) beneficially own
less than 30% of the outstanding voting power of all of our voting securities,
the number of directors which we are obligated to include as nominees on the
Board of Directors is reduced so that the number of designated directors
expressed as a percentage of our entire Board of Directors is approximately
equal to the percentage of the outstanding voting power than beneficially owned
by the investors, rounded to the nearest whole directorship but in any event not
a majority. Further, if the investors beneficially own less than 10% of our
outstanding voting power, the number of designees become zero. The investors
include entities in which Meritage Investment Partners, LLC is the general
partner. The three directors serving on our Board and having been designated
under the Ecrix agreement are: G. Jackson Tankersley, Jr.; John R. Garrett; and
Juan A. Rodriguez. Also Ms. Smeltzer McCoy was originally elected to the Board
of Directors in 2002 in satisfaction of one of the requirements for the sale of
Series I preferred stock in 2002.
The directors and executive officers of the Company and their ages as of
May 31, 2004, are as follows:
A. LAURENCE JONES
Mr. A. Laurence Jones, age 51, has served as a director of Exabyte since
May 1998, and served as non-executive Chairman of the Board from January 2002
until June 2002. He is currently the Chairman and CEO of Interelate Inc., a
leading provider of outsourced Customer Relationship Management services. He is
also the principal of Aegis Management, LLC, which provides high-level
management consulting services. Mr. Jones served as President and Chief
Executive Officer of Messagemedia, Inc., a provider of advanced email marketing
services, from March 1999 until January 2002. Previously, Mr. Jones served as an
independent operating affiliate of McCown DeLeeuw and Co., a private equity
firm, and chairman of SARCOM, a national IT services company. From 1993 to 1998
Mr. Jones served as President and Chief Executive Officer of Neodata Services,
Inc., a direct marketing services company with lead investor Hicks, Muse, Tate
and Furst. Mr. Jones also served as President and Chief Executive Officer of
GovPX, Inc., a leading financial information services provider from 1991 to
1993. From 1987 to 1991 Mr. Jones was with Automatic Data Processing and from
1977 to 1987 he was with Wang Laboratories. Mr. Jones also serves as a director
of Activant Solutions, a private computer services company, and Realm
Corporation, a private real estate software company.
G. JACKSON TANKERSLEY, JR.
Mr. G. Jackson Tankersley, Jr., age 55, has served on Exabyte's Board of
Directors since November 2001. Mr. Tankersley is a managing director of Meritage
Private Equity Funds, a Denver-based private equity firm with more than $475
million of committed capital under management. Previously, Mr. Tankersley
co-founded The Centennial Funds in 1981 and served as either its chief executive
officer or chief investment officer until 1997. He began his career at
Continental Illinois Bank in 1974 and joined its venture capital subsidiary in
1978. Mr. Tankersley also serves on the boards of directors of various private
companies, including several Meritage portfolio companies. Mr. Tankersley
previously served on the board of directors of Ecrix Corporation from 1996 until
the merger of Ecrix with a subsidiary of Exabyte in November 2001.
60
JOHN R. GARRETT
Mr. John R. Garrett, age 47, joined Exabyte as a director in December
2003. He is currently a managing director of Meritage Private Equity Funds, a
Denver-based private equity firm with over $475 million of committed capital
under management. Prior to joining Meritage upon its formation in 1999, Mr.
Garrett was a shareholder of the Denver law firm of Brownstein Hyatt & Farber,
where he served as head of the corporate and securities law practice group from
1995 to 1999. Previously, Mr. Garrett was a partner in the national law firm of
Kirkland & Ellis in Denver and in New York City from 1986 to 1995. Mr. Garrett
also serves on the board of directors of Xspedius Holding Corp., a Meritage
portfolio company.
THOMAS E. PARDUN
Mr. Thomas E. Pardun, age 60, has served as a director of Exabyte since
April 1995. Mr. Pardun served as Chairman of the Board of Western Digital
Corporation, an information storage provider, from January 2000 until December
2001, and Chairman of the Board and Chief Executive Officer of edge2net, Inc., a
provider of voice, data and video services, from November 2000 until September
2001. Previously, Mr. Pardun was President of MediaOne International,
Asia-Pacific (previously U.S. West International, Asia-Pacific, a subsidiary of
U.S. West, Inc.), an owner/operator of international properties in cable
television, telephone services, and wireless communications companies, from May
1996 until his retirement in July 2000. Before joining U.S. West, Mr. Pardun was
President of the Central Group for Sprint, as well as President of Sprint's West
Division and Senior Vice President of Business Development for United Telecom, a
predecessor company to Sprint. Mr. Pardun also held a variety of management
positions during a 19-year tenure with IBM, concluding as Director of product
line evaluation. Mr. Pardun also serves as a director of Western Digital
Corporation, as well as MegaPath Networks.
JUAN A. RODRIGUEZ
Mr. Juan A. Rodriguez, age 63, has served as a director and Chief
Technologist of Exabyte since November 2001, was its interim President and Chief
Executive Officer from January 2002 until June 2002, and has served as its
Chairman of the Board and Chief Technologist since June 2002. Mr. Rodriguez
co-founded Ecrix Corporation in 1996 and was its Chairman of the Board and Chief
Executive Officer since 1996. Mr. Rodriguez co-founded Storage Technology
Corporation in 1969 after several years as an IBM tape technology engineer.
While at Storage Technology Corporation, he served in vice presidential and
general manager roles over Engineering, Hard Disk Operations and Optical Disk
Operations. In 1985, Mr. Rodriguez co-founded Exabyte Corporation, where he held
the positions of chairman, president and CEO through 1992. Mr. Rodriguez is an
adjunct professor for the University of Colorado, Boulder College of Engineering
and Applied Science.
LEONARD W. BUSSE
Mr. Busse, age 65, became a director of Exabyte in October 2002. Mr. Busse
is a Certified Public Accountant. From 1998 - 2000, Mr. Busse was the Chief
Financial Officer and a director of Worldbridge Broadband Services of Lakewood,
CO, a telecom technical services company. Prior to Worldbridge, he was the
Managing Director and Chief Executive Officer of First Citizens Bank Limited in
Trinidad and Tobago from 1994 - 1996. Mr. Busse was also the President and Chief
Executive Officer of The Pacific Bank of San Francisco from 1993 - 1994 and
provided consulting services through his consulting company, The Busse Group,
from 1989 - 1993. Prior to these positions, he held various executive management
positions with Continental Illinois National Bank of Chicago over 25 years.
STEPHANIE SMELTZER MCCOY
Ms. McCoy, age 35, joined Exabyte as a director in September 2002. She is
a Vice President with Meritage Private Equity Funds, a Denver-based private
equity firm with over $475 million in committed capital under management. Prior
to joining Meritage in 2001, Ms. McCoy earned an M.B.A. from Harvard Business
School with high distinction as a George F. Baker Scholar. Previously, she was
61
an investment banking professional with The Wallach Company in Denver, Colorado
during 1999, and from 1995 to 1999 was an associate director with Arthur
Andersen and co-founded the firm's corporate finance practice in Moscow, Russia.
Ms. McCoy is a member of the American Institute of Certified Public Accountants.
Ms. McCoy also serves on the board of directors of Trillion Partners, a Meritage
portfolio company.
TOM W. WARD
Mr. Tom Ward, age 47, joined Exabyte as its President and Chief Executive
Officer and a director in June 2002. Mr. Ward founded Data Storage Marketing, a
distributor of storage products, in 1987 and sold the company to General
Electric in 1997. Mr. Ward founded Canicom in 1997, a call center company, which
he sold to Protocol Communications, an integrated direct marketing company, in
2000, assuming the position of Chief Operating Officer until June 2001. Mr. Ward
began his career with Storage Technology Corporation serving in several roles in
engineering and marketing. He later joined MiniScribe as Director of Sales for
High Performance Products.
CARROLL A. WALLACE
Mr. Carroll Wallace, age 54, was engaged as a consultant in May 2003 to
act as the interim Chief Financial Officer of Exabyte and became an employee and
officer on November 1, 2003. Mr. Wallace was a partner at KPMG LLP from 1982 to
2002, at which time he retired from the firm. During Mr. Wallace's tenure at
KPMG, he served as partner in charge of the audit department of the Denver,
Colorado office from 1992 to 1995, and from 1995 through 2001, Mr. Wallace
headed KPMG's Colorado technology practice which served companies ranging in
size from early growth state to large diverse corporations.
Mr. Wallace is the subject of an administrative proceeding commenced by
the Securities and Exchange Commission in April, 1999, alleging that Mr. Wallace
violated applicable auditing standards in the audit of financial statements of a
public investment company for 1994 and 1995. The claims concern an alleged
misclassification (in one year) and overstatement in the value of restricted
securities held by the investment company in one particular portfolio company.
Mr. Wallace denies all such claims. In December 2002, an administrative law
judge at the SEC entered an initial decision adverse to Mr. Wallace and
concluded that Mr. Wallace should be temporarily denied the privilege of
practicing before the SEC as an accountant for one year. As stated in that
decision, no fraud or investor losses were charged or proven. Mr. Wallace
appealed the decision to the Commission, and in August 2003, the Commission
upheld the findings of the administrative law judge and entered an
administrative order against Mr. Wallace. Mr. Wallace requested and received a
stay of the order and has appealed this decision to the United States Federal
District Court of Appeals.
The directors serve until the annual meeting of stockholders in the
following years or their successors are elected and qualified: 2004, Mr. Jones
and Mr. Tankersley; 2005, Mr. Garrett, Mr. Pardun and Mr. Rodriguez; 2006, Mr.
Busse, Ms. Smeltzer McCoy and Mr. Ward.
The executive officers serve at the discretion of the Board of Directors.
There are no family relationships among any of the directors and executive
officers.
62
EXECUTIVE COMPENSATION
COMPENSATION COMMITTEE INTERLOCKS
During 2003 none of the Company's executive officers served on the board
or compensation committee of another company which had one of its executive
officers serve as one of the Company's directors or a member of the Company's
Compensation Committee.
COMPENSATION OF DIRECTORS
Currently, each director who is not an employee of Exabyte, with the
exception of the Chairman of the Audit Committee, receives $15,000 as an annual
retainer for his services as a director. The Chairman of the Audit Committee
receives a $30,000 annual retainer. These retainers are paid in quarterly
installments in cash or stock at the discretion of the individual directors.
Non-employee directors receive $1,500 for each Board meeting they attend in
person and $250 for each telephone Board meeting in which they participate. The
Audit Committee members receive $750 per Audit Committee meeting in which they
participate, and all other committee members receive $250 per committee meeting
in which they participate. Non-employee directors are also reimbursed for
out-of-pocket travel expenses in connection with their attendance at Board
meetings.
Meeting fees are payable in shares of restricted Common Stock instead of
cash. The closing stock price on the day of each meeting is used to determine
the number of shares granted to each director. The total number of restricted
Common Stock shares issued to each director is issued at the end of the year.
For 2003, a total of $60,000 and 506,808 shares of restricted Common Stock were
issued to directors for their services rendered during fiscal 2003.
Non-employee directors receive options under the Incentive Stock Plan. On
January 27th of each fiscal year, each non-employee director that has been so
for at least three months is automatically granted an option to purchase 15,000
shares of Common Stock. Upon initial election to the board all newly elected
non-employee directors receive an option to purchase 25,000 shares. The exercise
price of these options is equal to the fair market value of the stock as of the
date of grant. Directors are also eligible to receive discretionary grants of
options under the Incentive Stock Plan. During fiscal 2003, options covering a
total of 100,000 shares were granted to non-employee directors as a group with a
weighted average exercise price of $.485 per share.
SUMMARY OF COMPENSATION
The following table provides summary compensation information paid to or
earned by Exabyte's Chief Executive Officer, and the Company's two other
executive officers at the end of fiscal 2003, (collectively, the "Named
Executive Officers"):
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------- ------
SECURITIES ALL OTHER
SALARY BONUS UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($)(1) ($)(2) OPTIONS (#)(3) ($)(4)(5)
- --------------------------- ---- ------ ------ -------------- ---------
TOM W. WARD(6) 2003 300,000 225,000(2) 7,000,000 810
President and Chief Executive 2002 166,154 75,000(2) 7,000,000 1,033
Officer
JUAN A. RODRIGUEZ(7) 2003 225,014 50,000(2) 940,000 3,176
Chairman of the Board and 2002 225,014 0 540,000 7,114
Chief Technologist 2001 28,409 0 200,000 262
CARROLL A. WALLACE(8) 2003 15,384 50,000(2) 400,000 74
Chief Financial Officer
63
(1) Includes amounts earned but deferred at the election of the Named
Executive Officers under the 401(k) plan.
(2) 2002 bonus amounts include the value of 111,940 shares issued to Mr. Ward
for a bonus earned in 2002. 2003 bonus amounts include the value of
745,214 shares issued to Mr. Ward, 52,631 shares issued to Mr. Rodriguez,
and 52,631 shares issued to Mr. Wallace for bonuses earned in 2003.
(3) We have not granted any SARs or restricted stock awards.
(4) As permitted by SEC rules, we have not shown amounts for certain
perquisites where the amounts do not exceed the lesser of 10% of bonus
plus salary or $50,000.
(5) 2003 compensation includes the dollar value of executive life insurance
premiums paid by Exabyte for the benefit of the Named Executive Officers
as follows: Mr. Ward, $810; Mr. Rodriguez, $3,176; and Mr. Wallace, $74.
2002 compensation includes matching payments by Exabyte under the 401(k)
plan for 2002 as follows: Mr. Ward, $807; and Mr. Rodriguez, $3,938. Also
included in the 2002 compensation is the dollar value of executive life
insurance premiums paid by Exabyte for the benefit of the named Executive
officers as follows: Mr. Ward, $226; and Mr. Rodriguez, $3,176.
2001 compensation includes matching payments by Exabyte under the 401(k)
plan for 2001 as follows: Mr. Rodriguez; as well as the dollar value of
executive life insurance premiums paid by Exabyte in 2001 for the benefit
of the Named Executive Officers as follows: Mr. Rodriguez, $262.
(6) Mr. Tom Ward was hired and appointed President and Chief Executive Officer
on June 3, 2002.
(7) Mr. Rodriguez was appointed Interim Chief Executive Officer and President
on January 20, 2002. He served in this position until June 2002, at which
time he was appointed Chairman of the Board and Chief Technologist.
(8) Mr. Wallace was appointed Chief Financial Officer of Exabyte on November
1, 2003.
OFFICER SEVERANCE PROGRAM
Exabyte has a severance program that provides for severance payments in
the event that certain officers and other specified employees are terminated
within one year after certain changes in control of Exabyte occur. The amounts
payable under this program may vary dependent on the position of the terminated
officer or employee. The program limits the amount payable to up to 12 months of
compensation and also provides for the accelerated vesting of outstanding stock
options held by the terminated officer or employee.
EMPLOYMENT AGREEMENT
At the time of Mr. Ward's joining the Company in June, 2002, the Company
and Mr. Ward entered into an employment agreement. The agreement provides for
Mr. Ward to be the President and Chief Executive Officer of the Company. Either
Mr. Ward or the Company is free to terminate his employment at any time for any
reason. The employment agreement provides for a base salary of $300,000 per
annum, subject to review at least annually, and a quarterly incentive bonus of
up to $75,000 paid in stock at the then current fair market value upon
achievement of mutually agreed goals. The employment agreement also covered
stock options which were granted in 2002 to Mr. Ward and his purchase of
preferred stock which was being sold at that time.
INCENTIVE STOCK PLAN
The Board adopted the Incentive Stock Plan in January 1987. Due to a
series of amendments, as of April 13, 2004 there were 9,500,000 shares of Common
Stock authorized for issuance under the Incentive Stock Plan. The Incentive
Stock Plan provides for the grant of both incentive stock options (which
generally have a favorable tax treatment for the optionee) and non-statutory
stock options to employees, directors and consultants. These grants are made at
the discretion of the Board. The Incentive Stock Plan also provides for the
non-discretionary grant of non-statutory stock options to our non-employee
directors. In connection with the sale of Series G Preferred Stock on April 12,
2001, we revised the Incentive Stock Plan to provide that, Exabyte shall not,
unless approved by the holders of a majority of the shares present and entitled
to vote at a duly convened meeting of stockholders;
- grant any stock options with an exercise price that is less
than 100% of the fair market value of the underlying stock on
the grant; or
- reduce the exercise price of any stock option granted under
the Incentive Stock Plan.
As of April 13, 2004, options to purchase 5,175,321 shares were
outstanding under the Incentive Stock Plan and 385,931 shares were available for
future grant.
64
STOCK OPTION GRANTS
The following table contains information for fiscal 2003 concerning the
grant of stock options under the Incentive Stock Plan, except as noted, to the
Named Executive Officers:
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
NUMBER OF % OF TOTAL POTENTIAL REALIZABLE VALUE AT
SECURITIES OPTIONS ASSUMED ANNUAL RATES OF STOCK
UNDERLYING GRANTED TO PRICE APPRECIATION FOR OPTION
OPTIONS EMPLOYEES EXERCISE TERM(3)
GRANTED IN FISCAL PRICE EXPIRATION -----------------------------
NAME (#)(1) YEAR(2) ($/SH) DATE 5% ($) 10% ($)
- ---- --------- ---------- -------- ---------- ------------- ------------
Tom W. Ward 7,000,000 48.92% $0.147 8/22/2013 $657,132 $1,639,960
Juan A. Rodriguez 100,000 0.70% $0.181 3/21/2013 $ 11,382 $ 28,846
840,000 5.87% $0.147 8/22/2013 $ 77,655 $ 196,795
Carroll A. Wallace 400,000 2.79% $0.450 11/01/2013 $113,201 $ 286,873
(1) Exabyte does not have a plan that provides for the issuance of SARs.
Options under the Incentive Stock Plan generally vest at the rate of 2% of
the total grant per month, beginning one month from the date of grant, for
a period of 50 months. Options may be either non-statutory or incentive
stock options. The exercise price of options granted under the Incentive
Stock Plan must be at least equal to the fair market value of the Common
Stock on the date of grant. Options granted to certain executive officers
and other members of management are subject to an agreement with Exabyte,
which provides that, unless the board otherwise directs, options will
fully vest upon a change in control. The Board may not reprice options
granted under the Incentive Stock Plan.
(2) Based on options granted to Exabyte employees during fiscal 2003 to
purchase 14,307,000 shares.
(3) The potential realizable value is based on the term of the option at the
date of grant (10 years in each case). It is calculated by assuming that
the stock price on the date of grant appreciates at the indicated annual
rate, compounded annually for the entire term, and that the option is
exercised and sold on the last day of the option term for the appreciated
stock price. These amounts represent certain assumed rates of appreciation
only, in accordance with SEC rules, and do not reflect our estimate or
projection of future stock price performance. Actual gains, if any, are
dependent on the actual future performance of Exabyte's Common Stock. The
amounts reflected in this table may never be achieved.
OPTION EXERCISES AND YEAR-END HOLDINGS
The following table provides information concerning the exercise of
options during fiscal 2003 and unexercised options held as of the end of fiscal
2003 for the Named Executive Officers:
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
ACQUIRED OPTIONS AT FY-END AT FY-END
ON VALUE (#)(1) ($)(2)
EXERCISE REALIZED ------------------------------- -----------------------------
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- -------- -------- ----------- ------------- ----------- -------------
Tom W. Ward 0 0 1,700,000 12,300,000 703,080 12,300,000
Juan A. Rodriguez 0 0 807,200 872,800 461,555 872,800
Carroll A. Wallace 0 0 16,000 384,000 12,960 384,000
(1) Includes both "in-the-money" and "out-of-the-money" options.
