-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DRTELm0+0ms/XjDuL5DWa2ped6lyNG7jcSKGIhrRYZyPEc3at35QGIk13hksXgzv upDgFvA0VTcfJfjqoXe8eg== 0000898430-96-003062.txt : 19960708 0000898430-96-003062.hdr.sgml : 19960708 ACCESSION NUMBER: 0000898430-96-003062 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19960329 FILED AS OF DATE: 19960705 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: STREAMLOGIC CORP CENTRAL INDEX KEY: 0000718865 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER STORAGE DEVICES [3572] IRS NUMBER: 953093858 STATE OF INCORPORATION: DE FISCAL YEAR END: 0329 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-12046 FILM NUMBER: 96591411 BUSINESS ADDRESS: STREET 1: 21211 NORDHOFF ST CITY: CHATSWORTH STATE: CA ZIP: 91311 BUSINESS PHONE: 8187093300 MAIL ADDRESS: STREET 1: 21211 NORDHOFF STREET CITY: CHATSWORTH STATE: CA ZIP: 91311 FORMER COMPANY: FORMER CONFORMED NAME: MICROPOLIS CORP DATE OF NAME CHANGE: 19920703 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (MARK ONE) [ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED [X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM DECEMBER 31, 1995 TO MARCH 29, 1996 COMMISSION FILE NUMBER: 0-12046 STREAMLOGIC CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 95-3093858 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
21329 NORDHOFF STREET, CHATSWORTH, CALIFORNIA 91311 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (818) 701-8400 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
TITLE OF CLASS TITLE OF CLASS -------------- -------------- COMMON STOCK, $1.00 PAR VALUE 6% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2012
INDICATE BY CHECK MARK WHETHER REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING TWELVE MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [_] INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405 OF REGULATION S-K ((S)229.405 OF THIS CHAPTER) IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. [X] THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF THE REGISTRANT AS OF JUNE 14, 1996 WAS APPROXIMATELY $84,242,000. THE NUMBER OF SHARES OUTSTANDING OF REGISTRANT'S COMMON STOCK AS OF JUNE 14, 1996: 15,672,967. DOCUMENTS INCORPORATED BY REFERENCE PARTS OF THE PROXY STATEMENT FOR REGISTRANT'S 1996 ANNUAL MEETING OF STOCKHOLDERS (THE "1996 PROXY STATEMENT") ARE INCORPORATED BY REFERENCE TO PART III OF THIS FORM 10-K REPORT. STREAMLOGIC CORPORATION ANNUAL REPORT ON FORM 10-K MARCH 29, 1996 TABLE OF CONTENTS PART I
PAGE ---- Item 1. Business......................................................... 1 Item 2. Properties....................................................... 9 Item 3. Legal Proceedings................................................ 9 Item 4. Submission of Matters to a Vote of Security Holders.............. 9 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.................................................................. 10 Item 6. Selected Financial Data ......................................... 11 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................................... 12 Item 8. Financial Statements and Supplementary Data...................... 18 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..................................................... 35 PART III Item 10. Directors and Executive Officers of the Registrant .............. 35 Item 11. Executive Compensation .......................................... 36 Item 12. Security Ownership of Certain Beneficial Owners and Management... 36 Item 13. Certain Relationships and Related Transactions................... 36 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. 36
PART I ITEM 1. BUSINESS StreamLogic Corporation (formerly Micropolis Corporation) was incorporated in California in December 1976. In April 1987, the Company was reincorporated in Delaware. In April 1996, the Company changed its name from Micropolis Corporation to StreamLogic Corporation. Unless the context otherwise indicates, the terms "StreamLogic" and "Company" refer to StreamLogic Corporation and its consolidated subsidiaries. On May 13, 1996 the Company elected to change its fiscal year end from the last Friday in December to the last Friday in March, beginning with March 1996. Accordingly, this transition report on Form 10-K covers the three month period ended March 29, 1996 (the 1996 transition period). StreamLogic is a designer and manufacturer of information storage products and systems. The Company sells these products and systems directly to original equipment manufacturers ("OEMs") and systems integrators and through independent distributors and value-added resellers ("VARs") for resale to end users. The Company's storage subsystems and video systems business (the "Systems Business") offers storage subsystem products known as the Raidion and Microdisk, a line of video servers which provide video-on-demand for up to 64 individual users, and a line of low cost digital video disk recorders which allow real-time record and playback of video material. All of the Systems Business products incorporate certain of the disk drives described below. The Company's disk drive business (the "Drive Business"), operated under the "Micropolis" name, designed and manufactured disk drives exclusively in the 3 1/2-inch and 5 1/4-inch form factors, with capacities ranging in the 1996 transition period from 2 Gigabytes ("GB") to 9 GB. On January 24, 1996, the Company entered into a definitive agreement (the "Purchase Agreement") with ST Chatsworth Pte Ltd, a Singapore corporation which was later renamed "Micropolis (S) Pte Ltd" ("MPL") and a