"In-the-money" options are options with exercise prices below the market
price of Exabyte's Common Stock (as noted) on January 2, 2004.
(2) Fair market value of Exabyte's Common Stock on January 2, 2004, the last
trading day of fiscal 2003 ($1.26, based on the closing sales price
reported on the Over the Counter Bulletin Board) less the exercise price
of the option.
65
EQUITY COMPENSATION PLAN INFORMATION
The following table provides information concerning our equity
compensation plan as of January 3, 2004.
NUMBER OF SECURITIES
NUMBER OF WEIGHTED REMAINING AVAILABLE
SECURITIES TO BE AVERAGE FOR FUTURE ISSUANCE
ISSUED UPON EXERCISE PRICE UNDER EQUITY
EXERCISE OF OF OUTSTANDING COMPENSATION PLANS
OUTSTANDING OPTIONS, (EXCLUDING SECURITIES
OPTIONS, WARRANTS, WARRANTS AND REFLECTED IN COLUMN
AND RIGHTS RIGHTS (A))
PLAN CATEGORY (A) (B) (C)
- ------------- ------------------ -------------- ---------------------
Equity compensation plans approved by 12,088,741 $1.14 638,511
security holders(1)
Equity compensation plans NOT approved 15,333,082 $0.58 407,049
by security holders(2)
TOTAL 27,421,823 $0.83 1,045,560
(1) Amounts include shares issued under the stock option plan approved by
stockholders on July 30, 2002 for the issuance of options to Mr. Ward of
up to 7,000,000 shares.
(2) Consists of the 1997 Non-Officers Stock Plan, under which options may be
granted to employees who are not officers or directors of the Company, as
well as a stock option plan approved by the Board of Directors in 2003 for
the issuance of options to Mr. Ward for an additional 7,000,000 shares.
66
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table provides certain information regarding the ownership
of Exabyte's Common Stock as of May 27, 2004 by:
- each director;
- each current executive officer named in the Summary
Compensation Table;
- all of Exabyte's directors and the named Executive Officers as
a group; and
- all those known to be beneficial owners of more than five
percent of Exabyte's Common Stock.
BENEFICIAL OWNERSHIP(1c)
BENEFICIAL OWNER NUMBER OF SHARES PERCENT OF TOTAL
- ---------------- ---------------- -----------------------
MERITAGE INVESTMENT PARTNERS LLC(2)(4) 64,765,543 52.22%
1600 Wynkoop
Suite 300
Denver, CO 80202
JUAN A. RODRIGUEZ(3)(4) 1,390,037 1.27%
TOM W. WARD(3)(5) 11,935,421 10.45%
LEONARD W. BUSSE(3) 120,824 *
JOHN R. GARRETT(3) 11,937 *
A. LAURENCE JONES(3) 374,441 *
THOMAS E. PARDUN(3) 200,725 *
STEPHANIE SMELTZER MCCOY(3) 147,405 *
G. JACKSON TANKERSLEY, JR.(3)(4)(5) 70,360,083 54.40%
CARROLL A. WALLACE(3) 66,500 *
EXECUTIVE OFFICERS AND DIRECTORS AS A GROUP
(9 persons)(7) 84,607,373 61.90%
-----------
* Less than one percent.
(1) This table is based upon information supplied by officers, directors and
principal stockholders and by Schedules 13D and 13G, if any, filed with
the SEC. Subject to footnotes below and community property laws, where
applicable, each of the stockholders named has sole power to vote and
dispose of the shares indicated as beneficially owned. As required by Rule
13d-3(d), each of the names indicated in the table are deemed to be the
beneficial owner of shares that the person has the right to acquire
beneficial ownership of within 60 days of May 27, 2004.
Applicable percentages are based on 108,250,414 shares outstanding on May
27, 2004, adjusted as required by Rule 13d-3(d)(1).
(2) This information is based on a Schedule 13D, dated November 20, 2003,
filed with the SEC and subsequent information separately provided by
Meritage Private Equity Fund, L.P. ("Meritage Fund"), a private equity
investment fund, and Meritage Investment Partners, LLC ("Meritage
Investment"), a manager of private equity investment funds and the sole
general partner of Meritage Fund.
Includes shares directly beneficially owned by Meritage Fund as follows:
42,963,201 shares of Common Stock, 13,735.547 shares of Series AA
Preferred stock (as-converted), and 4,208,344 shares of Common Stock
issuable upon the exercise of several warrants.
Also includes shares owned indirectly beneficially by Meritage Investment
through two other funds in which it is the sole general partner as
follows: 6,036,801 shares of Common Stock, 1,929,994 shares of Series AA
Preferred stock (as-converted), and 543,317 shares of Common Stock
issuable upon the exercise of several warrants.
Meritage Fund is shown to have sole voting and dispositive power over
60,907,092 shares, representing 48.26% of the Common Stock. Meritage
Investment is shown to have sole voting and dispositive power over all of
the shares.
(3) Includes shares issuable upon the exercise of outstanding stock options
that are exercisable within 60 days of May 27, 2004, as follows: Mr.
Rodriguez, 959,300 shares; Mr. Ward, 3,043,750 shares; Mr. Busse, 17,600
shares; Mr. Garrett, 3,500; Mr. Jones, 206,400 shares; Mr. Pardun, 71,400
shares; Ms. McCoy, 11,200 shares; Mr. Tankersley, 19,400 shares; and Mr.
Wallace, 66,500 shares.
(4) Includes shares underlying Series AA preferred stock as follows: Meritage
Investment Partners LLC, 15,665,541 shares; and Mr. Tankersley, 510,065
shares. All shares are listed on an as-converted basis.
67
(5) Includes the shares listed for Meritage Investment Partners LLC under
footnote 2, as to which Mr. Tankersley has voting and dispositive power by
virtue of being a managing member of Meritage Investment Partners, LLC.
Mr. Tankersley disclaims beneficial ownership of such shares. Also
includes the following shares held by the following entities: Millennial
Holdings LLC, 29,853 shares of Common Stock; 281,226 shares of Series AA
preferred stock (as-converted) and 84,367 shares issuable upon the
exercise of several warrants; The Millennial Fund, 12,212 shares of Common
Stock; 101,323 shares of Series AA preferred stock (as-converted) and
30,396 shares of Common Stock issuable upon the exercise of several
warrants; and Tankersley Family Limited Partnership, 21,404 shares of
Common Stock, 127,516 shares of Series AA preferred stock (as-converted)
and 38,254 shares of Common Stock issuable upon the exercise of several
warrants. Mr. Tankersley is the managing member of Millennial Holdings LLC
and sole general partner of Tankersley Family Limited Partnership and may
be deemed to posses voting and dispositive power over shares held by such
entities. Mr. Tankersley disclaims beneficial ownership of all such
shares. The Millennial Fund is not a separate legal entity and Mr.
Tankersley is the direct beneficial owner of all shares held in that name.
(7) Includes shares described in the notes above, as applicable.
68
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Series G Issuance
On April 12, 2001, we entered into an agreement with State of Wisconsin
Investment Board ("SWIB"), under which we sold 1,500,000 shares of our Series G
preferred stock to SWIB at $2.00 per share for total proceeds of $3,000,000.
Merger and Series H Issuance
On November 9, 2001, Ecrix Corporation merged into a subsidiary of
Exabyte, and we issued a total of 10,000,000 shares of Exabyte common stock to
the former Ecrix stockholders. Additionally, in conjunction with merger, certain
investors of Ecrix purchased 9,650,000 shares of new Series H preferred stock of
Exabyte at $1.00 per share. These transactions were approved by our
stockholders. In the agreement for the Ecrix merger, we agreed that three
persons designated by Ecrix would be nominated for election to the Exabyte
board. As a result, Juan A. Rodriguez, G. Jackson Tankersley, and William J.
Almon, Sr. were elected to the Exabyte board. The vacancy created by Mr. Almon's
resignation in 2002 was filled by John R. Garrett in 2003. Exabyte also agreed
that Exabyte's board would continue to include three directors (or such greater
number of directors as shall constitute the maximum number of members that
represent a numerical minority of the board) who are nominated by the Ecrix
designees. Upon the death, resignation or removal of any Ecrix designee, Exabyte
will cause the vacancy to be filled by a subsequent designee recommended by the
remaining Ecrix designees then serving on the board. However, the total number
of directors that may be designated by the Ecrix designees is subject to the
following.
If at any time the holders of Series H preferred stock beneficially own
less than 30% of the voting power of all classes of Exabyte's voting securities,
the number of directors that Exabyte is obligated to include on the board of
directors will be reduced so that the number of these designees expressed as a
percentage of the entire board of directors is approximately equal to the
percentage of the outstanding voting power then beneficially owned by the
holders of Series H preferred stock rounded to the nearest whole directorship
but in any event not a majority; provided, that if the holders of Series H
preferred stock beneficially own less than 10% of the outstanding voting power
of all classes of Exabyte's voting securities, the number of Ecrix designees is
zero.
Series I Issuance
On May 17, 2002 we entered into the Series I preferred stock purchase
agreement with a number of purchasers. As amended, the agreement provided for
the sale of a total of 8,400,000 shares of Series I preferred stock at $1.00 per
share. The purchasers of Series I preferred stock included Meritage Private
Equity Fund, L.P. and SWIB, both of which are significant stockholders of
Exabyte. The purchasers of Series I preferred stock also included Mr. Ward and
an entity related to Mr. Rodriguez.
Under the terms of the Series I purchase agreement, Exabyte enlarged its
board of directors to a total of eight, and Meritage Private Equity Fund, L.P.,
was permitted to designate the new director. Meritage previously had a
representative on the board as a result of the merger of Ecrix Corporation into
an Exabyte subsidiary in November 2001.
Bank Guarantees
In April 2003, the Company entered into a Third Modification Agreement of
its line of credit agreement with Silicon Valley Bank ("SVB"). In connection
with the Third Modification, SVB notified the Company that it was in an "over
advance" state with respect to its line of credit, and that, in order for SVB to
continue to allow the Company to borrow under the line, the Company was required
to cause Tom Ward, the Company's Chief Executive Officer, and Meritage Private
Equity Funds, L.P., a significant beneficial owner (together the "Guarantors"),
to guarantee up to a maximum of $2,500,000 (with Mr. Ward and Meritage
guaranteeing 10% and 90%, respectively, of the amount) for advances in excess of
the Company's credit limit (the "Guaranties"). The Company, through an
independent committee of its Board, negotiated agreements with the Guarantors,
whereby the Guarantors agreed to such a guarantee in exchange for a specific
number of shares of the Company's common stock, as discussed below. In addition,
SVB required that each of the Guarantors enter into a subordination agreement
whereby each Guarantor agreed to subordinate to SVB: (1) all of the Company's
present and future indebtedness and obligations to the Guarantor; and (2) all of
the Guarantor's present and future security interests in the Company's assets
and property. Additional guaranties for $250,000 of excess borrowings from other
guarantors were obtained in July 2003 under similar terms.
69
As consideration for the Guaranties, the Company issued to the Guarantors
(pro-rata) 25,000,000 shares of its common stock on April 21, 2003, 12,500,000
shares on July 15, 2003, 8,793,252 shares on September 15, 2003, and 3,706,748
shares on March 11, 2004. During July 2003, the Company entered into agreements
with two additional shareholders to guarantee an additional $250,000 of
borrowings from SVB in exchange for 2,500,000 common shares issued in July and
an additional 1,500,000 shares issued in October 2003. The Company determined
the fair value of all of the shares based on the market price of the Company's
stock on the date the shares were earned by the Guarantors, and recorded
$10,146,000 of stock-based interest expense during 2003. All of the Guaranties
were terminated in November 2003. The excess borrowing availability was
substantially utilized by the Company during the period of time that the
Guaranties were in effect.
Series AA Issuance
On May 3, 2004, the following related parties purchased the number of
shares of Series AA preferred stock and warrants following their name pursuant
to the Purchase Agreement as described below:
SERIES AA COMMON SHARES
NAME SHARES UNDERLYING WARRANTS
Meritage Entrepreneurs Fund, L.P. 80 24,000
Meritage Private Equity Fund, L.P. 4,384 1,315,200
Meritage Private Equity Parallel Fund, L.P. 536 160,800
The Millennial Fund 50 15,000
Millennial Holdings LLC 100 30,000
Tankersley Family Limited Partnership 50 15,000
On April 30, 2004, Exabyte entered into the Purchase Agreement pursuant to
which the Company issued and sold to the purchasers in a private placement (a)
25,000 shares of Series AA preferred stock of the Company and (b) warrants to
purchase in the aggregate 7.5 million shares of Common Stock. The Company
received in the aggregate gross proceeds of $25 million from this financing on
May 3, 2004. Participants in the financing included a group of institutional
investors and existing Exabyte shareholders.
The Series AA preferred shares were priced at $1,000 per share and are
convertible into 1,000 Common shares at $1 per share. The warrants to purchase
Common Stock expire after five years and carry an exercise price of $1.00 per
Common share. The conversion and exercise prices are subject to certain
anti-dilution adjustments.
Series AA Exchange
In conjunction with the Purchase Agreement, the Company also entered into
Exchange Agreements with all of the then existing holders of the Company's
Series H and Series I preferred stock, pursuant to which such holders exchanged
their preferred shares for Series AA preferred shares. The Series H preferred
shares were converted into Series AA preferred shares on a one share for one
share basis. The Series I preferred shares were converted as follows: one Series
AA preferred share for each share of Common Stock the Series I holder would have
received upon conversion, including the accrual of all dividends on the Series I
shares through December 31, 2004. Under the Exchange Agreements, the Company
issued a total of 19,909 Series AA Shares and warrants to purchase 5,972,712
shares of Common Stock. These warrants have the same terms as those issued to
the Purchasers.
The following related parties exchanged the number of shares indicated
with the Company:
SERIES H SHARES SERIES I SHARES SERIES AA
PARTY EXCHANGED EXCHANGED SHARES RECEIVED
Meritage Private Equity Fund, L.P. 3,896,890 2,411,200 13,736.000
Meritage Private Equity Parallel Fund, L.P. 476,444 294,800 1,679.345
Meritage Entrepreneurs Fund, L.P. 71,111 44,000 250.649
Millenial Holdings LLC 76,881 46,758 281.226
The Millenial Fund 21,773 13,242 101.000
Tankersley Family Limited Partnership 32,884 20,000 127.516
Tom W. Ward 1,320,000 2,945.717
70
VALIDITY OF SECURITIES
The validity of the securities offered hereby will be passed upon for us
by Holland & Hart LLP.
EXPERTS
The consolidated financial statements as of January 3, 2004 and December
28, 2002, and for each of the three years in the period ended January 3, 2004
included in this prospectus have been so included in reliance on the report
(which contains an explanatory paragraph relating to Exabyte's ability to
continue as a going concern as described in Note 1 to the consolidated financial
statements) of PricewaterhouseCoopers LLP, an independent registered public
accounting firm, given on the authority of said firm as experts in auditing and
accounting.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements and other
information with the SEC. Our SEC filings are available to the public over the
Internet at the SEC's website at http://www.sec.gov. You may also read and copy
any document we file with the SEC at the SEC's Public Reference Room, 450 Fifth
Street, N.W., Room 1024, Washington, D.C. 20549.
You may also obtain copies of the documents at prescribed rates by writing
to the Public Reference Room of the SEC at the address set forth above. Please
call 1-800-SEC-0330 for further information on the operations of the public
reference facilities. Our SEC filings are also available at the offices of the
Nasdaq Stock Market at 1735 K Street, N.W., Washington, D.C. 20006.
71
Consolidated Financial Statements
Page
Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets - December 28, 2002 and January 3, 2004 and
(unaudited) June 30, 2004 F-3
Consolidated Statements of Operations - Years ended December 29, 2001,
December 28, 2002 and January 3, 2004 and (unaudited) Six Months Ended
June 28, 2003 and June 30, 2004 F-5
Consolidated Statements of Stockholders' Equity (Deficit) - Years ended
December 29, 2001, December 28, 2002 and January 3, 2004 and (unaudited)
Six Months Ended March 31, 2004 F-6
Consolidated Statements of Cash Flows - Years ended December 29, 2001,
December 28, 2002 and January 3, 2004 and (unaudited) Six Months Ended
June 28, 2003 and June 30, 2004 F-8
Notes to Consolidated Financial Statements F-10
Consolidated Financial Statement Schedules
Years ended December 29, 2001, December 28, 2002, January 3, 2004, and
(unaudited) Six Months Ended June 30, 2004.
Valuation and Qualifying Accounts II-8
All other schedules are omitted because they are inapplicable, not
required under the instructions, or the information is included in the financial
statements or notes thereto.
F-1
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
of Exabyte Corporation
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of
Exabyte Corporation and its subsidiaries at December 28, 2002 and January 3,
2004, and the results of their operations and their cash flows for each of the
three years in the period ended January 3, 2004, in conformity with accounting
principles generally accepted in the United States of America. In addition, in
our opinion, the consolidated financial statement schedule listed in the
accompanying index presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements. These consolidated financial statements and the
consolidated financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and the consolidated financial statement
schedule based on our audits. We conducted our audits of these statements in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has suffered recurring losses and
has an accumulated deficit of $135,629,000 at January 3, 2004. These factors,
among others, raise substantial doubt about the Company's ability to continue as
a going concern. Management's plans in regard to these matters are also
described in Note 1. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ PricewaterhouseCoopers LLP
- ----------------------------------
PricewaterhouseCoopers LLP
Denver, Colorado
March 30, 2004
F-2
Exabyte Corporation And Subsidiaries
Consolidated Balance Sheets
(In thousands, except per share data)
December 28, January 3, June 30, 2004
2002 2004 (Unaudited)
---- ---- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 664 $ 6,979 $ 7,659
Accounts receivable, less allowances for uncollectible
accounts and sales returns and programs of $3,559,
$1,804 and (unaudited) $1,985, respectively 31,873 14,764 15,706
Inventory, net 24,582 12,085 11,256
Other 1,851 1,777 1,351
------- ------- -------
Total current assets 58,970 35,605 35,792
------- ------- -------
Equipment and leasehold improvements, net (Note 2) 4,924 2,781 3,040
Goodwill (Note 9) 7,428 7,428 7,428
Other non-current assets 803 315 407
------- ------- -------
Total non-current assets 13,155 10,524 10,875
------- ------- -------
Total assets $72,125 $46,129 $46,847
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $30,624 $ 8,843 $ 7,011
Accrued liabilities (Note 3) 13,139 9,436 5,265
Current portion of deferred revenue (Note 10) 1,694 3,495 3,552
Line of credit - Bank (Note 4) 18,560 6,498 --
Current portion of notes payable - suppliers (Note 4) -- 13,384 10,463
Current portion of other non-current liabilities 152 510 270
------- ------- -------
Total current liabilities 64,169 42,166 26,561
------- ------- -------
Notes payable, less current portion (Note 4)
Suppliers -- 11,014 5,259
Others -- 2,946 2,958
------- ------- -------
-- 13,960 8,217
------- ------- -------
Accrued warranties, less current portion 2,585 979 1,398
Deferred revenue, less current portion (Note 10) 519 16,980 15,986
Other liabilities, less current portion 320 460 310
------- ------- -------
Total liabilities $67,593 $74,545 $52,472
------- ------- -------
See accompanying notes to the consolidated financial statements.
F-3
Exabyte Corporation And Subsidiaries
Consolidated Balance Sheets (Continued)
(In thousands, except per share data)
December 28, January 3, June 30, 2004
2002 2004 (Unaudited)
---- ---- -----------
Stockholders' equity (deficit) (Notes 5 and 6):
Preferred stock; no series; $.001 par value; 18,350 shares
authorized; no shares issued and outstanding $ -- $ -- $ --
Preferred stock; series A; $.001 par value; 500 shares
authorized; no shares issued and outstanding -- -- --
Series G convertible preferred stock; $.001 par value; 1,500
shares authorized, issued and outstanding at December 28, 2002;
exchanged for common stock in 2003 1 -- --
Series H convertible preferred stock; $.001 par value; 9,650
shares authorized; 9,650, 7,296 and (unaudited) 5,911 shares
issued and outstanding, respectively; aggregate liquidation
preference at January 3, 2004 of $7,296; exchanged for Series AA
preferred shares in 2004 10 7 --
Series I convertible preferred stock; $.001 par value;
10,000 shares authorized; 8,438, 9,321 and (unaudited)
8,188 shares issued and outstanding, respectively;
aggregate liquidation preference at January 3, 2004
of $20,003; exchanged for Series AA preferred
shares in 2004 8 9 --
Series AA convertible preferred stock; $.001 par value; 55
shares authorized; 45 shares issued and outstanding;
aggregate liquidation preference at June 30, 2004 of
$ 44,909 -- -- --
Common stock, $.001 par value; 350,000 shares authorized;
33,600, 93,017 and (unaudited) 107,118 shares
outstanding, respectively 34 93 107
Additional paid-in capital 98,476 107,682 134,241
Treasury stock, 342, 96 and 96 shares at cost, respectively (2,060) (578) (578)
Accumulated deficit (91,937) (135,629) (139,395)
--------- --------- ---------
Total stockholders' equity (deficit) 4,532 (28,416) (5,625)
--------- --------- ---------
Commitments and contingencies (Note 11)
========= ========= =========
Total liabilities and stockholders' equity (deficit) $ 72,125 $ 46,129 $ 46,847
========= ========= =========
See accompanying notes to the consolidated financial statements.
F-4
Exabyte Corporation And Subsidiaries
Consolidated Statements Of Operations
(In thousands, except per share data)
Fiscal Years Ended Six Months Ended
------------------ ----------------
December 29, December 28, January 3, June 28, June 30,
2001 2002 2004 2003 2004
---- ---- ---- ---- ----
(Unaudited)
Net revenue $ 158,438 $ 133,191 $ 94,169 $ 45,330 $ 52,759
Cost of goods sold 132,143 110,948 78,576 42,403 39,226
--------- --------- --------- --------- ---------
Gross profit (loss) 26,295 22,243 15,593 2,927 13,533
Operating expenses:
Selling, general and administrative 36,759 27,316 30,084 18,124 12,133
Research and development 25,184 23,713 9,826 5,588 4,643
Lease terminations and related
costs (Note 12) -- -- 4,707 -- --
--------- --------- --------- --------- ---------
Total operating expenses 61,943 51,029 44,617 23,712 16,776
--------- --------- --------- --------- ---------
Loss from operations (35,648) (28,786) (29,024) (20,785) (3,243)
Other income (expense):
Interest expense (Note 4):
Stock-based -- (541) (10,146) (2,571) (88)
Other (1,715) (1,510) (2,713) (1,127) (867)
--------- --------- --------- --------- ---------
Total interest expense (1,715) (2,051) (12,859) (3,698) (955)
Gain (loss) on foreign currency
translation 124 (803) (1,851) (212) 488
Gain on sale of investment (Note 13) 1,719 1,500 -- -- --
Sale of technology (Note 13) -- 1,200 -- -- --
Other, net 424 (534) 130 148 (27)
--------- --------- --------- --------- ---------
Loss before income taxes and
equity in net loss of investee (35,096) (29,474) (43,604) (24,547) (3,737)
Income tax (expense) benefit 6 402 (88) (85) (29)
Equity in net loss of investee (Note 13) (343) -- -- -- --
--------- --------- --------- --------- ---------
Net loss (35,433) (29,072) (43,692) (24,632) (3,766)
Deemed dividend related to beneficial
conversion features and exchange
of preferred stock(Note 17) -- (4,557) (556) -- (4,225)
--------- --------- --------- --------- ---------
Net loss available to common
stockholders $ (35,433) $ (33,629) $ (44,248) $ (24,632) $ (7,991)
========= ========= ========= ========= =========
Basic and diluted loss per share $ (1.47) $ (1.02) $ (0.70) $ (0.56) $ (0.08)
========= ========= ========= ========= =========
Weighted average common shares used
in calculation of basic and diluted
loss per share 24,052 33,022 63,617 43,896 101,103
========= ========= ========= ========= =========
See accompanying notes to the consolidated financial statements.
F-5
Exabyte Corporation And Subsidiaries
Consolidated Statements Of Stockholders' Equity (Deficit)
(In thousands, except per share data)
Preferred Stock Common Stock
---------------------------------------------- --------------------
Series G Series H Series I Series AA Shares Amount
-------- -------- -------- --------- ------ ------
Balances at December 30, 2000 $ -- $ -- $ -- $ -- 23,234 $ 23
Common stock options exercised at
$0.65 per share -- -- -- -- 14 --
Common stock issued pursuant to Employee
Stock Purchase Plan at $.079 and $0.82
per share -- -- -- -- 102 --
Issuance of 9,560 shares of Series H
preferred stock at $2.00 per share 1 -- -- -- -- --
Issuance of 1,500 shares of Series G
preferred stock at $1.00 per share -- 10 -- -- -- --
Common stock issued pursuant to
acquisition at $0.72 per share -- -- -- -- 10,000 10
Options granted to employees of acquired
company -- -- -- -- -- --
Issuance of common stock warrants -- -- -- -- -- --
Net loss for the year -- -- -- -- -- --
------ ------ ------ ------ ------ ------
Balances at December 29, 2001 1 10 -- -- 33,350 33
Common stock options exercised at $0.65
and $0.80 per share -- -- -- -- 95 --
Common stock issued pursuant to Employee
Stock Purchase Plan at $0.45 and $0.94
per share -- -- -- -- 85 --
Common stock options issued to
non-employees -- -- -- -- -- --
Issuance of 8438 shares of Series I
preferred stock at $1.00 per share -- -- 8 8 -- --
Issuance of common stock warrants -- -- -- -- -- --
Common stock issued for compensation -- -- -- -- -- 1
Common stock dividend -- -- -- -- 70 --
Net loss for the year -- -- -- -- -- --
------ ------ ------ ------ ------ ------
Balances at December 28, 2002 1 10 8 8 33,600 34
Common stock options exercised at $0.18
and $0.74 per share -- -- -- -- 22 --
Additional Treasury Total
Paid-In Stock Accumulated Stockholders'
Capital Amount Deficit Equity (Deficit)
------- ------ ------- ----------------
Balances at December 30, 2000 $ 69,154 $ (2,742) $ (27,377) $ 39,058
Common stock options exercised at
$0.65 per share -- -- -- --
Common stock issued pursuant to Employee
Stock Purchase Plan at $.079 and $0.82
per share 82 -- -- 82
Issuance of 9,560 shares of Series H
preferred stock at $2.00 per share 2,999 -- -- 3,000
Issuance of 1,500 shares of Series G
preferred stock at $1.00 per share 9,640 -- -- 9,650
Common stock issued pursuant to
acquisition at $0.72 per share 7,190 -- -- 7,200
Options granted to employees of acquired
company 1,006 -- -- 1,006
Issuance of common stock warrants 191 -- -- 191
Net loss for the year -- -- (35,433) (35,433)
-------- --------- --------- ---------
Balances at December 29, 2001 90,262 (2,742) (62,810) 24,754
Common stock options exercised at $0.65
and $0.80 per share 62 -- -- 62
Common stock issued pursuant to Employee
Stock Purchase Plan at $0.45 and $0.94
per share 63 -- -- 63
Common stock options issued to
non-employees 77 -- -- 77
Issuance of 8438 shares of Series I
preferred stock at $1.00 per share 7,998 -- -- 8,006
Issuance of common stock warrants 541 -- -- 541
Common stock issued for compensation (582) 682 -- 101
Common stock dividend 55 -- (55) --
Net loss for the year -- -- (29,072) (29,072)
-------- --------- --------- ---------
Balances at December 28, 2002 98,476 (2,060) (91,937) 4,532
Common stock options exercised at $0.18
and $0.74 per share 13 -- -- 13
See accompanying notes to the consolidated financial statements
F-6
Exabyte Corporation And Subsidiaries
Consolidated Statements Of Stockholders' Equity (Deficit) (Continued)
(In thousands, except per share data)
Preferred Stock Common Stock
---------------------------------------------- --------------------
Series G Series H Series I Series AA Shares Amount
-------- -------- -------- --------- ------ ------
Common stock issued pursuant to
Employee Stock Purchase Plan at
$.08 per share -- -- -- -- 21 --
Issuance of 1,500 shares of Series I
preferred stock at $1.00 per share -- -- 1 -- -- --
Issuance of common stock warrants -- -- -- -- -- --
Common stock issued under loan
guaranties -- -- -- -- 50,043 50
Common stock issued for compensation -- -- -- -- 263 --
Common stock issued for settlement of
accounts payable -- -- -- -- 2,943 3
Common stock dividend -- -- -- -- 223 --
Conversion of preferred stock to
common stock (1) (3) -- -- 5,902 6
Net loss for the year -- -- -- -- -- --
------ ------ ------ ------ ------ ------
Balances at January 3, 2004 $ -- $ 7 $ 9 $ -- 93,017 $ 93
Additional Treasury Total
Paid-In Stock Accumulated Stockholders'
Capital Amount Deficit Equity (Deficit)
------- ------ ------- ----------------
Common stock issued pursuant to
Employee Stock Purchase Plan at
$.08 per share 2 -- -- 2
Issuance of 1,500 shares of Series I
preferred stock at $1.00 per share 1,499 -- -- 1,500
Issuance of common stock warrants 71 -- -- 71
Common stock issued under loan
guaranties 8,394 -- -- 8,444
Common stock issued for compensation (1,151) 1,482 -- 331
Common stock issued for settlement of
accounts payable 380 -- -- 383
Common stock dividend -- -- -- --
Conversion of preferred stock to
common stock (2) -- -- --
Net loss for the year -- -- (43,692) (43,692)
--------- --------- ---------- ---------
Balances at January 3, 2004 $ 107,682 $ (578) $ (135,629) $ (28,416)
See accompanying notes to the consolidated financial statements
F-7
Exabyte Corporation And Subsidiaries
Consolidated Statements Of Stockholders' Equity (Deficit) (Continued)
(In thousands, except per share data)
Preferred Stock Common Stock
----------------------------------------------- ---------------------
Series G Series H Series I Series AA Shares Amount
-------- -------- -------- --------- ------ ------
Balances at January 3, 2004 $ -- $ 7 $ 9 $ -- 93,017 $ 93
Activity after January 3, 2004 is
unaudited
Common stock options exercised at
$0.89 to $1.60 per share -- -- -- -- 289 --
Common stock issued for compensation -- -- -- -- 2,759 3
Common stock issued under loan
guaranties -- -- -- -- 3,707 4
Issuance of common stock warrants -- -- -- -- -- --
Conversion of preferred stock to common
stock -- (1) (3) -- 6,948 7
Common stock issued pursuant to
Employee Stock Purchase Plan at
$.748 per share -- -- -- -- 21 --
Exchange of Series H and I preferred
stock to Series AA preferred stock -- (6) (6) -- -- --
Issuance of 25 shares of Series AA
preferred stock at $1,000 per share,
net of offering costs -- -- -- -- -- --
Common stock dividend -- -- -- -- 377 --
Net loss for the period -- -- -- -- -- --
------ ------ ------- ------ ------- ------
Balances at June 30, 2004 $ -- $ -- $ -- $ -- 107,118 $ 107
====== ====== ======= ====== ======= ======
Additional Treasury Total
Paid-In Stock Accumulated Stockholders'
Capital Amount Deficit Equity (Deficit)
------- ------ ------- ----------------
Balances at January 3, 2004 $ 107,682 $ (578) $ (135,629) $ (28,416)
Activity after January 3, 2004 is
unaudited
Common stock options exercised at
$0.89 to $1.60 per share 171 -- -- 171
Common stock issued for compensation 885 -- -- 888
Common stock issued under loan
guaranties 1,627 -- -- 1,631
Issuance of common stock warrants 88 -- -- 88
Conversion of preferred stock to common
stock (3) -- -- --
Common stock issued pursuant to
Employee Stock Purchase Plan at
$.748 per share 16 -- -- 16
Exchange of Series H and I preferred
stock to Series AA preferred stock 12 -- -- --
Issuance of 25 shares of Series AA
preferred stock at $1,000 per share,
net of offering costs 23,763 -- -- 23,763
Common stock dividend -- -- -- --
Net loss for the period -- -- (3,766) (3,766)
--------- -------- ---------- ---------
Balances at June 30, 2004 $ 134,241 $ (578) $ (139,395) $ (5,625)
========= ======== ========== =========
See accompanying notes to the consolidated financial statements
F-8
Exabyte Corporation And Subsidiaries
Consolidated Statements Of Cash Flows
(In thousands)
Fiscal Years Ended Six Months Ended
----------------------------------------- -----------------------
December 29, December 28, January 3, June 28, June 30,
2001 2002 2004 2003 2004
---- ---- ---- ---- ----
(Unaudited)
Cash flows from operating activities:
Net loss $(35,433) $(29,072) $(43,692) $(24,632) $ (3,766)
Adjustments to reconcile net loss to net
cash provided (used) by operating
activities:
Depreciation and amortization 8,874 6,724 3,688 2,426 831
Write-down of assets -- 4,071 -- -- --
Provision for uncollectible accounts
receivable and sales returns and
programs 2,904 3,749 7,398 6,934 265
Equity in loss of investee 343 -- -- -- --
Lease termination expense -- -- 4,707 -- --
Gain on sale of investment (1,719) (1,500) -- -- --
Stock-based compensation expense -- 178 331 181 696
Stock-based interest expense -- 541 10,146 2,571 88
Loss (gain) on disposal of equipment
and leasehold improvements -- 106 (124) - --
Loss (gain) on foreign currency
translation of non-current liability -- -- 1,634 -- (392)
Changes in assets and liabilities,
net of effects of business combination:
Accounts receivable, net 9,821 (9,194) 9,711 5,819 (1,207)
Inventory, net 15,129 4,723 12,497 14,433 829
Other current assets 1,315 (174) 74 453 426
Other non-current assets 5 5 488 257 (92)
Accounts payable (8,653) 13,843 (452) 1,928 (1,832)
Accrued liabilities (5,661) (1,234) (2,318) (1,516) (2,348)
Deferred revenue -- -- 18,262 -- (937)
Other non-current liabilities 1,162 (6,033) 908 (1,170) (164)
-------- -------- -------- -------- --------
Net cash provided (used) by
operating activities (11,913) (13,267) 23,258 7,684 (7,603)
-------- -------- -------- -------- --------
Cash flows from investing activities:
Proceeds from sale of investments 1,719 1,590 -- -- --
Purchase of equipment and leasehold
improvements (1,751) (3,903) (2,695) (2,026) (1,090)
Acquisition, net of cash acquired 2,766 -- -- -- --
Proceeds from sale of equipment and
leasehold improvements 94 259 302 -- --
-------- -------- -------- -------- --------
Net cash provided (used) by
investing activities 2,828 (2,054) (2,393) (2,026) (1,090)
-------- -------- -------- -------- --------
See accompanying notes to the consolidated financial statements.
F-9
Exabyte Corporation And Subsidiaries
Consolidated Statements Of Cash Flows (Continued)
(In thousands)
Fiscal Years Six Months Ended
------------------------------------------- -------------------------
December 29, December 28, January 3, June 28, June 30,
2001 2002 2004 2003 2004
---- ---- ---- ---- ----
(Unaudited)
Cash flows from financing activities:
Proceeds from issuance of common and
preferred stock 12,733 7,081 1,515 -- 23,950
Cash overdraft (2,343) -- -- -- --
Decrease (increase) in restricted cash (451) 451 -- -- --
Borrowings under bridge loan -- 1,000 -- -- --
Borrowings under line of credit - Bank 181,454 147,247 113,987 47,093 47,503
Payments under line of credit - Bank (181,470) (140,978) (126,050) (51,161) (54,001)
Principal payments on notes payable and
other non-current liabilities (1,800) (1,013) (4,002) (906) (8,079)
--------- --------- --------- --------- ---------
Net cash provided (used) by
financing activities 8,123 13,788 (14,550) (4,974) 9,373
--------- --------- --------- --------- ---------
Net increase (decrease) in cash and cash
equivalents (962) (1,533) 6,315 684 680
Cash and cash equivalents at beginning of
period 3,159 2,197 664 664 6,979
--------- --------- --------- --------- ---------
Cash and cash equivalents at end of period $ 2,197 $ 664 $ 6,979 $ 1,348 $ 7,659
========= ========= ========= ========= =========
Supplemental disclosures of other cash and
non-cash investing and financing
activities:
Interest paid in cash $ (1,715) $ (1,510) $ (2,713) $ -- $ --
Income taxes paid (175) (150) -- -- --
Income tax refund received -- 453 -- -- --
Purchase of equipment under capital
lease obligations -- 57 -- -- --
Settlement of accrued liability recorded
as goodwill -- 2,721 -- -- --
Conversion of bridge loan plus accrued
interest to Series I preferred stock -- 1,051 -- -- --
Conversion of accounts payable to notes
payable -- -- 20,946 16,629 --
Conversion of accrued liabilities to
notes payable -- -- 4,049 4,049 --
Non-cash principal reduction on note
payable -- -- -- (184) --
Common stock issued in settlement of
accounts payable -- -- 383 -- --
Common stock issued in satisfaction of
liability related to overadvance
loan guarantees -- -- -- -- 1,631
Common stock issued in satisfaction of
accrued compensation -- -- -- -- 330
Reconciliation of the effects of business
combination:
Fair value of net assets acquired $ 21,495
Cash purchase price (1,809)
Fair value of common stock and
options issued (8,206)
---------
Liabilities assumed $ 11,480
=========
See accompanying notes to the consolidated financial statements.
F-10
Exabyte Corporation And Subsidiaries
Notes To Consolidated Financial Statements
(Information as of June 30, 2004 and for the six months ended June 28, 2003 and
June 30, 2004 is unaudited)
Note 1 - Operations and Summary of Significant Accounting Policies
Business, Liquidity and Basis of Presentation
Exabyte Corporation ("Exabyte" or the "Company") was incorporated on June
5, 1985 under the laws of the state of Delaware. Exabyte markets, designs and
manufactures storage products including VXA(R), and MammothTape(TM) drives, as
well as automation for VXA(R), MammothTape(TM) and LTO(TM) (Ultrium(TM))
technologies. Exabyte also provides its own brand of recording media and
provides worldwide service and customer support to its customers and end users.
The Company has reported its results of operations on the basis of a fiscal year
of 52 or 53 weeks ending on the Saturday closest to December 31. There were 53
weeks in fiscal 2003 and 52 weeks in fiscal 2002 and 2001. The year ended
January 3, 2004 is referred to as "2003" in the accompanying notes to the
consolidated financial statements. Beginning with the three months ended March
31, 2004, the Company will report its operating results on a calendar month,
quarter and annual basis. During 2003, Nasdaq delisted the Company's stock,
which is now traded on the OTC Bulletin Board.
The accompanying consolidated financial statements have been prepared on a
going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The Company has
incurred losses in fiscal 2001, 2002 and 2003 and for the six months ended June
30, 2004, and had a stockholders' deficit and working capital deficit of
$28,416,000 and $6,561,000, respectively as of January 3, 2004. At June 30,
2004, the Company had a stockholders' deficit of $5,625,000 and a working
capital surplus of $9,411,000.