wholly-owned subsidiary of Singapore Technologies Pte Ltd, a Singapore Corporation ("ST"), to sell substantially all of the Company's assets (other than cash and accounts receivable) related to the Company's hard disk drive business to MPL (the "Sale"). The Purchase Agreement has been filed with the Commission and is Exhibit 10.53 hereto and is described in detail in the section "Terms of the Asset Purchase Agreement" in the Company's Proxy Statement filed March 7, 1996, which Section is incorporated herein by reference. The Sale was consummated on March 29, 1996. In addition, the Company and MPL have entered into an OEM supply agreement effective upon consummation of the Sale. Among other things, the OEM Supply Agreement allows the Company after the Sale to buy at prices equal to or slightly lower than the most favored OEM customer of MPL. The Company must offer all its disk drive business and requirements to MPL on a right-of-first-refusal basis, subject to the ability of MPL to meet certain delivery and other standards. The agreement has an initial two-year term, after which it may be renewed annually by mutual agreement. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." PRODUCTS The Company's product lines focus on two main markets: data and video storage/server products (the "Systems Business") and Micropolis high capacity disk drives (the "Drive Business"). Substantially all of the assets of the Drive Business were sold to MPL on March 29, 1996 pursuant to the Sale. Systems Business RAID The Company's Systems Business competes in the local area network ("LAN")- based redundant array of inexpensive disks ("RAID") market. RAID is a large- scale storage technology that replaces one high-capacity hard disk drive with an array of smaller, less expensive drives. The RAID concept provides protection of data 1 against the possibility of failure of any one drive in the array by storing redundant information on different drives within the array (mirroring), or by separating and distributing data flow with parity check blocks across multiple drives within the array. If data is lost or corrupted, the array can automatically reconstruct the lost or corrupted data from the remaining data blocks using the associated parity blocks and continue with uninterrupted operation. The growth in the LAN RAID market has been attributable in large measure to the trend toward requiring mainframe level functionality on LAN-based systems, the introduction by personal computer-based server manufacturers of symmetrical multiprocessor servers and a significant increase in multimedia personal computers capable of displaying video compressed using the Motion Picture Experts Group ("MPEG") standard. Competition in this market is resulting in increased levels of system integration and product enhancements, and decreased costs for comparable performance. Increased system integration is achieved by pre-configuring systems to include everything needed to "plug and play" and testing them in a systems environment before shipment. Certain competitors (the "captive" market) have introduced network file servers already configured for their own RAID products. Other competitors offer RAID products with built-in functionality such as tape backup devices. However, opportunities for growth in the non- captive market in which the Company participates could still be substantial. The Companys RAID products are aimed at those end users and systems integrators who value having the choice of supplying or buying a RAID product tailored to their specific application or need at a reasonable cost. The Company offers both software and hardware-based RAID products. In some instances, software RAID products are favored over hardware products due to the perceived cost differences between hardware and software, although software solutions require more overhead from the system. Software solutions are also favored, for example, on single user desktop systems where cost and performance are important and the user has more processing power. In situations where systems operations are very central processing unit ("CPU") intensive, users would prefer a hardware RAID solution so that the computational effort can be off loaded from the CPU. The Company's Systems Business RAID products consist of the Raidion line of fault-tolerant disk arrays, and the Microdisk. The Raidion line encompasses a software-based array known as the Model LT (featuring 3 1/2-inch drives) and the Model LS (featuring 5 1/4-inch drives), and a hardware-based array which incorporates a proprietary disk array controller known as Gandiva. The Gandiva controller card in the Company's current hardware RAID products performs the basic interface between the host computer and the drive array as well as the RAID fault tolerance, array maintenance and management functions. The software-based Raidion products have been optimized for use on the Novell Netware and IBM OS/2 operating systems. The hardware-based Raidion has been optimized to work with a greater number of operating systems, including Netware, OS/2, Microsoft Windows NT, Apple Macintosh and UNIX. The Microdisk product consists of an external storage device in a modular housing. The systems described above accounted for 26% of total revenues in the 1996 transition period. In December 1995, the Company announced RAIDIONplus, an extension of the current Gandiva array controller that improves performance, redundancy, array management capability and has features that will allow RAIDIONplus to be used in applications from on-line transaction processing (OLTP) to multimedia. RAIDIONplus provides