The Company has evaluated various strategic alternatives that would result
in increased working capital and liquidity. These alternatives have included one
or more of the following:
- Proceeds from debt or equity fund raising activities;
- sale of all or a portion of operating assets;
- continued restructuring of current operations;
- strategic alliance or business combination; or
- restructuring of payment terms of notes payable to certain
suppliers.
As of January 3 and June 30, 2004, it was necessary for the Company to
take one or more of these actions in order to have adequate funds to support its
operations in 2004. If the Company is not successful in achieving one or more of
these actions, it may not be able to continue as a going concern. As of January
3 and June 30, 2004, the accompanying consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
As discussed more fully in Note 17, on May 3, 2004 the Company sold preferred
stock and common stock purchase warrants for net proceeds of $23,763,000.
Through June 30, 2004, the Company's primary sources of funds for
operations have been cash generated from operations, its revolving line of
credit with a bank, the proceeds from the Media Distribution Agreement with
Imation Corp. received in the fourth quarter of 2003 and the net proceeds from
the sale of preferred stock and common stock purchase warrants.
F-11
Exabyte Corporation And Subsidiaries
Notes To Consolidated Financial Statements
(Information as of June 30, 2004 and for the six months ended June 28, 2003 and
June 30, 2004 is unaudited)
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All intercompany accounts and transactions
have been eliminated in consolidation. The accompanying unaudited interim
consolidated financial statements as of June 30, 2004 and for the six months
ended June 28, 2003 and June 30, 2004 have been prepared on a basis consistent
with the annual consolidated financial statements, and reflect all adjustments,
consisting only of normal, recurring adjustments, necessary for a fair
presentation in accordance with accounting principles generally accepted in the
United States of America. The results of operations for the interim periods
presented are not necessarily indicative of the operating results for the full
year. All information included in the accompanying interim consolidated
statements, and the related notes thereto, of June 30, 2004 and for the six
months ended June 28, 2003 and June 30, 2004 are unaudited. In addition,
information as of or for any period subsequent to June 30, 2004 is unaudited.
The Company has prepared the accompanying consolidated financial
statements in conformity with accounting principles generally accepted in the
United States of America, which require the use of management's estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities, as well as the reported amounts of revenue
and expenses. Accordingly, actual results could differ from the estimates used.
Cash and Cash Equivalents
Cash equivalents are short-term, highly liquid investments that are both
readily convertible to cash and have original maturities of three months or less
at the date of purchase. The Company has no cash equivalents at December 28,
2002, or January 3, 2004. Cash equivalents at June 30, 2004 totaled
approximately $7,300,000 and consisted of an investment in a short-term money
market fund.
Inventory
Inventory is recorded at the lower of cost or market using the first-in,
first-out method, and includes materials, labor and manufacturing overhead.
Inventory is presented net of reserves for excess quantities and obsolescence of
$13,130,000, $11,353,000 and $8,199,000 at December 28, 2002, January 3, 2004
and June 30, 2004, respectively, and consists of the following:
December 28, January 3, June 30,
2002 2004 2004
---- ---- ----
(In thousands) (Unaudited)
Raw materials and component parts $11,038 $ 6,450 $ 5,963
Work-in-process 834 -- --
Finished goods 12,710 5,635 5,293
------- ------- -------
$24,582 $12,085 $11,256
======= ======= =======
Equipment and Leasehold Improvements
Equipment and leasehold improvements are recorded at cost. Depreciation
and amortization is recorded using the straight-line method over the estimated
useful lives of the respective assets. Software, computers, furniture and
machinery/equipment are depreciated over three years. Leasehold improvements are
amortized over the useful life of the asset or the lease term (three to twelve
years), whichever is less. Maintenance and repairs are expensed as incurred.
F-12
Exabyte Corporation And Subsidiaries
Notes To Consolidated Financial Statements
(Information as of June 30, 2004 and for the six months ended June 28, 2003 and
June 30, 2004 is unaudited)
The Company continually evaluates long-lived assets, based on the net
future cash flow expected to be generated from the asset on an undiscounted cash
flow basis, whenever significant events or changes in circumstances occur which
indicate the carrying amount may not be recoverable. If that analysis indicates
that an impairment has occurred, the Company measures the impairment based on a
comparison of discounted cash flows or fair values, whichever is more readily
determinable, to the carrying value of the related asset.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, accounts receivable,
accounts payable, accrued liabilities, borrowings under the Company's line of
credit and other notes payable, and the current portion of other non-current
liabilities in the consolidated balance sheets approximate fair value due to the
short-term maturity of these instruments. The fair value of non-current notes
payable and capital leases was estimated by discounting the future cash flows
using market interest rates and does not differ significantly from the amounts
reflected in the consolidated balance sheets.
Goodwill
In June of 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 141, "Business Combinations"
("FAS 141") and Statement of Financial Accounting Standard No. 142, "Goodwill
and Other Intangible Assets" ("FAS 142").
FAS 141 was effective for the Company for all business combinations
initiated after June 30, 2001, and mandates the purchase method to account for
all business combinations. The Company accounted for its business combination
with Ecrix Corporation ("Ecrix"), which was completed on November 9, 2001, under
the provisions of FAS 141. Under the purchase method, the purchase price of an
acquired business is allocated to the individual tangible and intangible assets
acquired and liabilities assumed based upon estimated fair values at the date of
acquisition. Any excess of the purchase price over the amounts assigned to
assets acquired and liabilities assumed is recognized as goodwill. Goodwill is
accounted for under the provisions of FAS 142.
The Company adopted FAS 142 on January 1, 2002. Under FAS 142, goodwill is
assigned to one or more reporting units based upon certain criteria, is tested
for impairment upon adoption of FAS 142 and annually thereafter, and is no
longer amortized. No amortization expense was recorded in 2001, as the Ecrix
combination was completed subsequent to June 30, 2001. Upon adoption of FAS 142,
the Company concluded that it has one reporting unit, and in 2002 the Company
completed the transitional and annual impairment tests using the following
approach: (1) Calculate the fair value of the Company based on quoted market
prices of the Company's stock, and compare such amount with the Company's
carrying value (stockholders' equity or deficit), including goodwill; (2) If the
fair value of the Company is less than its carrying amount, measure the amount
of impairment loss, if any, by comparing the implied fair value of the goodwill
with the carrying amount of such goodwill; (3) If the carrying amount of the
goodwill exceeds its implied fair value, recognize that excess as an impairment
loss. Using this method, the Company determined that the fair value of the
reporting unit, including goodwill, exceeded carrying value as of December 28,
2002, January 3, 2004 and June 30, 2004 and, accordingly, goodwill is not
considered to be impaired.
F-13
Exabyte Corporation And Subsidiaries
Notes To Consolidated Financial Statements
(Information as of June 30, 2004 and for the six months ended June 28, 2003 and
June 30, 2004 is unaudited)
Revenue Recognition
The Company recognizes revenue when persuasive evidence of an arrangement
exists, shipment or delivery has occurred, the sales price is fixed or
determinable, and collectibility is reasonably assured. Generally, these
criteria are met upon shipment or delivery of products and transfer of title and
risk of loss to customers. Product sales to certain distributors and resellers
are subject to agreements allowing certain limited rights of return, marketing
related rebates and price protection on unsold merchandise. Accordingly, the
Company records an allowance for estimated future returns, marketing rebates and
for price protection in the period of the sale based on contractual terms and
historical data. The Company sells to certain original equipment manufacturers
("OEM's") and other customers, which require that the Company maintain inventory
at third party warehouses. Revenue from these sales is recognized when title
transfers, which is generally when the OEM or customer takes possession of the
inventory from the warehouses. Revenue for out-of-warranty service repairs is
recorded when the service has been performed and the product has been returned
to the customer. Revenue for on-site warranty contracts is deferred and
amortized using the straight-line method over the contract period. Shipping and
handling costs are included in cost of goods sold.
The distribution fee received by the Company in connection with the Media
Distribution Agreement ("Media Agreement") discussed in Note 10 was recorded as
deferred revenue and is being amortized using the straight-line method over ten
years, which represents the estimated period over which existing media products
will be sold. In addition, under certain circumstances the distribution fee may
be refundable on a pro-rata basis over a ten year period from the date of the
Media Agreement.
Foreign Currency Transactions and Remeasurement
The U.S. dollar is the functional currency of the consolidated corporation
including its subsidiaries. For the Company's foreign subsidiaries, monetary
assets and liabilities are remeasured into U.S. dollars using the exchange rates
in effect at the balance sheet date and non-monetary assets are remeasured at
historical rates. Results of operations are remeasured using the average
exchange rates during the period. The Company recorded net foreign exchange
gains (losses) related to these remeasurements of $(438,000), $608,000 and
$(31,000) in 2001, 2002 and 2003, respectively and $(33,000) and $120,000 for
the six months ended June 28, 2003 and June 30, 2004, respectively. From time to
time, the Company enters into transactions that are denominated in foreign
currencies. These transactions are remeasured at the prevailing spot rate upon
payment and recorded in the operating account to which the payment relates.
Accounts receivable and payable from subsidiaries denominated in foreign
currencies are remeasured using period end rates and transaction gains and
losses are recorded. The Company recorded net foreign exchange gains (losses)
related to these transactions of $562,000, $(1,411,000) and $(1,818,000) in
2001, 2002 and 2003, respectively and $(179,000) and $368,000 for the six months
ended June 28, 2003 and June 30, 2004, respectively. In 2003 and the six months
ended June 30, 2004, $(1,634,000) and $392,000 of such gain (loss) related to
the translation of a note payable to a supplier denominated in the Yen. In
addition, during 2003 and the six months ended June 30, 2004 the Company's cost
of goods sold increased by $1,381,000 and $488,000 as a result of a supply
agreement with a Japanese supplier which required payment in Yen at a fixed
conversion rate. Effective April 1, 2004, purchases under this agreement are
made in U.S. dollars.
Comprehensive Income
The Company has no items of comprehensive income.
F-14
Exabyte Corporation And Subsidiaries
Notes To Consolidated Financial Statements
(Information as of June 30, 2004 and for the six months ended June 28, 2003 and
June 30, 2004 is unaudited)
Warranty Costs
The Company establishes a warranty liability for the estimated cost of
warranty-related claims at the time product related revenue is recognized. The
following table summarizes information related to the Company's warranty reserve
as of and for the periods presented:
Year ended Six months ended
---------- ----------------
December 28, January 3, June 28, June 30,
2002 2004 2003 2004
---- ---- ---- ----
(In thousands) (Unaudited)
Balance at beginning of period $ 10,943 $ 5,049 $ 5,049 $ 2,024
Accruals for warranties issued during the period 2,033 1,180 935 435
Adjustments to warranties (4,613) (2,977) (645) (651)
Amortization during the period (3,314) (1,228) (1,974) 85
-------- -------- -------- --------
Balance at end of period $ 5,049 $ 2,024 $ 3,365 $ 1,893
======== ======== ======== ========
Advertising Costs
Advertising costs are expensed as incurred and totaled $1,795,000,
$486,000 and $186,000 in 2001, 2002 and 2003, respectively, and $3,000 and
$121,000 for the six months ended June 28, 2003 and June 30, 2004, respectively.
Research and Development Costs
All research and development costs are expensed as incurred.
Loss Per Common Share
Basic loss per share is based on the weighted average number of common
shares issued and outstanding, and is calculated by dividing net loss by the
weighted average number of shares outstanding during the period. Diluted loss
per share is calculated by dividing net loss by the weighted average number of
common shares used in the basic loss per share calculation, adjusted for the
number of common shares that would be issued assuming exercise or conversion of
all potentially dilutive common shares outstanding. For 2001, 2002 and 2003, and
the six months ended June 28, 2003 and June 30, 2004, basic and diluted loss per
share are equal, as the inclusion of potentially dilutive common shares is
anti-dilutive.
Options to purchase 6,667,000, 12,891,000, 16,028,000, 15,603,000 and
9,178,000 shares of common stock were excluded from diluted share calculations
for 2001, 2002 and 2003, and the six months ended June 28, 2003 and June 30,
2004, respectively, as a result of the exercise prices being greater than the
average fair market value of the Company's stock for the year, and as such are
anti-dilutive.
F-15
Exabyte Corporation And Subsidiaries
Notes To Consolidated Financial Statements
(Information as of June 30, 2004 and for the six months ended June 28, 2003 and
June 30, 2004 is unaudited)
In addition, options to purchase 5,161,000, 6,132,000, 11,294,000,
2,345,000 and 32,320,000 shares of common stock, respectively, were excluded
from diluted share calculations for 2001, 2002 and 2003, and the six months
ended June 28, 2003 and June 30, 2004, respectively, as these options are
anti-dilutive.
The Company had several classes of preferred stock outstanding during 2003
and through June 30, 2004, all of which were convertible into the Company's
common stock (see Note 6). The assumed conversion of the preferred shares into
common stock for 2001, 2002 and 2003, and the six months ended June 28, 2003 and
June 30, 2004 has been excluded from diluted share calculations as the effect of
the conversion features is anti-dilutive. In addition, as a result of their
anti-dilutive effect, accumulated preferred dividends payable in 97,500,
1,087,000, 2,282,000, 2,082,000 and 0 shares of common stock have been excluded
from diluted share calculations for 2001, 2002 and 2003, and the six months
ended June 28, 2003 and June 30, 2004, respectively.
Stock-Based Compensation
As permitted under Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("FAS 123"), the Company accounts for
stock-based compensation using the intrinsic value method in accordance with
Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees" ("APB 25"). Accordingly, no compensation expense has been recognized
for options granted to employees with an exercise price equal to the market
value at the date of grant or in connection with the employee stock purchase
plan. The Company accounts for equity instruments issued to non-employees in
accordance with the provisions of FAS 123 and related interpretations.
The following table illustrates the effect on net loss available to common
stockholders and net loss per share if the Company had applied the fair-value
based method of SFAS 123 to stock-based compensation.
Years ended Six months ended
--------------------------------------- -----------------------
June 28, June 30,
2001 2002 2003 2003 2004
---- ---- ---- ---- ----
(In thousands, except per share data) (Unaudited)
Net loss $(35,433) $(29,072) $(43,692) $(24,632) $ (3,766)
Add stock-based compensation expense included in
reported net loss available to common
stockholders, net of related tax effects -- 178 331 181 696
Deduct total stock-based compensation expense
determined under fair-value based method for
all awards, net of related tax effects (3,978) (3,108) (2,113) (917) (2,533)
-------- -------- -------- -------- --------
Pro forma net loss $(39,411) $(32,002) $(45,474) (25,368) (5,603)
Deemed dividend related to beneficial conversion
features and exchange of preferred stock
(Note 17) -- (4,557) (556) -- (4,225)
-------- -------- -------- -------- --------
Proforma net loss available to common
stockholders $(39,411) $(36,559) $(46,030) (25,368) (9,828)
======== ======== ======== ======== ========
Basic and diluted net loss per share available
to common stockholders:
As reported $ (1.47) $ (1.02) $ (0.70) $ (0.56) $ (0.08)
Pro forma $ (1.64) $ (1.11) $ (0.72) $ (0.58) $ (0.10)
F-16
Exabyte Corporation And Subsidiaries
Notes To Consolidated Financial Statements
(Information as of June 30, 2004 and for the six months ended June 28, 2003 and
June 30, 2004 is unaudited)
For FAS 123 disclosure purposes, the fair value of each option grant is
estimated on the date of grant using the Black-Scholes option-pricing model with
the following weighted-average assumptions:
Year ended Six months ended
----------------------------------------------- -------------------------------
2001 2002 2003 June 28, 2003 June 30, 2004
---- ---- ---- ------------- -------------
Estimated dividends None None None None None
Expected volatility 133% 135% 190% 135% 183%
Risk-free interest rate 2.8%-4.8% 2.2%-4.0% 1.5%-2.5% 2.2%-4.0% 2.2%-3.3%
Expected term (years) 1.95 3.52 3.21 3.52 3.09
Reclassifications
Certain reclassifications have been made to prior years' balances to
conform with the current year presentation.
Note 2 - Equipment and Leasehold Improvements
Equipment and leasehold improvements consist of the following:
December 28, January 3, June 30,
2002 2004 2004
---- ---- ----
(In thousands) (Unaudited)
Equipment and furniture $ 52,991 $ 42,951 $ 42,252
Equipment under capital leases 2,443 273 273
Leasehold improvements 11,253 372 382
Less accumulated depreciation and
amortization (61,763) (40,815) (39,867)
-------- -------- --------
$ 4,924 $ 2,781 $ 3,040
======== ======== ========
Depreciation expense totaled $8,927,000, $6,724,000, $3,688,000,
$2,426,000 and $831,000 in 2001, 2002 and 2003, and for the six months ended
June 28, 2003 and June 30, 2004, respectively. Accumulated amortization of
equipment under capital leases was $2,168,000, $97,000 and $145,000 at December
28, 2002, January 3, 2004 and June 30, 2004, respectively. Amortization of
equipment under capital leases is included in depreciation expense.
F-17
Exabyte Corporation And Subsidiaries
Notes To Consolidated Financial Statements
(Information as of June 30, 2004 and for the Six months ended June 28, 2003 and
June 30, 2004 is unaudited)
Note 3 - Accrued Liabilities
Accrued liabilities are comprised of the following:
December 28, January 3, June 30,
2002 2004 2004
---- ---- ----
(In thousands) (Unaudited)
Wages and employee benefits $ 3,164 $ 2,228 $ 2,166
Inventory purchase commitments 5,211 1,392 --
Warranty costs, current portion 2,464 1,045 505
Liability related to overadvance
loan guaranties -- 1,631 --
Deferred rent concessions -- 1,747 1,047
Other 2,300 1,393 1,547
------- ------- -------
$13,139 $ 9,436 $ 5,265
======= ======= =======
Note 4 - Debt
Line of Credit
On June 18, 2002, the Company entered into a $25,000,000 line of credit
agreement (the "Agreement") with Silicon Valley Bank ("SVB") that originally
expired in June 2005. As of December 28, 2002, the Company was not in compliance
with certain financial covenants included in the Agreement which constituted an
event of default. In February 2003, SVB agreed to forbear from exercising its
remedies as a result of the default, and in April 2003, the Company entered into
the Third Modification Agreement ("Third Modification"). The Third Modification
provided for borrowings of up to $20,000,000, based on a specified percentage of
eligible accounts receivable, as defined, and a percentage of specified
inventory balances, also as defined in the Agreement. Collateral for all
borrowings included substantially all assets of the Company and the maturity
date of the Agreement was revised to September 30, 2003. Interest under the
Third Modification was charged at a rate equal to the prime rate plus 5.25%. The
Fourth Modification Agreement increased the overadvance guaranties from
$2,500,000 to $2,750,000 effective July 18, 2003.
On October 10, 2003, the Company entered into the Fifth Modification
Agreement which extended the Agreement through September 30, 2005, under similar
terms and conditions. As of January 3, 2004, the Company was in violation of the
covenant relating to operating results for the fourth quarter of 2003. The
Company obtained a waiver of such covenant violation in March 2004. As discussed
more fully in Note 17, in April 2004, the Company entered into a revised loan
agreement with SVB
In connection with the Third Modification, SVB had notified the Company
that it was in an "over advance" state with respect to its line of credit, and
that in order for SVB to continue to allow the Company to borrow against the
line, the Company was required to cause its CEO and a significant investor
("Guarantors") to agree to guarantee up to a maximum of $2,500,000 for advances
in excess of the Company's credit limit (the "Guaranties"). The Company, through
an independent committee of its Board, negotiated agreements with the
Guarantors, whereby the Guarantors agreed to such a guarantee in exchange for a
specific number of shares of the Company's common stock, as discussed below. In
addition, SVB required that each of the Guarantors enter into a subordination
agreement
F-18
("Subordination Agreement"), whereby each Guarantor agreed to subordinate to
SVB: (1) all of the Company's present and future indebtedness and obligations to
the Guarantor; and (2) all of the Guarantor's present and future security
interests in the Company's assets and property. Additional
F-19
Exabyte Corporation And Subsidiaries
Notes To Consolidated Financial Statements
(Information as of June 30, 2004 and for the Six months ended June 28, 2003 and
June 30, 2004 is unaudited)
guaranties for $250,000 of excess borrowings were obtained in July 2003 under
similar terms. As a result of entering into the Media Distribution Agreement
discussed in Note 10, all of the Guaranties were terminated in November 2003.
As consideration for the Guaranties, the Company issued to the Guarantors
(pro-rata) 25,000,000 shares of its common stock on April 21, 2003, 12,500,000
shares on July 15, 2003 and 8,793,252 shares on September 15, 2003. An
additional 3,706,748 common shares are required to be issued under the
Guaranties, but have not been issued as of January 3, 2004. The value of these
shares which were issued in March 2004, totaling $1,631,000, is included in
accrued liabilities in the accompanying consolidated financial statements as of
January 3, 2004. During July, 2003, the Company entered into agreements with two
additional shareholders to guarantee an additional $250,000 of borrowings from
SVB in exchange for up to 2,500,000 common shares issued in July, and an
additional 1,500,000 shares issued in October 2003. The Company determined the
fair value of all of the shares based on the market price of the Company's stock
on the date the shares were earned by the Guarantors, and recorded $10,146,000
of stock-based interest-expense during 2003. The value of the total shares
issued under the Guaranties was recorded as interest expense over the
anticipated period that such Guaranties were in effect.
In connection with the Third Modification, the Company issued SVB a fully
vested, immediately exercisable and non-forfeitable warrant to purchase
2,000,000 shares of common stock at an exercise price of $0.105 per share
pursuant to the Modification Agreement. This warrant was issued as compensation
to SVB for continuing to allow access to an extended credit limit while the
Company negotiated the series of Guarantee Agreements with its CEO and a
significant investor, as discussed above. The warrant was exercised in April
2004. The Company determined the value of the warrants to be $159,000 based on
the Black-Scholes option-pricing model with the following assumptions: no
dividend yield, expected life - 7 years, volatility - 135%, and risk free
interest rate - 3.5%. The fair value of the warrant was recognized as interest
expense over the term of the Third Modification, which expired on September 30,
2003.
Notes Payable - Suppliers
During 2003, the Company entered into agreements with four of its largest
suppliers that converted certain accounts payable and accrued liability amounts
outstanding at December 28, 2002, totaling $20,900,000, to unsecured notes
payable, which are currently due through 2005 and bear interest at rates ranging
from zero to 5%. In September 2003, the Company entered into restructuring and
note payable agreements (the "Agreements") with a fifth supplier, Solectron
Corporation ("Solectron"), for $8,991,000 which converted accounts payable and
inventory purchase commitments to a note payable. Of this balance, $3,020,000
represented a current inventory purchase commitment which is non-interest
bearing. Accordingly, the remaining purchase commitment balance of $1,392,000 at
January 3, 2004 is included in accrued liabilities in the accompanying
consolidated financial statements. The remaining $5,970,000 original balance of
the note is unsecured and is due monthly through 2007 with interest at 9.0%. In
May 2004, the Company made a $2,020,000 prepayment on the Solecton note and
revised the payment schedule. As of June 30, 2004, all inventory purchase
commitments have been satisfied. As of January 3, 2004, the total amount due
under all notes payable - suppliers is $24,398,000, which is payable as follows:
2004 - $13,384,000; 2005 - $8,093,000; 2006 - $1,753,000; 2007 - $1,168,000. As
of June 30, 2004, the total amount due under all notes payable - suppliers is
$15,722,000, which is payable as follows: 2004 - $6,881,000; 2005 - $7,410,000;
2006 - $1,335,000; 2007 - $96,000. The Company accounted for the modification of
the liabilities under EITF 96-19, `Debtors Accounting for a Modification or
Exchange of Debt Instruments ("EITF 96-19"). In
F-20
accordance with the provisions of EITF 96-19, the terms of the notes are not
considered to be substantially different than the terms of the original
liabilities.
F-21
Exabyte Corporation And Subsidiaries
Notes To Consolidated Financial Statements
(Information as of June 30, 2004 and for the Six months ended June 28, 2003 and
June 30, 2004 is unaudited)
Note Payable - Lessor
In September 2003, the Company entered into a note payable in the amount
of $3,060,000 with the lessor of certain of its 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, and bears
interest at the prime rate for the first year (4.0% at January 3, 2004), 6.0%
for years two through four and 10.0% for year five. 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 will
be recognized over the term of the note as additional interest expense using the
effective interest method.
Bridge Loan
On April 23, 2002, the Company received a $1,000,000 bridge loan from a
current investor in the Company, Meritage Private Equity Fund, L.P. The bridge
loan accrued interest at a rate of 18% per annum and matured on July 31, 2002.
Pursuant to the bridge loan, the Company issued Meritage Private Equity Funds a
warrant, with a ten-year life, to purchase 100,000 shares of common stock at an
exercise price of $0.83 per share. The Company valued the warrant using a
Black-Scholes valuation model with the following assumptions: 133% expected
volatility, a 5% risk-free interest rate, a 10 year expected term, and no
estimated dividends. The Company recorded $541,000 of debt discount related to
the value of the warrants and the resultant beneficial conversion feature. The
beneficial conversion feature was calculated in accordance with EITF 98-5
"Accounting for Convertible Securities With Beneficial Conversion Features or
Contingently Adjustable Conversion Features" and EITF 00-27 "Application of
Issue No. 98-5 to Certain Convertible Instruments." The Company amortized
$516,000 of debt discount to interest expense in the second quarter of 2002. The
bridge loan converted into Series I preferred stock as part of the second
closing of the Series I offering on July 31, 2002, and as of that date, the
Company amortized the remaining $25,000 of debt discount to interest expense.
Interest expense totaled $1,715,000, $2,051,000, $12,859,000, $3,698,000
and $955,000 in 2001, 2002 and 2003, and the six months ended June 28, 2003 and
June 30, 2004, respectively.
Note 5 - Stock Compensation Plans
Fixed Stock Option Plans
Under the Company's Incentive Stock Plan, the Company may grant options to
its employees and directors for up to 9,500,000 shares of common stock. Under
the Company's 1997 Non-Officer Stock Option Plan, the Company may grant options
to its employees (who are not officers or directors) for up to 9,000,000 shares
of common stock. Under both plans, options are granted at an exercise price not
less than the fair market value of the stock on the date of grant. The options
typically vest over periods up to 50 months and expire 10 years after the date
of grant, except in the event of the termination or death of the employee,
whereupon vested shares must be exercised within 90 days or six months,
respectively, or they are canceled. In addition, the Company has granted
14,000,000 options to its CEO outside of the Incentive Stock Plan. Such options
have the same terms and conditions as described above for options granted under
the plans.
F-22
Exabyte Corporation And Subsidiaries
Notes To Consolidated Financial Statements
(Information as of June 30, 2004 and for the Six months ended June 28, 2003 and
June 30, 2004 is unaudited)
A summary of the status of the Company's fixed stock option plans as of
December 29, 2001, December 28, 2002 and January 3, 2004, and changes during the
years then ended is as follows:
2001 2002 2003
---- ---- ----
Shares Weighted-Ave. Shares Weighted-Ave. Shares Weighted-Ave.
(000s) Exercise Price (000s) Exercise Price (000s) Exercise Price
------ -------------- ------ -------------- ------ --------------
Outstanding at beginning
of year 4,620 $ 10.08 11,828 $ 3.42 19,023 $ 2.00
Granted at fair market
value 10,593 1.37 10,856 1.03 14,438 0.22
Exercised (1) 0.65 (95) 0.65 (22) 0.65
Forfeited (3,384) 6.20 (3,566) 3.73 (6,017) 3.14
------- --------- ------- -------- ------- --------
Outstanding at end of year 11,828 $ 3.42 19,023 $ 2.00 27,422 $ 0.83
======= ========= ======= ======== ======= ========
Options exercisable at
year end 4,052 $ 6.67 7,268 $ 3.39 7,629 $ 1.51
Weighted-average fair
value of options granted
during the year $ 0.83 $ 0.80 $ 0.17
The following table summarizes information about fixed stock options
outstanding at January 3, 2004:
Options Outstanding Options Exercisable
------------------------------------------------ -------------------------------
Number Weighted-Avg. Weighted-Avg. Number Weighted-Avg.
Range of Outstanding Remaining Exercise Exercisable Exercise
Exercise Prices (000's) Contractual Life Price (000's) Price
------- ---------------- ----- ------- -----
$ 0.11 - 0.45 12,500 9.56 $ 0.18 1,201 $ 0.18
0.47 - 0.90 6,203 8.32 0.71 3,604 0.69
0.96 - 1.40 7,463 8.37 1.19 1,600 1.17
2.09 - 19.63 1,256 5.94 5.70 1,224 5.68
------ ---- ------ ----- ------
27,422 8.79 $ 0.83 7,629 $ 1.51
====== ==== ====== ===== ======
As discussed more fully in Note 17, in June 2004, the Company's
shareholders approved and ratified the Exabyte Corporation 2004 Stock Option
Plan ("Plan") which provides for the issuance of up to 25,000,000 options to
purchase the Company's common stock.
Employee Stock Purchase Plan
Under the Employee Stock Purchase Plan, the Company is authorized to issue
up to 1,500,000 shares of common stock to its full-time employees, substantially
all of whom are eligible to participate. Under the terms of the plan, employees
may elect to have up to 15% of their gross salaries withheld by payroll
deduction to purchase the Company's common stock. The purchase price of the
stock is 85% of the lower of market price at the beginning or end of each
six-month participation period. Purchases are limited to 1,000 shares per
employee per offering period. Employees purchased 102,000, 85,000 and 21,000
shares in 2001, 2002 and 2003, respectively.
F-23
Exabyte Corporation And Subsidiaries
Notes To Consolidated Financial Statements
(Information as of June 30, 2004 and for the Six months ended June 28, 2003 and
June 30, 2004 is unaudited)
The fair value of each stock purchase plan grant is estimated on the date
of grant using the Black-Scholes model with the following assumptions:
2001 2002 2003
---- ---- ----
Estimated dividends none none None
Expected volatility 133% 135% 190%
Risk-free interest rate 4.4%-4.8% 3.5%-3.6% 1.9%-2.2%
Expected term (years) 0.5 0.5 0.5
Weighted-average fair value of purchase
rights granted $1.26 $0.58 $0.13
Business Combination
On November 9, 2001, in connection with the Company's business combination
with Ecrix, certain options were granted to former Ecrix employees who became
employees of the Company. These options were granted at prices equal to or
greater than fair market value and included vesting credit for their period of
service at Ecrix. Otherwise, these options followed the normal provisions of the
Company's fixed stock option plans. These options were valued under FASB
Interpretation No. 44, an interpretation of APB Opinion 25. The calculated value
of $1,006,000 was recorded as part of the purchase price of the business
combination.
Note 6 - Preferred Stock
The Company has authorized and issued shares of the following series of
Preferred Stock:
Series I Preferred Stock
On May 17, 2002, the Company issued 3,901,200 shares of Series I preferred
stock at a price of $1.00 per share for net cash proceeds of $3,664,000. On July
31, 2002, the Company issued an additional 4,536,300 shares of Series I
preferred stock at a price of $1.00 per share in exchange for net cash proceeds
of $3,292,000 and the conversion of $1,051,000 in bridge loans and accrued
interest. Included in the total 8,437,500 shares of Series I preferred stock
issued were 37,500 shares issued as an introduction fee. As discussed in Note
10, the Company issued an additional 1,500,000 shares at $1.00 per share in
November 2003. The Series I preferred shares were convertible into shares of
common stock at a price of $0.5965 per share. The difference between the
conversion price of the Series I preferred stock and the fair value of the
Company's common stock on May 17, 2002 resulted in a beneficial conversion
feature in the amount of $2,639,000 for the shares issued pursuant to the first
closing. The difference between the conversion price of the Series I preferred
stock and the fair value of the Company's common stock on July 31, 2002 resulted
in a beneficial conversion feature in the amount of $1,918,000 for the shares
issued pursuant to the second closing. These amounts total $4,557,000, are
reflected in the Statement of Operations for 2002 as a deemed dividend and were
calculated in accordance with EITF 98-5 "Accounting for Convertible Securities
With Beneficial Conversion Features or Contingently Adjustable Conversion
Features" and EITF 00-27 "Application of Issue No. 98-5 to Certain Convertible
Instruments."
F-24
Exabyte Corporation And Subsidiaries
Notes To Consolidated Financial Statements
(Information as of June 30, 2004 and for the Six months ended June 28, 2003 and
June 30, 2004 is unaudited)
The holders of the Series I preferred stock were entitled to vote with the
shares of common stock (and not as a separate class) on an as-converted basis at
any annual or special meeting of the Company's stockholdersThe Series I
preferred stock had a liquidation preference of $17,736,000 as of March 31, 2004
over common stock.
In addition, the holders of the Series I preferred stock received the
right to receive, for no additional consideration, warrants to purchase a number
of shares of common stock equal to common shares issuable upon conversion. The
warrants were issuable upon any redemption or other involuntary retirement of
Series I preferred stock by Exabyte (other than pursuant to a conversion of
shares of Series I preferred stock or a reclassification or exchange of such
shares for other securities that preserve in all respects the benefits of the
conversion rights of the Series I preferred stock).
The holders of the Series I preferred stock, in preference to the holders
of Exabyte's other preferred and common stock, were also entitled to receive,
when, as and if declared by the board of directors, dividends in an amount per
share calculated at a compound annual rate of 12% (subject to adjustment to 15%
in 2007) of the original issue price of the Series I preferred stock, on a
cumulative basis. At March 31, 2004, the Company had accumulated, but had not
declared or paid $1,361,000 of preferred stock dividends related to the Series I
issuance. The Company had registered the shares of Series I preferred stock as
well as the underlying shares of common stock issuable upon conversion, the
underlying common shares, if applicable, upon the exercise of any warrant issued
upon redemption or involuntary retirement of shares of Series I preferred stock,
or payment of dividends when, as and if, declared by the Board of Directors. In
October 2003 and March 2004, preferred stockholders converted 616,500 and
1,750,000 shares, respectively, of Series I Preferred Stock into 1,034,000 and
3,662,303 shares, respectively, of common stock. As discussed more fully in Note
17, all Series I shares and accumulated dividends were exchanged for newly
issued Series AA preferred shares in May 2004.
Series H Preferred Stock
On November 9, 2001, the Company issued 9,650,000 shares of Series H
preferred stock as part of the Agreement and Plan of Merger between the Company,
Ecrix and certain investors (see Note 9). The issuance of the Series H preferred
stock resulted in cash proceeds of $7,606,000 and the conversion of $2,044,000
in bridge loans and accrued interest made under the Agreement and Plan of
Merger. The original issue price of the Series H preferred stock was $1.00 per
share. No dividends accrued with respect to the Series H preferred stock,
although an adjustment to the conversion price is required to be made in the
event a dividend or distribution payable in common stock is declared with
respect to the common stock. Series H preferred stock had a liquidation
preference of $5,911,000 as of March 31, 2004 over common stock, and conversion
rights, at the option of the holder, into shares of common stock, at a price of
$1.00 per share.
The holders of the Series H preferred stock were entitled to vote with
shares of common stock (and not as a separate class) on an as-converted basis at
any annual or special meeting of the Company's stockholdersThe Company
registered the underlying shares of common stock issuable upon conversion of the
Series H preferred stock. As discussed more fully in Note 17, all Series H
shares were exchanged for newly issued Series AA preferred shares in May 2004.
F-25
Exabyte Corporation And Subsidiaries
Notes To Consolidated Financial Statements
(Information as of June 30, 2004 and for the Six months ended June 28, 2003 and
June 30, 2004 is unaudited)
Series G Preferred Stock
On April 12, 2001, the Company entered into an agreement to issue
1,500,000 shares of Series G preferred stock to a private investor for total
proceeds of $3,000,000. The original issuance price of the Series G preferred
stock was $2.00 per share. Dividends accrued at a rate of 9% per annum on the
original Series G issue price and were cumulative, if not paid. Series G
preferred stock had a liquidation preference over common stock and conversion
rights, at the option of the holder, into shares of common stock at a conversion
price of $2.40 per share, subject to adjustment.
The Company registered the shares of Series G preferred stock as well as
the underlying shares of common stock issuable upon conversion, or payment of
dividends when, as and if, declared by the board of directors. During the third
quarter of 2002, the Company issued a dividend of 70,000 shares of common stock
valued at $56,000 to Series G shareholders. In November 2003, the sole
stockholder of the Series G preferred stock exchanged such shares for
approximately 2,515,000 shares of common stock. The number of common shares
issued was in excess of the shares that would have been issued using the
original conversion ratio and, accordingly, the Company recognized a deemed
dividend equal to the fair value of the additional common shares issued of
$556,000 in 2003.
Note 7 - Income Taxes
Loss before income taxes is subject to tax in the following jurisdictions:
Fiscal years ended Six months ended
--------------------------------------- ------------------------
June 28, June 30,
2001 2002 2003 2003 2004
--------- --------- --------- --------- --------
(In thousands) (Unaudited)
Domestic $ (35,230) $ (29,358) $ (42,749) $ (23,983) $ (3,191)
Foreign 134 (116) (855) (564) (546)
--------- --------- --------- --------- --------
$ (35,096) $ (29,474) $ (43,604) $ (24,547) $ (3,737)
========= ========= ========= ========= ========
The (benefit) expense from income taxes consists of the following:
Fiscal years ended Six months ended
--------------------------------- ----------------------
June 28, June 30,
2001 2002 2003 2003 2004
---- ------ ---- -------- --------
(In thousands) (Unaudited)
Current:
Federal $ -- $ (453) $ -- $ -- $ --
State 18 -- -- -- --
Foreign (24) 51 88 85 29
---- ------ ---- ---- ----
$ (6) $ (402) $ 88 $ 85 $ 29
==== ====== ==== ==== ====
F-26
Exabyte Corporation And Subsidiaries
Notes To Consolidated Financial Statements
(Information as of June 30, 2004 and for the Six months ended June 28, 2003 and
June 30, 2004 is unaudited)
Total income tax benefit differs from the amount computed by applying the
U.S. federal income tax rate of 35% to loss before income taxes for the
following reasons:
Fiscal year ended Six months ended
-------------------------------------- ------------------------
June 28, June 30,
2001 2002 2003 2003 2004
---------- ---------- ---------- ---------- ----------
(In thousands) (Unaudited)
U.S. federal income tax
at statutory rate $ (12,404) $ (10,316) $ (15,261) $ (8,591) $ (1,308)
State income taxes, net
of federal benefit (946) (563) (1,390) (460) (128)
Valuation allowance 13,270 10,063 16,381 9,051 1,436
Effects of sale of CreekPath
Systems, Inc. -- 726 -- -- --
U.S. federal income tax
refund -- (453) -- -- --
Foreign taxes in excess
of 35% (71) 50 88 85 29
Other 145 91 270 -- --
---------- ---------- ---------- ---------- ----------
$ (6) $ (402) $ 88 $ 85 $ 29
========== ========== ========== ========== ==========
The Company's deferred tax asset is attributable to the following:
December 29, January 3, June 30,
2002 2004 2004
------------ ---------- ----------
(In thousands) (Unaudited)
Current assets:
Warranty reserve $ 2,587 $ 1,508 $ 1,455
Allowance for uncollectible accounts receivable 1,359 687 756
Reserves for excess or obsolete inventory 5,259 4,480 3,261
Other 4,656 2,475 1,821
---------- ---------- ----------
13,861 9,150 7,293
Less: valuation allowance (13,861) (9,150) (7,293)
---------- ---------- ----------
$ -- $ -- $ --
========== ========== ==========
Noncurrent assets:
Net operating loss carry forwards $ 67,094 $ 83,386 $ 88,209
Equipment and leasehold improvements 5,026 4,000 4,000
Credit carry forwards 4,774 4,774 4,774
Goodwill 586 472 443
Capitalized research and development for tax
purposes 19,901 24,947 23,398
Other 801 1,694 1,665
---------- ---------- ----------
98,182 119,273 122,489
Less: valuation allowance (98,182) (119,273) (122,489)
---------- ---------- ----------
$ -- $ -- $ --
========== ========== ==========
During 2002, the Company received a refund of approximately $453,000. The
refund was the result of the carryback of net operating losses allowed under a
recent law change, increasing the carryback period from two to five years for
net operating losses generated in 2001 and 2002. As a result of the Company's
deferred tax valuation allowance, the Company recorded a benefit for the cash
refund received.