features such as dynamic expansion, adaptive caching, and a Fast 20 Wide Small Computer System Interface ("SCSI") interface, advanced dial in/dial out and network array management, and removable non-volatile dynamic random-access memory. Video Servers The Company offers a line of video servers which use hard disk drives to store and retrieve audio and full motion video signals. Such video servers, which can replace video cassette recorder systems, are used to play back video material that has been previously digitally encoded and compressed; they are marketed in the 2 hospitality, multimedia and cable TV markets. Video server applications in the hospitality market include displaying digitally encoded and compressed movies to guests in hotels, aircraft and cruise ships. Multimedia applications include corporate training, campus training and video libraries. Video servers in the cable TV market are designed to insert local cable TV advertisements in a video stream. The Company's initial video server, installed in hotels, was introduced in early 1994, with product deliveries beginning in June 1994. The Company's AV Server 50, 100 and 200, enable up to 16, 32 and 64 users, respectively, to randomly select and view, with video cassette recorder-like functionality, video material on demand from an on-disk library of up to 60 full length movies. During the 1996 transition period, sales of these servers were made primarily to the hospitality industry and cable headends for local cable TV advertisement insertion. Sales during the 1996 transition period represented approximately 1% of total revenues. Video Disk Recorders The Company is currently developing a line of low cost digital video disk recorders which also use hard disk drives to store and retrieve audio and full motion video signals. Video disk recorders utilize built-in encoding and compression circuitry, allowing real time record and playback of video material. Applications for video disk recorders include professional video editing of video for audio, non-linear editing, linear editing, graphics and animation and other general post-production activities. Existing Products Present Company products which comprise StreamLogic's initial product line include: . RAIDION(R) fault-tolerant disk arrays--software- and hardware-based RAID storage solutions for network data processing environments as well as video and multimedia applications. . MICRODISK(R) subsystems--modular, stackable, external storage for desktop computing and network environments. . MICRODISK AV subsystems--modular, stackable, external storage optimized for professional audio/video editing and desktop multimedia applications. . VIDEO DISK RECORDER(TM) (VDR)--digital disk recorder technology for professional and commercial video editing and playback environments. . VIDEON(TM)--Motion Picture Experts Group ("MPEG")-based video-on-demand ("VOD") servers for hospitality and cable television broadcast environments. The brand names "Raidion" and "Microdisk," which have been retained by StreamLogic, are believed to be of significant importance to ongoing market recognition and acceptance of the products sold under those names and their variants. StreamLogic's products are sold to OEMs and system integrators and through distribution channels worldwide. In 1995, revenues attributable to the products to be retained by StreamLogic amounted to $39.5 million and all but $2.5 million of these revenues came from products sold into the LAN RAID sub-system market. In the future, and especially in 1997, StreamLogic's revenue base will be largely dependent on its success in the LAN RAID sub-system market. StreamLogic products in the LAN RAID segment will continue to focus on Novell and Windows NT clustered operating environments. RAID functionality is required to ensure both data availability and data integrity. In addition, requirements exist for increasingly comprehensive management features. The company currently offers RAIDION desktop and rack mount configurations with RAID functionality in both external array controllers and host based software subsystems. Plans to bring deskside configurations to market in 1997 will continue the current scaleable, modular, hot swappable characteristics of the RAIDION. The product line will continue to be optimized for on-line transaction processing. 3 Drive Business (Business sold pursuant to the Purchase Agreement described above) Prior to March 29, 1996, the core of the Drive Business' product offerings consisted of high-performance, high-capacity Winchester disk drives used in mission critical, network file server and multimedia applications. The Company offered a line of disk drive products code-named "Javelin." This series of products encompassed the Taurus 2, a 3 1/2-inch, 1-inch high, 2 GB drive with a rotational speed of 7200 rpm; the Capricorn 4, a 3 1/2-inch, full-height, 4.3 GB drive with a rotational speed of 7200 rpm, and the Scorpio 9, a 5 1/4- inch, full-height, 9 GB drive with a rotational speed of 5400 rpm. Increased rotational speeds enable the drive to demonstrate faster access times and otherwise increased performance. The Javelin series of disk drives is characterized by a high degree of commonality in technology. These drives possess a greater degree of integration of hardware and software features across all three platforms than in previous models. These drives were primarily available with the industry standard SCSI interface. In addition, the Company sold disk drives that have been optimized for specific market niches. Included among these drives were the Company's "AV" drives, where the internal firmware had been modified to make these drives uniquely appropriate to large block data types, such as audio and video files. The Javelin series, which began shipping in the third quarter of 1994, represented approximately 71% of the Company's 1996 transition period total revenues. PRODUCT DEVELOPMENT Future Product Development StreamLogic's future product development will be focused on the storage, management and movement of digital data in various networking and audio/video related applications. StreamLogic's core technical competencies include its RAID software, RAID controllers, optimization of disk drives for application specific environments, enclosure packaging, control of both analog and digital video streams ("video streaming"), Serial Switching Architecture ("SSA") switching, MPEG encoding/decoding and network management. StreamLogic currently expects to use these core competencies and the products it has developed, and plans to develop in the future, to participate in five target markets. The five markets are: . Bundled RAID subsystems for the LAN market. . Bundled storage systems for internet and web server markets. . Digital output storage systems for the corporate IntraNet market. . Video disk recorders for the professional editing market. . Video servers for hospitality and cable head-end markets. These markets vary dramatically in size and competitive characteristics. Over the next two years, the segments expected to be of most importance to the growth and profitability of StreamLogic are: (1) Professional Video Editing. This market segment is characterized by single or few users per system and high data rate video streams stored on hard disks. Fault tolerance is desired but RAID technology is used primarily as a method of achieving higher data rate. Video disk recorders are used to replace professional level video tape recorders for a wide variety of applications. The Company has a strategic partnership with BTS Broadcast Television Systems GmbH ("BTS"), a division of Phillips Electronics, to develop video disk recorder products to be marketed by BTS. The professional video market is estimated by industry sources to be a $12 billion market with video tape recorders representing half of all revenues. Video disk recorders are expected to penetrate a small portion of that market while video disk editing is expected to penetrate a larger portion. Key competitors in the video disk recorder market are Tektronix and a number of small independent suppliers. In video disk editing, the key competitors are Avid Technology, Tektronix, Sony, Panasonic and a small number of independent suppliers. (2) Hospitality and Cable Head-end Video Servers. This market is made up of multi-channel video playback systems. A video server allows multiple simultaneous users from one video data stream stored on hard 4 disk. Such playback is today achieved by the installation of large numbers of video tape recorders. In the cable head-end market, the video server provides considerable ease-of-use benefits over conventional video cassette usage, as well as considerable cost savings. Fault tolerance is required in the cable head-end market, while price is more important in the hospitality market. StreamLogic is currently the only revenue producing competitor in the video server hospitality market. Competitors in the cable head-end market are Digital, Sea Change, and Sony. Technology Strategy StreamLogic's approach to product development is best characterized as being market driven, using a technology strategy that incorporates the latest reliably available components and software. Being market driven means that StreamLogic's engineers work closely with its sales force and with its customers to determine the appropriate prioritization of new product development efforts, as well as to establish product specifications. In general, this approach is designed to reduce time to market with products which have a broader set of potential customers. The technology strategy utilizes a basic set of mechanics and develops that set of mechanics from its initial capacity to higher capacities by further developing the electronic technology. The storage subsystems and video systems products share such common components as hard disk drives and the Gandiva array controllers. Future market trends in the LAN-based RAID industry are likely to favor products emphasizing low cost, optimization for application-specific environments, effective fault tolerance, high performance hardware and software interfaces, scalability of product and effective service and support. The information storage business is characterized by rapidly changing technology and user needs which require the continual development and introduction of new products. Although the Company believes its strategy of focus and specialization in the high-performance segment of the market, and an increased emphasis on time to market, improves the rate of new product introduction, no assurance can be given that the Company will be able to complete successfully the design or introduction of its new products in a cost-effective and timely manner, or that such products will perform to specifications. The introduction of new products also requires the Company to manage its inventory carefully to minimize inventory obsolescence. The failure to achieve any of these objectives could have, and has had, a material adverse effect on the Company's financial position and results of operations. Research and development expenses for the 1996 transition period and fiscal 1995, 1994 and 1993 were $8,874,000, $42,469,000, $43,648,000 and $36,112,000, respectively. In the 1996 transition period, approximately $2,581,000 of the Company's research and development expenses were incurred by the ongoing Systems Business. The Company anticipates its fiscal 1997 research and development expenses related to the Systems Business will increase slightly on a quarterly basis from those of the 1996 transition period. The Company plans to focus on development of video servers for hospitality and cable head-ends, professional video editing disk recorders, bundled storage for Internet and Web servers, corporate IntraNet digital output servers, and bundled RAID subsystems for LANs. The Company has discontinued funding of Tulip Memory Systems, Inc. (TMS), a start-up company formed to develop substrates which are to be used in the manufacture of computer disk drives, and has made other expense cuts in the engineering area. MANUFACTURING Systems Business The Company's manufacturing strategy has been to rely principally on outside vendors to supply high-level subassemblies and component parts. StreamLogic manufactures its storage subsystems products on production lines at its Chatsworth, California headquarters and has discontinued manufacturing Systems Business products at the Singapore facility as of March 29, 1996. The Company's video systems products are manufactured at the Chatsworth, California headquarters. The Company believes that its current facilities are adequate for its near-term production requirements. 5 The Company and MPL have entered into an OEM supply agreement, effective March 29, 1996. Among other things, the OEM Supply Agreement allows StreamLogic to buy at prices equal to or slightly lower than the most favored OEM customer of MPL. StreamLogic must offer all its disk drive business and requirements to MPL on a right-of-first-refusal basis, subject to the ability of MPL to meet certain delivery and other standards. The agreement has an initial two-year term, after which it may be renewed annually by mutual agreement. Drive Business (Business sold pursuant to the Purchase Agreement described above) The Company's disk drive manufacturing strategy was to rely principally on outside vendors to supply high-level subassemblies and component parts. The Company's drive manufacturing operations consisted primarily of the assembly of head positioner assemblies ("HPAs") and the final assembly and testing of disk drives. Through March 29, 1996 when the Drive Business was purchased by MPL, StreamLogic maintained two principal manufacturing sites, both located in Southeast Asia. During the 1996 transition period, the Company manufactured approximately 42,000 disk drives. The labor-intensive manufacture of HPAs took place in the Company's Bangkok facility, which was established in 1988. The Company's Singapore facility established in 1986 accounted for substantially all final production and test of the Company's disk drives. In addition, StreamLogic maintained a pilot production line at its Chatsworth, California headquarters. This line was employed to assemble new products used in evaluation testing by its customers prior to their transfer to the offshore operations. In March 1996 Company completed construction of a new manufacturing facility in Singapore to replace the previous leased facility. These manufacturing sites were acquired by MPL on March 29, 1996. General Manufacturing Considerations Continued improvement in storage subsystem and video systems manufacturing process capabilities and reduced materials and manufacturing costs are critical factors affecting the Company's financial position and results of operations. The Company continues to change the manufacturing processes for many of its products and must carefully manage the development of production processes for new products. There can be no assurance that such changes and new processes will be implemented in a cost-effective and timely manner. Delays or problems encountered in any of the foregoing could have a material adverse effect on the Company's financial position and results of operations. In addition, if for any reason the Company were to have a prolonged interruption in its manufacturing facilities, the Company's financial position and results of operations could be materially adversely affected. The Company's manufacturing process requires high volumes of high quality components, including disk drives. Several of the critical components used in the Company's products are available only from single or limited sources. The Company has had and continues to have difficulties in obtaining certain components, and there can be no assurance that such difficulties will not occur in the future. A prolonged interruption or reduction in supply of quality components, rework costs associated with defective components or the inability to obtain continued reduction in component prices would adversely affect the Company's financial position and results of operations and could damage customer relationships. The Company has experienced such supply interruptions, rework costs and increased component prices during the 1996 transition period and, in particular during 1995. Such component and manufacturing problems have adversely affected the Company's financial position and results of operations. MARKETING During the 1996 transition period, the Company's direct sales force sold storage subsystems and Micropolis disk drives to OEMs, distributors and VARs. The Company maintained eight domestic sales offices. During the 1996 transition period, approximately 21% of total sales were made to OEMs, with the remainder to independent distributors and VARs. The