F-27
Exabyte Corporation And Subsidiaries
Notes To Consolidated Financial Statements
(Information as of June 30, 2004 and for the Six months ended June 28, 2003 and
June 30, 2004 is unaudited)
The Company has recorded a deferred tax valuation allowance equal to 100%
of total deferred tax assets. In recording this allowance, management has
considered a number of factors, but primarily, the Company's cumulative
operating losses over the prior five years and the uncertainty regarding future
profitability. Management has concluded that a valuation allowance is required
for 100% of the total deferred tax asset as it is more likely than not that such
asset will not be realized.
At January 3, 2004, the Company had incurred domestic net operating loss
carryforwards of approximately $216,000,000 which expire between 2005 and 2023.
Under the Tax Reform Act of 1986, the amount of, and the benefit from, net
operating losses that can be carried forward is limited due to a cumulative
ownership change of more than 50% over a three-year period, which occurred in
November 2001 in connection with the Ecrix acquisition. The portion of Exabyte's
and Ecrix's pre-business combination tax carryovers, totaling $153,000,000, that
can be utilized in any one taxable year for federal tax purposes is limited to
approximately $1.2 million per year through 2021. Ownership changes after
January 3, 2004 could further limit the utilization of the Company's remaining
net operating loss carryforward of $63,000,000, in addition to any losses
incurred subsequent to January 3, 2004. As of January 3, 2004, the Company had
approximately $85,000,000 of total net operating loss carryforwards to offset
future taxable income.
Note 8 - Restructurings and Workforce Reductions
Restructurings and workforce reductions in 2001, 2002 and 2003 are
summarized as follows:
2001
In March 2001, the Company completed a reduction in its workforce in order
to reduce expenses, minimize ongoing cash consumption and to simplify management
structure. The reduction in workforce impacted all areas of the Company,
resulted in the termination of approximately 235 persons (211 domestically and
24 in Europe) and resulted in the Company recording a severance charge to
operations of approximately $498,000, of which $223,000 was recorded as cost of
sales, $179,000 as selling, general and administrative expenses and $96,000 as
research and development expenses. All amounts were paid during the first
quarter of 2001.
2002
During the first quarter of 2002, the Company incurred $4,363,000 in
charges related to a restructuring. The Board of Directors adopted the plan for
this restructuring on January 20, 2002. As a result of this restructuring, the
Company closed its service and final assembly facility in Scotland, closed its
service depots in Australia and Canada and further reduced its U.S workforce.
These restructuring charges include the write-off of leasehold
improvements and capital equipment taken out of service of $1,905,000, employee
severance and related costs of $1,345,000, the write-off of excess inventories
of $652,000, excess facilities costs of $307,000 and other costs of $154,000.
During the first quarter of 2002, the Company recorded approximately $3,736,000
of these charges to cost of sales, $509,000 to selling, general and
administrative expenses and $117,000 to research and development expenses.
During 2002, the Company paid approximately $1,446,000 of these restructuring
costs, of which approximately $1,311,000 is severance and related. At December
28, 2002, approximately $20,000 for severance pay and $174,000 of an excess
facilities obligation remain. Both amounts were paid in 2003.
F-28
Exabyte Corporation And Subsidiaries
Notes To Consolidated Financial Statements
(Information as of June 30, 2004 and for the Six months ended June 28, 2003 and
June 30, 2004 is unaudited)
Workforce reductions involved approximately 200 employees worldwide, of
which 184 were eligible to receive severance payments. All severance payments
for these employees were contractually defined and communicated during the first
quarter of 2002. The affected employees were from all functional areas of the
Company, with approximately 96 employees in Scotland, 92 in the U.S., six in
Australia, four in Canada and two in Singapore.
The Company also incurred special charges of $3,421,000 during the first
quarter of 2002, which did not qualify as restructuring charges. These charges
included $4,621,000 of fixed asset and inventory write-offs related to a
downsizing and to changes in its product roadmap, net of income of $1,200,000
related to the sale of certain technology. During the first quarter of 2002, the
Company recorded $3,675,000 of these special charges to cost of sales, $262,000
to selling, general and administrative expenses, and $684,000 to research and
development expenses.
In July 2002, the Company completed a reduction in its workforce in order
to reduce expenses and minimize ongoing cash consumption. All areas of the
Company were impacted by the workforce reduction. The Company reduced its
domestic workforce by approximately 104 persons and recorded a severance charge
to operations in the third quarter of 2002 of approximately $428,000. The
Company recorded $121,000 of this severance charge as cost of sales, $179,000 as
selling, general and administrative expenses and $128,000 as research and
development expenses. All severance was paid during the third quarter of 2002.
2003
During 2003, the Company terminated employment of 170 full- and part-time
employees. These terminations affected employees in all areas of the Company
including the sales, engineering and administrative functions and included
terminations of certain employees located in Europe. In addition, certain of
these terminations related to the outsourcing of the Company's repair and
service function as discussed in Note 13. The Company paid all severance related
to these terminations during 2003, which totaled approximately $549,000 and is
primarily recorded in SG&A.
Note 9 - Business Combination and Goodwill
On November 9, 2001, the Company completed a business combination with
Ecrix Corporation ("Ecrix"). The operations of Ecrix have been included in the
consolidated financial statements since that date. Ecrix was an early-stage
company which designed and sold high-capacity, high-performance data storage
tape drive products which use VXA(R) technology. Ecrix was a start-up phase
company and had commenced revenue shipments of product in late 1999 and had
incurred cumulative losses of $62,994,000 through the date of the business
combination. Under the business combination agreement, the Company issued
10,000,000 shares of its common stock in exchange for all the outstanding common
and preferred shares of Ecrix. In addition, in a related transaction, certain
Ecrix shareholders purchased 9,650,000 shares of the Company's Series H
preferred stock at a price of $1.00 per share.
The primary reasons for the business combination and the reasons why the
Company was willing to pay more than the fair value of the net assets acquired
include: (1) expansion of the Company's product offerings providing access to
potential customers and revenues; (2) expansion of technology used in products
and enhanced research and development talent; (3) ability to leverage the
Company's existing supplier and customer relationships, resulting in economies
of scale; and (4) liquidity provided by the issuance of the Series H shares.
F-29
Exabyte Corporation And Subsidiaries
Notes To Consolidated Financial Statements
(Information as of June 30, 2004 and for the Six months ended June 28, 2003 and
June 30, 2004 is unaudited)
The aggregate purchase price included the following items:
(In thousands)
Common stock issued ($0.72 per share) $ 7,200
Options issued to Ecrix employees 1,006
Investment banker fee 1,241
Accounting, legal and other expenses 568
--------
$ 10,015
========
The value of common stock issued was determined using the average price of
the Company's stock over the four-day period before and after the Agreement and
Plan of Merger was signed and announced. The 2,187,000 options issued to Ecrix
employees were valued using a Black-Scholes option-pricing model with no
expected dividends, expected volatility of 118%, a risk-free interest rate of
4.5% and an expected term of 2.88 years. There was no intrinsic value of these
options and therefore the entire fair value of these options was included as
part of the purchase price.
The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed at the date of the business combination:
November 9,
2001
-----------
(In thousands)
Current assets $ 10,758
Property and equipment 588
--------
Total assets acquired 11,346
========
Current liabilities 11,196
Long-term debt 284
--------
Total liabilities assumed 11,480
--------
Net liabilities assumed (134)
Goodwill recorded 10,149
--------
Purchase price $ 10,015
========
The purchase price was allocated to the assets acquired and liabilities
assumed based on the Company's estimates of fair value. The Company utilized an
independent third-party appraisal firm to determine the fair value of the
intangible assets acquired. This appraisal firm considered all possible
intangible assets, including proven research and development, customer
relationships and others. The appraisal firm concluded that these potential
intangible assets had no determinable value, based primarily on the start-up
characteristics of Ecrix. The excess of the purchase price over the amounts
allocated to tangible assets acquired, less liabilities assumed, of $10,149,000
was assigned to goodwill, and accounted for under FAS 142. For income tax
purposes, the Company will not deduct the goodwill recorded for financial
reporting purposes.
Included in the acquired liabilities above is $4,321,000 due to a supplier
under an agreement to purchase certain inventory and equipment. This supplier
manufactured the VXA-1 drives for Ecrix, and held this equipment and inventory
for this purpose. On July 12, 2002, the Company renegotiated this agreement due
to disagreements between the parties related to the value of certain inventory
and equipment. The Company agreed to pay $2,000,000 to settle the amount due, of
which $1,000,000 was paid in October, and the remainder is being paid $100,000
per month through August 2004. The Company recorded the reduction in the
settlement value of $2,721,000 as a decrease to the goodwill related to the
merger with Ecrix during the third quarter of 2002.
F-30
Exabyte Corporation And Subsidiaries
Notes To Consolidated Financial Statements
(Information as of June 30, 2004 and for the Six months ended June 28, 2003 and
June 30, 2004 is unaudited)
Note 10 - Media Distribution Agreement
On November 7, 2003, the Company entered into a Media Distribution
Agreement ("MDA") with Imation whereby the Company 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 the
Company a distribution fee of $18,500,000 all of which had been received by
December 31, 2003. The MDA provides for discounted sales prices to Imation and
the Company agreed to grant Imation a second security interest in its
intellectual property to secure the Company's obligations under the MDA and a
seat as an observer on the Company's 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 during the
first ten years of the MDA, the Company must pay Imation a prorated portion of
the distribution fee based on a ten-year period. If the MDA is terminated by
Imation, the Company is not obligated to refund any portion of the distribution
fee. In addition, on November 7, 2003, Imation also purchased 1,500,000 shares
of the Company's Series I Preferred Stock for $1,500,000. As of January 3, 2004
and June 30, 2004, the deferred revenue balance related to the distribution fee
is approximately $18,346,000 and $17,421,000, respectively, including the
current portion of $1,850,000.
Note 11 - Commitments and Contingencies
Indemnities, Commitments and Guaranties
The Company leases its office, distribution and sales facilities under
various operating lease arrangements. Substantially all of the leases contain
various provisions for rental adjustments including, in certain cases, a
provision based on increases in the Consumer Price Index, and require the
Company to pay property taxes, insurance and normal maintenance costs. The
Company also leases certain equipment under operating leases. Future minimum
lease payments under non-cancelable operating lease arrangements as of January
3, 2004 are as follows:
(In thousands)
2004 $ 1,138
2005 1,642
2006 1,369
Thereafter 82
-------
$ 4,231
=======
Rent expense aggregated $5,191,000, $5,414,000, $6,022,000, $1,426,000 and
$795,000 in 2001, 2002 and 2003, and the six months ended June 28, 2003 and June
30, 2004, respectively.
In the normal course of business, the Company has made certain
indemnities, commitments and guarantees under which it may be required to make
payments in relation to certain transactions. These indemnities include
intellectual property indemnities to the Company's customers in connection with
the sales of its products, indemnities for liabilities associated with the
infringement of other parties' technology based upon the Company's products,
indemnities to various lessors in connection with facility leases for certain
claims arising from such facility or lease, and indemnities to directors and
officers of the Company to the maximum extent permitted under the laws of the
State of Delaware. In addition, the Company has contractual commitments to
various customers, which could require it to incur costs to repair an epidemic
defect with respect to its products outside of the normal warranty
F-31
period if such defect were to occur. The duration of these indemnities,
commitments and guarantees varies, and in certain cases, is indefinite. The
majority of these indemnities, commitments and
F-32
Exabyte Corporation And Subsidiaries
Notes To Consolidated Financial Statements
(Information as of June 30, 2004 and for the Six months ended June 28, 2003 and
June 30, 2004 is unaudited)
guarantees do not provide for any limitation of the maximum potential future
payments that the Company could be obligated to make. The Company has not
recorded any liability for these indemnities, commitments and guarantees in the
accompanying consolidated balance sheets. The Company does, however, accrue for
losses for any known contingent liability, including those that may arise from
indemnification provisions, when future payment is probable.
In addition, as of June 30, 2004, the Company has issued irrevocable
letters-of-credit in favor of certain suppliers totaling $750,000, of which
$250,000 expires on August 31, 2004, $250,000 expires December 31, 2004, and
$250,000 expires March 1, 2005.
Litigation
The Company is, from time to time, subjected to certain claims, assertions
or litigation by outside parties as part of its ongoing business operations. The
outcomes of any such contingencies are not expected to have a material adverse
impact on the consolidated financial condition, results of the operations or
cash flows of the Company.
Through a lawsuit filed in February 2004, Solectron notified the Company
that it was declaring the Company to be in default under the restructuring and
note payable agreements (the Agreements) discussed in Note 4, due to
non-compliance with the inventory purchase provision of the Agreements, which
required the purchase of a specified amount of inventory from Solectron by
December 31, 2003. The Company disputed this assertion and, based on
consultation with legal counsel, the Company was advised that it had meritorious
defenses related to this claim. On March 5, 2004, the Company entered into an
agreement with Solectron that modified certain provisions of the Agreements and
cured the alleged default. As a result, Solectron agreed to dismiss the lawsuit
pending the extension of certain letters of credit provided to Solectron by the
Company, which was completed on March 8, 2004.
Note 12 - Lease Terminations and Related Costs
During the second and third quarters of 2003, the Company was in default
under three lease agreements for facilities due to delinquent rental payments.
For the first property, which included the Company's headquarters, the lessor
terminated the original lease and a subsequent short-term lease on June 30,
2003, and the Company ceased use of the building on that date. Remaining lease
payments under the original lease totaled approximately $1,600,000. The lessor
under this lease had commenced litigation against the Company and claimed
damages relating to the rental default and an alleged failure to maintain the
leased premises.
In October 2003, the Company reached a settlement with the lessor for the
payment of the remaining lease payments over a one-year period commencing in
November 2003. As discussed in Note 4, the Company settled the default under a
second lease for facilities through the issuance of a note payable. The Company
also settled its obligation under a lease for its former San Diego, California
sales office space for approximately $170,000.
As a result of the lease terminations and settlements and the Company
ceasing to use the leased facilities, the Company has recorded lease termination
expense and related costs totaling $4,707,000. Included in this amount is
$4,498,000 of past and future rental payments (net of discount) and $972,000 of
accelerated amortization of leasehold improvements, less $763,000 of related
deferred rent concessions.
F-33
Exabyte Corporation And Subsidiaries
Notes To Consolidated Financial Statements
(Information as of June 30, 2004 and for the Six months ended June 28, 2003 and
June 30, 2004 is unaudited)
Note 13 - Investments and Sale of Technology
As of December 30, 2000, the Company owned 80,000 shares of Series B
Preferred Stock and 83,000 shares of Series C Preferred Stock in HighGround
Systems Inc. These shares had a net book value of $0 at December 30, 2000. In
April 2001, Sun Microsystems purchased HighGround Systems Inc., and as a result,
the Company received 96,000 shares of Sun Microsystems common stock. During the
second quarter of 2001, the Company sold 85,000 of these shares, and recorded a
gain of $1,719,000.
In December 1999, the Company formed a wholly-owned subsidiary, CreekPath
Systems Inc. ("CreekPath"), and received 10,000 shares of CreekPath common stock
in exchange for $1,000. CreekPath is a developer of solutions which enable the
economical delivery of managed storage services. Until December 20, 2000,
Exabyte owned 100% of the outstanding common and preferred stock of CreekPath,
and consolidated the financial statements of CreekPath into the Company's
financial statements. As of December 20, 2000, Exabyte held less than a majority
of the outstanding stock of CreekPath, and accounted for its investment
prospectively under the equity method. During 2001, the Company recorded
$343,000 of losses under the equity method. On June 28, 2002, Exabyte sold its
remaining ownership interest in CreekPath Systems, Inc. and received cash and
recorded a gain of $1,500,000.
During the third quarter of 2001, the Company entered into a Technology
and Manufacturing license agreement with Plasmon LMS, Inc. ("Plasmon"), whereby
the Company granted Plasmon a non-exclusive license to manufacture certain LTO,
AIT and DTLtape libraries. All terms of the agreement were met by the end of the
first quarter of 2002, and fees of $1,200,000 related to this agreement were
received and recognized as other income.
Note 14 - Employee Benefit Plan
The Company maintains a qualified Section 401(k) Savings Plan which allows
eligible employees to contribute up to 15% of their salaries on a pre-tax basis.
The Company made matching contributions totaling $790,000 and $480,000 to the
plan in 2001 and 2002, respectively. There were no matching contributions by the
Company in 2003 or the six months ended June 30, 2004. Company contributions are
fully vested after four years of employment.
Note 15 - Concentration of Credit Risk and Significant Customers
The Company's customers include OEMs, resellers, distributors and end
users. The Company is subjected to credit risk from accounts receivable with
customers. The Company performs ongoing credit evaluations of its customers'
financial condition and, generally, requires no collateral from its customers.
At December 28, 2002, January 3, 2004 and June 30, 2004, and for the years and
period then ended, significant customers as a percentage of accounts receivable
and revenue were as follows:
F-34
Exabyte Corporation And Subsidiaries
Notes To Consolidated Financial Statements
(Information as of June 30, 2004 and for the six months ended June 28, 2003 and
June 30, 2004 is unaudited)
Accounts Receivable Revenue
---------------------------------------- --------------------------------------------
December 28, January 3, June 30,
2002 2004 2004 Fiscal Year Ended Six months ended
------------ ---------- ----------- ------------------------- June 30, 2004
(Unaudited) 2001 2002 2003 (Unaudited)
---- ---- ---- ----------------
Ingram Micro 21.6% 14.5% 23.2% 17.6% 17.9% 16.0% 11.4%
Digital Storage 34.0 0.2 -- 10.6 16.1 1.9 --
Tech Data 23.2 16.4 24.1 12.2 15.8 16.2 12.6
IBM 6.2 8.0 14.4 10.1 7.9 6.8 10.7
Imation 1.0 26.2 21.6 1.2 1.8 8.8 38.7
Fujitsu Siemens 3.3 8.8 7.7 0.1 3.3 5.9 6.5
No other customers accounted for more than 10% of accounts receivable or
revenue in 2001, 2002 or 2003, or the six months ended June 30, 2004.
Note 16 - Segment, Geographic and Sales Information
All operations of the Company are considered to be in one operating
segment and, accordingly, no segment disclosures have been presented. The
Company will continue to review the internal reporting structure for future
changes that could result in disclosure of additional segments. Foreign revenue
is based on the country in which the customer is located.