Company's OEM customers included Xerox Corporation, Ericsson Telecom AB, Auspex Systems, Inc., Parity Systems and Stratus Computer. The Company's distribution customers included 6 Peripheral Technology Group, Alliance Peripheral Systems, Tech Data Corporation, Megahaus Corporation and Hammer Distribution Ltd. International operations are an important element of the Company's sales mix. During the 1996 transition period, sales to customers outside of North America comprised approximately 48% of total sales. The Company currently maintains two European offices which support sales in Europe to both U.S. and European-based OEMs and European-based independent distributors. Through March 1996, the Company deployed its sales and marketing efforts in the Asia/Pacific region with four offices and maintained a service and support operation in England. Effective March 29, 1996, the Company entered into a non-exclusive European Distribution Handling Agreement with MPL, under which MPL provides distribution services to the Company in Europe and other locations specified in such agreement. The Company's sales force, which currently has offices in San Jose and Irvine, California; Roswell and Lawrenceville, Georgia; Salem, New Hampshire; North Potomac, Maryland; Des Plaines, Illinois; Plano, Texas; Reading, England; and Munich, Germany. In addition, members of senior management, together with engineering, operations and marketing executives, participate actively in sales to major OEM customers. Independent distributors are also used in the United States and for certain markets abroad. No customers accounted for more than 10% of total sales during the 1996 transition period or 1995 or 1994. The Company generally warrants its products against defects for periods from one to five years. The Company provides for estimated future product warranty costs when products are shipped. Such warranty liability for disk drives was assumed by MPL as of March 29, 1996. In addition, the Company generally grants trade credit to its customers, typically on net 30 day terms. Historically, the Company has not experienced significant bad debt write-offs. The Company has policies and/or contractual agreements which allow distributors to receive price protection credit under certain circumstances when the Company lowers its sales prices. In addition, the Company permits customers to return products under certain circumstances. The Company makes a provision for the estimated amount of price protection credits and for product returns that may occur under these programs and contracts in the period of sale. Direct shipments from Chatsworth and Singapore are denominated in U.S. dollars. Sales by the European subsidiaries, except Germany, are denominated in local currency. Although export sales are subject to certain restrictions, including approval by the Office of Export Administration of the United States Department of Commerce, such restrictions have not limited such sales. BACKLOG AND VARIABILITY OF DEMAND The Company's total order backlog at May 31, 1996 was approximately $2.4 million compared with approximately $9.6 million at December 29, 1995. The decrease in backlog was primarily attributable to the sale of the disk drive business on March 29, 1996. Backlog includes orders for which a delivery schedule has been specified by the customer and which the Company has agreed to ship within six months. Lead time for the release of purchase orders varies from month to month. For this reason and because changes in delivery schedules and cancellation of orders occur, the Company's backlog on a particular date may not be representative of future sales. The Company's customers place orders based on their own internal forecasts. If demand falls below forecast, the customer may cancel or reschedule shipments previously ordered from the Company, a process that may be exacerbated by customers' inventory management practices. Accordingly, the Company may, at any time and with limited notice, experience a significant downturn in demand for its products. The Company's expectations of future net sales are based largely on its own estimate of future demand and not on firm customer orders. The Company's net sales may also be affected by its distributors' decisions as to the quantity of the Company's products to be maintained in their inventories. The Company's expenditures are based in part on management's estimate of 7 future sales. If orders and net sales do not meet expectations, the Company generally will not be able to reduce expenses commensurately in the near term and therefore profitability would be adversely affected. COMPETITION The data and video storage industry is competitive and characterized by price erosion over the life of a product. The Company believes that being first to market with new products is a critical element in the achievement of desired gross margins. Being first to market provides initial price advantages to the Company and the opportunity to accelerate learning and cost reduction curves due to increased production volumes. During 1994 and 1995 the Company experienced significant price erosion related to several of its products as a result of increased competition. Such pricing pressures negatively impacted the Company's operating results for 1994 and 1995. In the high-performance market in which the Company competes, the principal dimensions of competition are generally data storage capacity, data transfer rate, average access time, form factor, timely delivery in quantity, reliability and price. Some of the Company's competitors are much larger in size and have access