The following table details revenue from external customers by geographic
area for the following years or periods:
Year ended Six months ended
-------------------------------------------- ------------------------------
2001 2002 2003 June 28, 2003 June 30, 2004
--------- --------- -------- ------------- -------------
(In thousands) (Unaudited)
United States $ 113,072 $ 96,582 $ 65,075 $ 31,078 $ 39,432
Europe/Middle East 32,086 26,705 21,329 10,014 10,667
Asia Pacific 10,932 9,007 7,241 3,991 1,791
Other 2,348 897 524 247 869
--------- --------- -------- -------- --------
$ 158,438 $ 133,191 $ 94,169 $ 45,330 $ 52,759
========= ========= ======== ======== ========
The following table details long-lived asset information by geographic
area as of:
December 28, January 3, June 30,
2002 2004 2004
------------ ---------- -----------
(In thousands) (Unaudited)
United States $ 12,861 $ 10,396 $ 10,745
Europe 38 18 18
Asia Pacific 256 110 112
Other -- -- --
--------- --------- --------
$ 13,155 $ 10,524 $ 10,875
========= ========= ========
F-35
Exabyte Corporation And Subsidiaries
Notes To Consolidated Financial Statements
(Information as of June 30, 2004 and for the six months ended June 28, 2003 and
June 30, 2004 is unaudited)
The following table details revenue by product line for the following
fiscal years or periods:
Year ended Six months ended
--------------------------------------------- -----------------------------
2001 2002 2003 June 28, 2003 June 30, 2004
-------------- -------------- ------------- ------------- -------------
(In thousands) (Unaudited)
Drives $ 48,440 $ 36,675 $ 28,415 $ 12,512 $ 16,653
Libraries 40,436 31,551 13,444 7,507 12,697
Media 58,691 58,777 44,457 21,248 19,912
Service, spares and other 11,842 9,445 9,077 4,771 4,781
Sales allowances (971) (3,257) (1,224) (708) (1,284)
------------- ------------- ------------- ------------- -------------
$ 158,438 $ 133,191 $ 94,169 $ 45,330 $ 52,759
============= ============= ============= ============= =============
Note 17 - Events Subsequent to Date of Report of Independent Registered Public
Accounting Firm (Unaudited)
Revised Loan Agreement
In April 2004, the Company entered into a revised loan agreement with SVB
(the "Revised Agreement"), which provides for borrowings of up to $20,000,000
based on 75% of eligible accounts receivable (as adjusted). Eligible accounts
receivable excludes balances greater than 60 days past due, certain foreign
receivables and other items defined in the Revised Agreement. No borrowings are
available based on inventory balances. Interest is being charged at the prime
rate plus 2.0% (6.25%) at June 30, 2004, and the Revised Agreement includes
financial covenants relating to operating results, limits on inventory levels
with product distributors, the maintenance of minimum levels of net worth or
deficit and prohibits the payment of cash dividends. The Revised Agreement also
includes certain acceleration clauses that may cause any outstanding balance to
become immediately due in the event of default. As of March 31, 2004, the
Company was in violation of the covenant relating to the maintenance of
specified levels of net worth or deficit and received a waiver of such violation
in April 2004.
Series AA Preferred Stock
On May 3, 2004, the Company completed the issuance of 25,000 shares of
newly authorized Series AA Preferred Stock and warrants to purchase 7,500,000
shares of common stock for total gross proceeds of $25,000,000 (approximately
$23,763,000, net of offering costs). The purchase price of the Series AA was
$1,000 per share and each share is convertible into 1,000 shares of common stock
at $1.00 per share. The warrants have an exercise price of $1.00 per share and a
term of five years and were valued using the Black-Scholes option pricing model
with the following assumptions: no dividend yield, expected life - 3.09 years,
volatility - 183%, and risk free interest rate - 3.26%. In addition, in
connection with the issuance of the Series AA Preferred Stock, all shareholders
of the Company's existing Series H and Series I Preferred Stock exchanged those
shares and accumulated dividends, for shares of the Series AA Preferred Stock
and common stock purchase warrants on an as-converted common stock equivalent
basis. Series AA shares and common stock warrants issued for the exchange
totaled 19,909 shares and 5,972,712 common stock warrants. In connection with
the exchange, the Company agreed to accrue common stock dividends on the Series
I Preferred shares through December 31, 2004. Accordingly, the Series I
shareholders received the equivalent of an additional 708,563 shares of common
stock as consideration for the exchange, and the Company recognized a deemed
dividend equal to the fair value of the additional consideration, including the
value of the common stock warrants, of approximately $4,225,000.
F-36
Dividends on the Series AA Shares are payable in cash or common stock at
an initial rate of 5%, with an increase to 8% after four years, 10% after five
years and 12% thereafter. The Company has the right to force conversion of the
Series AA shares, which are non-voting, at such time as the Company's common
stock has reached specified price parameters, subject to certain limitations.
The Series AA shares have a liquidation preference equal to the issuance price,
plus accumulated unpaid dividends and are subject to redemption based on the
occurrence of certain triggering events (as defined), all of which are under the
sole control of the Company. The Company is obligated to register the underlying
common shares that would be issued upon conversion and exercise of the warrants,
as well as a specified number of common shares that would be issued as dividends
on the Series AA shares.
2004 Stock Option Plan
In June 2004, the Company's shareholders approved and ratified the Exabyte
Corporation 2004 Stock Option Plan ("Plan") which provides for the issuance of
up to 25,000,000 options to purchase the Company's common stock. Options granted
under the Plan are non-qualified options and may be granted to employees,
directors and consultants under the provisions of the Plan. On June 11, 2004,
the Company granted 14,004,500 options to purchase common stock at an exercise
price of $0.82 per share under the Plan. During the six months ended June 30,
2004, the Company issued a total of 14,573,000 options to purchase common stock
from all of its employee stock option plans at exercise prices ranging from
$0.82 to $1.31.
F-37
Exabyte Corporation And Subsidiaries
Notes To Consolidated Financial Statements
(Information as of June 30, 2004 and for the six months ended June 28, 2003 and
June 30, 2004 is unaudited)
Note 18 - Quarterly Information (Unaudited)
(In thousands, except per share data) 2002
--------------------------------------------
Q1 Q2 Q3 Q4
--------- -------- -------- --------
Net revenue $ 36,605 $ 35,649 $ 36,905 $ 24,032
Gross profit 709 8,453 10,585 2,496
Net loss (14,123) (5,604) (1,238) (8,107)
Net loss available to common stockholders (14,123) (8,243) (3,156) (8,107)
Basic and diluted loss per share (0.43) (0.25) (0.10) (0.24)
2003
------------------------------------------------------------
Q1 Q2 Q3 Q4
(as restated(1))
------------- ------------ ---------------- ------------
Net revenue $ 22,594 $ 22,736 $ 22,955 $ 25,884
Gross profit (3,430) 6,358 7,969 4,696
Net loss (19,583) (5,049) (13,462) (5,598)
Net loss available to common stockholders (19,583) (5,049) (13,462) (6,154)
Basic and diluted loss per share (0.59) (0.09) (0.18) (0.07)
2004
-----------------------------
Q1 Q2
-------------- -------------
Net revenue $ 26,139 $ 26,620
Gross profit 6,086 7,447
Net loss (3,310) (456)
Net loss available to common stockholders (3,310) (4,681)
Basic and diluted loss per share (0.03) (0.04)
(1) In connection with the preparation of its fiscal 2003 annual financial
statements, the Company re-evaluated its accounting for the sale of service
inventory and parts to its outsourced service provider, Teleplan, in the third
quarter of 2003. Upon completion of such evaluation, it was determined that the
transaction should be treated for accounting purposes as a consignment of
inventory and the proceeds from the transaction should be deferred and
recognized as a reduction of warranty expense as the inventory and parts are
utilized by Teleplan in providing warranty services to the Company, rather than
recognized as revenue at the time of sale. At the time the inventory is
utilized, the cost will be recognized as an increase to warranty expense within
costs of goods sold. Accordingly, the balance sheet and statement of operations
as of and for the three months ended September 27, 2003 has been restated to
reflect this revised accounting treatment as follows (in thousands, except
per-share data):
F-38
Exabyte Corporation And Subsidiaries
Notes To Consolidated Financial Statements
(Information as of June 30, 2004 and for the six months ended June 28, 2003 and
June 30, 2004 is unaudited)
As Previously Reported As Restated
---------------------- -----------
Statement of Operations:
Net revenue $ 24,555 $ 22,955
Cost of goods sold 15,700 14,986
Gross profit 8,855 7,969
Loss from operations (3,371) (4,257)
Net Loss (12,576) (13,462)
Net loss available to common
stockholders (12,576) (13,462)
Basic and diluted loss per share (0.17) (0.18)
Balance Sheet:
Current assets 30,040 30,626
Current liabilities 46,013 47,057
Other non-current liabilities 17,828 18,256
Stockholder's deficit (22,899) (23,785)
Note 19 - Recent Accounting Pronouncements
In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation
of Variable Interest Entities, an Interpretation of ARB No. 51 ("FIN 46"). The
FASB revised FIN No. 46 in December 2003 ("FIN 46R"). Pursuant to FIN 46R, the
effective date for applying certain provisions is deferred. FIN 46 provides
guidance on the identification of, and financial reporting for, entities over
which control is achieved through means other than voting rights; such entities
are known as variable-interest entities. The Company will apply the provisions
of FIN 46 prospectively to any variable interest entities created after January
31, 2003. Since the Company does not have any current interests in any variable
interest entities, the adoption of this interpretation did not have a
significant impact on the Company's 2003 financial condition or results of
operations.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity ("SFAS
150"). This statement establishes standards for how an issuer classifies and
measures in its statement of financial position certain financial instruments
with characteristics of both liabilities and equity. In accordance with the
standard, certain financial instruments that embody obligations for the issuer
are required to be classified as liabilities. SFAS 150 shall be effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
shall be effective at the beginning of the first interim period beginning after
June 15, 2003. The FASB issued FASB Staff Position ("FSP") 150-3 on November 7,
2003 to defer the effective date for applying the provisions of SFAS No. 150 for
certain mandatorily redeemable non-controlling interests. The Company does not
expect the provisions of this statement to have a significant impact on its
current or prospective financial statements.
In November 2002, the Emerging Issues Task Force ("EITF") issued EITF
Issue No. 00-21, Accounting for Revenue Arrangements with Multiple Deliverables
("EITF 00-21"). EITF 00-21 addresses how to determine whether a revenue
arrangement involving multiple deliverables contains more than one unit of
accounting for the purposes of revenue recognition and how the revenue
arrangement consideration should be measured and allocated to the separate units
of accounting. EITF 00-21 applies to all revenue arrangements that the Company
enters into after June 27, 2003. The adoption of this statement did not have a
significant impact on the Company's 2003 consolidated financial condition or
results of operations.
F-39
Exabyte Corporation And Subsidiaries
Notes To Consolidated Financial Statements
(Information as of June 30, 2004 and for the six months ended June 28, 2003 and
June 30, 2004 is unaudited)
In December 2003, the SEC issued Staff Accounting Bulletin No. 104,
Revenue Recognition, ("SAB 104") which supercedes SAB 101, Revenue Recognition
in Financial Statements. SAB 104's primary purpose is to rescind accounting
guidance contained in SAB 101 related to multiple element revenue arrangements
and to rescind the SEC s Revenue Recognition in Financial Statements Frequently
Asked Questions and Answers ("FAQ") issued with SAB 101. Selected portions of
the FAQ have been incorporated into SAB 104. The adoption of SAB 104 did not
have a material impact on the Company s revenue recognition policies.
F-40
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses in connection with the
sale and distribution of the securities being registered, other than the
underwriting discounts and commissions. All amounts shown are estimates except
for the SEC registration fee.
SEC registration fee $ 7,001.00
Printing expenses 100.00
Legal fees and expenses 100,000.00
Accounting fees and expenses 100,000.00
Fees of transfer agent 0.00
Miscellaneous 50,000.00
-------------
Total $ 257,101.00
=============
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article Fifth of our restated certificate of incorporation, as amended
("certificate of incorporation"), provides that to the fullest extent permitted
under the General Corporation Law of the State of Delaware (the "DGCL"), a
director of Exabyte shall not be personally liable to Exabyte or its
stockholders for monetary damages for breach of fiduciary duty as a director.
Section 102(b)(7) of the DGCL provides that a corporation may eliminate or
limit the personal liability of a director (or certain persons who, pursuant to
the provisions of the certificate of incorporation, exercise or perform duties
conferred or imposed upon directors by the DGCL) to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
provided that such provision shall not eliminate or limit the liability of a
director:
-- for any breach of the director's duty of loyalty to the corporation or
its stockholders;
-- for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
-- under Section 174 of the DGCL (providing for liability of directors for
unlawful payment of dividends or unlawful stock purchases or redemptions); or
-- for any transaction from which the director derived an improper
personal benefit.
Article 5 of our by-laws provides that to the fullest extent permitted
under the DGCL, Exabyte will indemnify its directors and executive officers,
including the advancement of expenses. The by-laws provide, however, that
Exabyte is not required to indemnify any director or executive officer in
connection with any proceeding initiated by such person against Exabyte or its
directors, officers, employees or agent, unless such indemnification is
expressly required by law, the proceeding was authorized by the Board of
Directors or such indemnification is provided by Exabyte in its sole
II-1
discretion. Article 5 of the by-laws further authorizes Exabyte to indemnify its
other officers, employees and other agents as set forth in the DGCL.
Section 145 of the DGCL provides that a corporation may indemnify
directors and officers as well as other employees and individuals against
expenses (including attorneys' fees), judgments, fines, and amounts paid in
settlement in connection with specified actions, suits or proceedings, whether
civil, criminal, administrative or investigative (other than an action by or in
the right of the corporation - a "derivative action"), if they acted in good
faith and in a manner they reasonably believed to be in or not opposed to the
best interests of the corporation and, with respect to any criminal action or
proceedings, had no reasonable cause to believe their conduct was unlawful. A
similar standard is applicable in the case of derivative actions, except that
indemnification only extends to expenses (including attorneys' fees) actually
and reasonably incurred in connection with the defense or settlement of such
action, and the statute requires court approval before there can be any
indemnification where the person seeking indemnification has been found liable
to the corporation. The statute provides that it is not exclusive of other
indemnification that may be granted by a corporation's charter, by-laws,
disinterested director vote, stockholder vote, agreement or otherwise.
Exabyte also has obtained insurance policies which provide coverage for
the Company's directors and officers in certain situations, including claims or
actions arising under the Securities Act, including some situations where
Exabyte cannot directly indemnify the directors or officers.
In addition, Exabyte has entered or will enter into contractual agreements
with its directors and executive officers whereby it agrees to indemnify them
against any expenses, amounts paid in settlement or other amounts incurred by
such directors or officers by reason of the fact that he was a director or
officer, respectively, of Exabyte.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following is a summary of the transactions by Exabyte during the past
three years involving sales of Exabyte's securities that were not registered
under the Securities Act of 1933:
Series G Issuance
On April 12, 2001, we entered into an agreement with State of Wisconsin
Investment Board ("SWIB"), under which we sold 1,500,000 shares of our Series G
preferred stock to SWIB at $2.00 per share for total proceeds of $3,000,000.
Ecrix Merger
On November 9, 2001, Ecrix Corporation merged into a subsidiary of
Exabyte, and we issued a total of 10,000,000 shares of Exabyte Common Stock to
the former Ecrix stockholders. The common stock was registered under the
Securities Act. Additionally, in conjunction with merger, certain investors of
Ecrix purchased 9,650,000 shares of new Series H preferred stock of Exabyte at
$1.00 per share. These transactions were approved by our stockholders.
Series I Preferred
On May 17, 2002 we entered into the Series I preferred stock purchase
agreement with a number of purchasers. As amended, the agreement provided for
the sale of a total of 8,400,000 shares of Series I preferred stock at $1.00 per
share in two closings. The first closing on May 17, 2002 concerned the sale of
3,890,100 shares of Series I preferred stock. The second closing on July 31,
2002 was for 4,509,900 shares of Series I preferred stock and was subject to
stockholder approval.
II-2
SERIES AA PREFERRED
On April 29, 2004, we entered into the Purchase Agreement pursuant to
which Exabyte issued and sold to the purchasers in a private placement (a)
25,000 shares of Series AA Preferred Stock of the Company; and (b) warrants to
purchase in the aggregate 7.5 million shares of Common Stock. The Company
received in the aggregate gross proceeds of $25 million from this financing.
Participants in the financing include a group of institutional investors and
Exabyte shareholders.
The Series AA shares were priced at $1,000 per share and are convertible
into Common shares at $1 per share. The warrants to purchase Common shares
expire after five years and carry an exercise price of $1.00 per Common share.
The conversion and exercise prices are subject to certain anti-dilution
adjustments.
C.E. Unterberg, Towbin was engaged as placement agent for the Series AA
offering and received compensation of $1,100,000 and a warrant to purchase
349,000 shares of Common Stock for its services.
SERIES H AND SERIES I EXCHANGE
In conjunction with the sale of Series AA shares pursuant to the Purchase
Agreement, the Company also entered into Exchange Agreements with all of the
then existing holders of the Company's Series H and Series I preferred stock,
pursuant to which such holders exchanged their preferred shares for Series AA
shares. The Series H preferred shares were converted into Series AA shares on a
one share for one share basis, and the Series I preferred shares were converted
as follows: one Series AA preferred share for each share of Common Stock the
Series I holder would have received upon conversion, including the accrual of
all dividends on the Series I shares through December 31, 2004. Under the
Exchange Agreements, the Company issued a total of 19,909 Series AA Shares and
warrants to purchase 5,972,712 shares of Common Stock. These warrants have the
same terms as those issued to the purchasers of Series AA shares.
For all of the above described transactions, Exabyte relied on the
exemption from registration provided under Regulation D, promulgated under
Section 4(2) of the Securities Act. In relying upon this exemption, Exabyte
received representations from each of the investors as to their status as a
"qualified institutional buyer", or an "accredited investor", their investment
intent and other representations and warranties. In addition, appropriate
restrictions upon the transfer of the shares were imposed.
EXECUTIVE COMPENSATION
As an inducement to have Tom Ward serve as our President and Chief
Executive Officer, we agreed to grant stock options to Mr. Ward pursuant to a
Nonstatutory Stock Option Agreement, dated June 3, 2002 between Exabyte and Mr.
Ward (the "Plan"). The Plan is independent of our existing Stock Option Plans
and was approved by stockholders at a meeting on July 30, 2002. The terms of the
Plan were also approved by our Compensation Committee.
Under the Plan, as of the commencement of Mr. Ward's employment with us,
he was granted an option to purchase 3,000,000 shares of our Common Stock. The
option has an exercise price equal to the Common Stock's closing price on the
Nasdaq National Market on the date of the stockholder approval of the Plan. This
option contains our normal vesting terms, providing for vesting during Mr.
Ward's employment at the rate of 2% per month, except that any remaining
unvested options will be deemed to be fully vested as of December 30, 2005.
Also, in accordance with the Plan, Mr. Ward received an additional option
to purchase 4,000,000 shares of our Common Stock with a vesting schedule which
accelerates based upon the market price for our Common Stock. The additional
option was granted with an exercise price equal to
II-3
the Common Stock's closing price on the Nasdaq National Market on the date of
the stockholder approval of the Plan. This option will vest as follows:
- All shares will be deemed to be fully vested as of June 5,
2007, provided that Mr. Ward is employed as the President and
Chief Executive Officer of Exabyte at such time;
- Mr. Ward will qualify for an accelerated vesting schedule (for
such additional options) as follows, provided he is employed
as the President and Chief Executive Officer of Exabyte at the
time of any such acceleration event:
- 1,000,000 shares at such time as our stock price closes
at or above $2.00 for 30 consecutive trading days; -
- 1,000,000 shares at such time as our stock price closes
at or above $4.00 for 30 consecutive trading days; -
- 1,000,000 shares at such time as our stock price closes
at or above $5.00 for 30 consecutive trading days; and -
- 1,000,000 shares at such time as our stock price closes
at or above $6.00 for 30 consecutive trading days.
All stock prices and option strike prices will be appropriately adjusted
for stock splits, a stock dividend, a merger or similar events. Unless
terminated earlier as provided in the Plan, both of Mr. Ward's options will
expire on June 2, 2012. Options granted under the Plan will terminate 90 days
after termination of employment with Exabyte for any reason except in limited
circumstances, including disability or death, in which case the term of the
options continues for an additional period of time. Mr. Ward's employment with
Exabyte may be terminated by Exabyte or him at any time for any reason.
On December 5, 2003, we issued a total of 263,155 shares of Common Stock
for bonuses to our executive officers and other key employees for the third
quarter of 2003. Of those shares, 105,262 were issued to executive officers,
with the remaining shares being issued to other key employees of the Company.
On January 13, 2004, we issued a total of 1,690,759 shares of Common Stock
to our Chief Executive Officer and another key employee for bonuses related to
the fourth quarter of 2002 and the first three quarters of 2003. Our Chief
Executive Officer received 745,214 of those shares.
The Company believes that these executive compensation issuances are not
considered sales for purposes of the registration requirements of the Securities
Act. In addition, 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.
II-4
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibit Index
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 (8)
3.1 Restated Certificate of Incorporation. (1)
3.3 By-laws of the Company, as amended. (8)
3.5 Certificate of Designation of Series AA Convertible Preferred Stock (12)
4.1 Article 4 of the Restated Certificate of Incorporation (included in
Exhibit 3.1) (8)
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 (8)
5 Opinion re legality
**10.1 Incentive Stock Plan, as amended and restated on September 11, 2002 (9)
**10.2 Stock Option Agreement used in connection with the Incentive Stock Plan
(5)
**10.3 1990 Employee Stock Purchase Plan (3)
**10.4 Employee Stock Purchase Plan Offering used in connection with the 1990
Employee Stock Purchase Plan (4)
**10.5 Form of participation agreement used in connection with the 1990 Employee
Stock Purchase Plan (2)
**10.6 1997 Non-officer Stock Option Plan, as amended and restated on January
19, 2001 (7)
**10.7 Stock Option Agreement used in connection with the 1997 Non- Officer
Stock Option Plan (4)
10.8 Form of Indemnity Agreement entered into by the Company with each director
and executive officer of the Company (6)
**10.9 Form of Severance Agreement entered into among the Company and its
executive officers (8)
*10.10 Manufacturing and Purchase Agreement, dated March 1, 2001, among Hitachi,
Ltd., Nihon Exabyte Corporation and Exabyte Corporation (6)
10.11 Exabyte Purchase Agreement between the Company and Singapore Shinei Sangyo
PTE., Ltd., dated February 3, 1999 (8)
10.12 Amendment #A01 to Purchase Agreement between the Company and Singapore
Shinei Sangyo, dated January 24, 2001 (8)
10.13 Supplier Managed Inventory Agreement between the Company and Singapore
Shinei Sangyo, dated January 15, 2003 (9)
10.14 Lease Agreement between Industrial Housing Company LLC and Ecrix
Corporation, dated December 14, 1998, as amended (8)
10.15 Lease Agreement between Cottonwood Farms Ltd. and Ecrix Corporation, dated
September 7, 1999, as amended (8)
10.16 Amendment to Lease between Cottonwood Land and Farms, Ltd. and Ecrix
Corporation, dated April 15, 2000 (8)
*10.17 Exabyte Payment and Repayment Plan Memorandum of Understanding, by and
between Exabyte Corporation and Nihon Exabyte Corporation, and Hitachi,
Ltd., dated February 14, 2003 (9)
*10.18 Exabyte Payment and Repayment Plan, among the Company, Nihon Exabyte
Corporation and Hitachi, Ltd., dated August 25, 2003 (10)
10.19 Exabyte Repayment Plan Memorandum of Understanding, by and between Exabyte
Corporation and TDK Corporation, dated February 14, 2003 (9)
*10.20 Letter of Agreement and Promissory Note, by and between Exabyte
Corporation and the Media and Application Solutions of Sony Electronics
Inc., dated February 13, 2003 (9)
10.21 Exabyte Repayment Plan Memorandum of Understanding, by and between Exabyte
Corporation and Panasonic and Consumer Electronics Company, dated March 4,
2003 (9)
*10.22 Agreement for Debt Restructuring and Modification of Manufacturing Terms,
among the Company, Solectron Corporation and Shinei International Pte.
Ltd., dated September 1, 2003 (10)
II-5
EXHIBIT NUMBER DESCRIPTION
- ------------- -----------
*10.23 Depot Repair Services Agreement, among the Company and Teleplan Service
Logistics, Inc., dated June 2003 (10)
*10.24 Settlement Agreement, among the Company and 1685-1775 38th St, LLC, dated
November 4, 2003 (10)
10.25 Lease Termination Agreement, among the Company and Eastpark, LLC f/k/a
Eastpark Associates, Ltd., dated September 26, 2003 (10)
10.26 Promissory Note among the Company and Eastpark, LLC f/k/a Eastpark
Associates Ltd., dated September 1, 2003 (10)
*10.27 Media Distribution Agreement, by and between Exabyte Corporation and
Imation Corp, dated November 7, 2003 (14)
*10.28 Software License and Maintenance Agreement, by and between Exabyte
Corporation and MSS Technologies, Inc.,dated November 26, 2003 (11)
10.29 Securities Purchase Agreement, dated April 30, 2004, by and among Exabyte
Corporation and the purchasers listed therein (12)
10.30 Amended and Restated Loan and Security Agreement, dated January 1, 2004,
by and among Exabyte Corporation and Silicon Valley Bank (13)
10.31 Series H Exchange Agreement (12)
10.32 Series I Exchange Agreement (12)
21.1 List of Subsidiaries.(13)
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of Holland & Hart LLP (contained in Exhibit 5)
24.1 Power of Attorney(13)
* Certain portions of this exhibit have been omitted pending a
determination on a request for confidential treatment thereof by the Company.
** Indicates management contracts or compensation plans or arrangements
filed pursuant to Item 601(b)(10) of Regulation S-K.
(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 S-8 (Registration No. 33-33414), as filed with the SEC on
February 9, 1990 and incorporated herein by reference.
(3) Filed as an Exhibit to the Company's Registration Statement on
Form S-8 (Registration No. 333-09279), as filed with the SEC
on July 31, 1996 and incorporated herein by reference.
(4) Filed as an Exhibit to the Company's Registration Statement on
Form S-8 (Registration No. 333-73011), as filed with the SEC
on March 1, 2000, and incorporated herein by reference.
(5) Filed as an Exhibit to the Company's Annual Report on Form
10-K, filed with the SEC on March 25, 1998, and incorporated
herein by reference.
(6) Filed as an Exhibit to the Company's Annual Report on Form
10-K, filed with the SEC on April 12, 2001, and incorporated
herein by reference.
(7) Filed as an Exhibit to the Company's Registration Statement on
Form S-8 (Registration No. 333-67464), as filed with the SEC
on August 14, 2001, and incorporated herein by reference.
(8) Filed as an Exhibit to Amendment No. 1 to the Company's
Registration Statement on Form S-4, filed with the SEC on
October 5, 2001, and incorporated herein by reference.
II-6
(9) Filed as an Exhibit to the Company's Annual Report on Form
10-K, filed with the SEC on March 28, 2003, and incorporated
herein by reference.
(10) Filed as an Exhibit to the Company's Quarterly Report on Form
10-Q, filed with the SEC on November 12, 2003, and
incorporated herein by reference.
(11) Filed as an Exhibit to the Company's Annual Report on Form
10-K, filed with the SEC on March 31, 2004, and incorporated
herein by reference.
(12) Filed as an Exhibit to the Company's Current Report Form 8-K,
as filed with SEC on May 4, 2004.
(13) Previously filed.
(14) Filed as an Exhibit to Amendment No. 2 to the Company's Annual
Report on Form 10-K, filed with the SEC on August 19, 2004,
and incorporated herein by reference.
II-7
FINANCIAL STATEMENT SCHEDULE
EXABYTE CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Col. A Col. B Col. C(a) Col. C(b) Col. D Col. E
- -------------------------------------------------------------------------------------------------------------------
Balance
At Charged Balance
(In thousands) Beginning to Charged at End
of Costs and to Other of
Description Period Expenses Accounts Deduction Period
- -------------------------------------------------------------------------------------------------------------------
Year Ended December 29, 2001:
Allowance for doubtful accounts $ 670 $ (380) $ 33 $ 216(1) $ 539
Reserves for sales programs 6,743 -- 3,251 (5,702)(2) 4,292
Inventory valuation reserves 7,301 7,804 -- (4,061)(3) 11,044
------- -------- -------- -------- -------
$14,714 $ 7,424 $ 3,284 $ (9,547) $15,875
======= ======== ======== ======== =======
Year Ended December 28, 2002:
Allowance for doubtful accounts $ 539 $ 341 $ 50 $ (418)(1) $ 512
Reserves for sales programs 4,292 -- 3,778 (5,023)(2) 3,047
Inventory valuation reserves 11,044 5,645 -- (3,559)(3) 13,130
------- -------- -------- -------- -------
$15,875 $ 5,986 3,828 $ (9,000) $16,689
======= ======== ======== ======== =======
Year Ended January 3, 2004:
Allowance for doubtful accounts $ 512 $ 6,678 $ 1 $ (7,056)(1) $ 135
Reserves for sales programs 3,047 -- 719 (2,097)(2) 1,669
Inventory valuation reserves 13,130 9,814 -- (11,591)(3) 11,353
------- -------- -------- -------- -------
$16,689 $ 16,492 $ 720 $(20,744) $13,157
======= ======== ======== ======== =======
Six Months Ended June 30, 2004 (unaudited):
Allowance for doubtful accounts $ 135 $ 107 $ -- $ (71)(1) $ 171
Reserves for sales programs 1,669 (145) -- -- 1,814
Inventory valuation reserves 11,353 -- -- (3,154)(2) 8,199
------- -------- -------- -------- -------
$13,157 $ 252 $ -- $ (3,225)(3) $10,184
======= ======== ======== ======== =======
(1) Accounts written off, net of recoveries.
(2) Net credits issued to customers for sales programs.
(3) Reserves related to inventory written-off or otherwise disposed of.
II-8
ITEM 17. UNDERTAKINGS
1. The undersigned Registrant hereby undertakes:
(a) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration statement:
(i) to include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the Securities and Exchange Commission pursuant to Rule 424(b) under
the Securities Act of 1933 if, in the aggregate, the changes in volume and price
represent no more than a 20% change in the maximum aggregate offering price set
forth in the "Calculation of Registration Fee" table in the effective
registration statement; and
(iii) to include any material information with respect to the
plan of distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
provided, however, that paragraphs (1)(a)(i) and (1)(a)(ii) above do not
apply if the registration statement is on Form S-3, Form S-8 or Form F-3, and
the information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the Registrant pursuant to
Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in this registration statement.
(b) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(c) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
2. The undersigned Registrant hereby undertakes that, insofar as
indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the provisions described in Item 15 (other than the provisions
relating to insurance), or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
II-9
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Boulder,
State of Colorado, on this 26th day of August, 2004.
EXABYTE CORPORATION
By: /s/ Carroll A. Wallace
--------------------------------------
Carroll A. Wallace
Title: Chief Financial Officer, Treasurer
(Principal Financial and Accounting Officer)
S-1
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this registration statement has been signed by the following persons in
the capacities and on the dates indicated.
/s/ Tom W. Ward President and Chief Executive August 26, 2004
- -------------------------------------------- Officer (Principal Executive Officer) ------------------------------
Tom W. Ward
/s/ * Chairman of the Board, Chief August 26, 2004
- -------------------------------------------- Technologist ------------------------------
Juan A. Rodriguez
/s/ Carroll A. Wallace Chief Financial Officer, August 26, 2004
- -------------------------------------------- Treasurer (Principal Financial and ------------------------------
Carroll A. Wallace Accounting Officer)
/s/ * Director August 26, 2004
- -------------------------------------------- ------------------------------
Leonard W. Busse
/s/ * Director August 26, 2004
- -------------------------------------------- ------------------------------
John Garrett
/s/ * Director August 26, 2004
- -------------------------------------------- ------------------------------
A. Laurence Jones
/s/ * Director August 26, 2004
- -------------------------------------------- ------------------------------
Thomas E. Pardun
/s/ * Director August 26, 2004
- -------------------------------------------- ------------------------------
Stephanie L. Smeltzer
/s/ * Director August 26, 2004
- -------------------------------------------- ------------------------------
G. Jackson Tankersley, Jr.
*/s/ Carroll A. Wallace
- ------------------------
Attorney in Fact
S-2
EXHIBITS INDEX
The following exhibits are filed as a part of this registration statement.
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 (8)
3.1 Restated Certificate of Incorporation. (1)
3.3 By-laws of the Company, as amended. (8)
3.5 Certificate of Designation of Series AA Convertible Preferred Stock (12)
4.1 Article 4 of the Restated Certificate of Incorporation (included in Exhibit 3.1) (8)
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 (8)
5 Opinion re legality
**10.1 Incentive Stock Plan, as amended and restated on September 11, 2002 (9)
**10.2 Stock Option Agreement used in connection with the Incentive Stock Plan (5)
**10.3 1990 Employee Stock Purchase Plan (3)
**10.4 Employee Stock Purchase Plan Offering used in connection with the 1990 Employee Stock Purchase Plan (4)
**10.5 Form of participation agreement used in connection with the 1990 Employee Stock Purchase Plan (2)
**10.6 1997 Non-officer Stock Option Plan, as amended and restated on January 19, 2001 (7)
**10.7 Stock Option Agreement used in connection with the 1997 Non- Officer Stock Option Plan (4)
10.8 Form of Indemnity Agreement entered into by the Company with each director and executive officer
of the Company(6)
**10.9 Form of Severance Agreement entered into among the Company and its executive officers (8)
*10.10 Manufacturing and Purchase Agreement, dated March 1, 2001, among Hitachi, Ltd., Nihon Exabyte
Corporation and Exabyte Corporation (6)
10.11 Exabyte Purchase Agreement between the Company and Singapore Shinei Sangyo PTE., Ltd., dated
February 3, 1999 (8)
10.12 Amendment #A01 to Purchase Agreement between the Company and Singapore Shinei Sangyo, dated
January 24, 2001 (8)
10.13 Supplier Managed Inventory Agreement between the Company and Singapore Shinei Sangyo, dated
January 15, 2003 (9)
10.14 Lease Agreement between Industrial Housing Company LLC and
Ecrix Corporation, dated December 14, 1998, as amended (8)
10.15 Lease Agreement between Cottonwood Farms Ltd. and Ecrix Corporation, dated September 7, 1999,
as amended (8)
10.16 Amendment to Lease between Cottonwood Land and Farms, Ltd. and Ecrix Corporation, dated April
15, 2000 (8)
*10.17 Exabyte Payment and Repayment Plan Memorandum of Understanding, by and between Exabyte
Corporation and Nihon Exabyte Corporation, and Hitachi, Ltd., dated February 14, 2003 (9)
*10.18 Exabyte Payment and Repayment Plan, among the Company, Nihon Exabyte Corporation and Hitachi,
Ltd., dated August 25, 2003 (10)
10.19 Exabyte Repayment Plan Memorandum of Understanding, by and between Exabyte Corporation and TDK
Corporation, dated February 14, 2003 (9)
*10.20 Letter of Agreement and Promissory Note, by and between Exabyte Corporation and the Media and
Application Solutions of Sony Electronics Inc., dated February 13, 2003 (9)
10.21 Exabyte Repayment Plan Memorandum of Understanding, by and between Exabyte Corporation and
Panasonic and Consumer Electronics Company, dated March 4, 2003 (9)
*10.22 Agreement for Debt Restructuring and Modification of Manufacturing Terms, among the Company,
Solectron Corporation and Shinei International Pte. Ltd., dated September 1, 2003 (10)
*10.23 Depot Repair Services Agreement, among the Company and Teleplan Service Logistics, Inc., dated
June 2003 (10)
*10.24 Settlement Agreement, among the Company and 1685-1775 38th St, LLC, dated November 4, 2003 (10)
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
10.25 Lease Termination Agreement, among the Company and Eastpark, LLC f/k/a Eastpark Associates,
Ltd., dated September 26, 2003 (10)
10.26 Promissory Note among the Company and Eastpark, LLC f/k/a Eastpark Associates Ltd., dated
September 1, 2003 (10)
*10.27 Media Distribution Agreement, by and between Exabyte Corporation and Imation Corp, dated
November 7, 2003 (14)
*10.28 Software License and Maintenance Agreement, by and between Exabyte Corporation and MSS
Technologies, Inc., dated November 26, 2003 (11)
10.29 Securities Purchase Agreement, dated April 30, 2004, by and among Exabyte Corporation and the purchasers listed
therein (12)
10.30 Amended and Restated Loan and Security Agreement, dated January 1, 2004, by and among Exabyte Corporation and
Silicon Valley Bank (13)
10.31 Series H Exchange Agreement (12)
10.32 Series I Exchange Agreement (12)
21.1 List of Subsidiaries.(13)
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of Holland & Hart LLP (contained in Exhibit 5)
24.1 Power of Attorney(13)
* Certain portions of this exhibit have been omitted pending a
determination on a request for confidential treatment thereof by the Company.
** Indicates management contracts or compensation plans or arrangements
filed pursuant to Item 601(b)(10) of Regulation S-K.
(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 S-8 (Registration No. 33-33414), as filed with the SEC on
February 9, 1990 and incorporated herein by reference.
(3) Filed as an Exhibit to the Company's Registration Statement on
Form S-8 (Registration No. 333-09279), as filed with the SEC
on July 31, 1996 and incorporated herein by reference.
(4) Filed as an Exhibit to the Company's Registration Statement on
Form S-8 (Registration No. 333-73011), as filed with the SEC
on March 1, 2000, and incorporated herein by reference.
(5) Filed as an Exhibit to the Company's Annual Report on Form
10-K, filed with the SEC on March 25, 1998, and incorporated
herein by reference.
(6) Filed as an Exhibit to the Company's Annual Report on Form
10-K, filed with the SEC on April 12, 2001, and incorporated
herein by reference.
(7) Filed as an Exhibit to the Company's Registration Statement on
Form S-8 (Registration No. 333-67464), as filed with the SEC
on August 14, 2001, and incorporated herein by reference.
(8) Filed as an Exhibit to Amendment No. 1 to the Company's
Registration Statement on Form S-4, filed with the SEC on
October 5, 2001, and incorporated herein by reference.
(9) Filed as an Exhibit to the Company's Annual Report on Form
10-K, filed with the SEC on March 28, 2003, and incorporated
herein by reference.
(10) Filed as an Exhibit to the Company's Quarterly Report on Form
10-Q, filed with the SEC on November 12, 2003, and
incorporated herein by reference.
(11) Filed as an Exhibit to the Company's Annual Report on Form
10-K, filed with the SEC on March 31, 2004, and incorporated
herein by reference.
(12) Filed as an Exhibit to the Company's Current Report Form 8-K,
as filed with SEC on May 4, 2004.
(13) Previously filed.
(14) Filed as an Exhibit to Amendment No. 2 to the Company's Annual
Report on Form 10-K, filed with the SEC on August 19, 2004,
and incorporated herein by reference.