to greater financial and other resources than the Company. The Company believes that its future success hinges on its ability to bring cost and feature-competitive products to market on a timely basis. Systems Business Competitors in the non-captive LAN RAID market include: Storage Dimensions, Ciprico, Andetaco, ECCS and FWB. The Company's market share declined in 1995 as compared to 1994. The Company will endeavor to recapture and expand its market share by providing RAID controller feature enhancements and by improved focus as a result of the sale of the disk drive business. Systems Business products face competition from companies offering standard computer systems with video server specific software, and those offering specially designed video server systems. Competitors offering standard computer systems with video server specific software include Digital Equipment Corporation, Silicon Graphics Inc., Sun Microsystems and Hewlett Packard Company. Competitors offering specially designed video server systems include Sony corporation, Optibase Inc., Sea Change, and The Network Connection Inc. The Company believes its video server systems offer significant price advantages, longer market presence and a more suitable overall solution for the applications targeted. Drive Business (Business sold pursuant to the Purchase Agreement described above) The Drive Business competition included other independent domestic disk drive manufacturers, the disk drive divisions of both domestic and foreign (primarily Japanese) computer systems manufacturers and the captive disk drive manufacturing operations of some of its customers. The Company's principal competitors in the market for high-performance Winchester drives were Seagate/Conner, Quantum Corporation and Fujitsu Corporation. In addition, the Company experienced increased competition from computer manufacturers such as International Business Machines and Hewlett Packard Company. EMPLOYEES As of March 29, 1996, after the Sale, the Company employed approximately 150 persons, including 64 in Engineering, 5 in Quality Assurance and Control, 41 in Manufacturing and Operations, 21 in Marketing and 19 in General Management and Administration. Competition for highly skilled employees is intense. The Company believes that its future success will depend on its continued ability to attract and retain qualified employees. None of the Company's employees is represented by a labor union, and the Company has experienced no work stoppages. The Company believes that its employee relations are good. 8 FOREIGN AND DOMESTIC OPERATIONS The information relating to foreign and domestic operations is included in Note 8 to the Company's Consolidated Financial Statements on page 32 of this report. ITEM 2. PROPERTIES The Company's executive and engineering offices and domestic manufacturing operations are located in the Company's owned 58,000 square foot facility in Chatsworth, California. StreamLogic leases on a month-to-month basis, a small amount of storage and parking space in Chatsworth. Through March 29, 1996, the Company also leased one building with approximately 128,000 square feet at an annual rental of approximately $982,000. In Singapore, the Company leased, through March 29, 1996, approximately 56,000 square feet on three floors of one building, and an additional 12,000 square feet on another floor of the same building. The space was used in the Company's manufacturing operations. These leases, which provided for an annual rental of $791,000 and $150,000, respectively, expired in April 1996. The Company leased an additional 134,600 square feet for manufacturing on five floors of an adjacent building at an annual rental of approximately $1,743,000. This lease expired in April 1996. In March 1996, the Company completed construction of a 302,000 usable square foot manufacturing facility in Singapore. The new facility was sold to MPL on March 29, 1996 upon consummation of the Purchase Agreement. A thirty-year ground lease for the new facility, providing for lease payments of approximately $616,000 annually, was assumed by MPL. Through March 29, 1996 StreamLogic owned a building with approximately 37,000 square feet in Bangkok, Thailand which was used for manufacturing HPAs and other disk drive sub-assemblies. This facility was sold to MPL upon consummation of the Purchase Agreement. In addition, the Company leased approximately 20,400 square feet in two separate locations adjacent to the main manufacturing site. These leases were assumed by MPL upon consummation of the Purchase Agreement. StreamLogic also leases sales office space in San Jose and Irvine, California; Roswell, Georgia; New York, New York; Salem, New Hampshire; Des Plaines, Illinois; Plano, Texas; Reading, England and Munich, Germany. The Company believes that its current facilities are well maintained and are adequate for its near-term production requirements. The Company is presently (after the Sale) at approximately 60% of capacity. ITEM 3. LEGAL PROCEEDINGS The Company is involved in routine legal matters and contingencies in the ordinary course of business which management believes will not have a material effect upon the Company's financial position. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS a) On March 7, 1996 the Board of Directors of StreamLogic Corporation circulated to the Stockholders a Notice and Proxy Statement For Action to be Taken by Written Consent In Lieu of a Meeting of Stockholders. This Proxy Statement was furnished for solicitation of the written consent of Stockholders to authorize and approve (i) the sale of substantially all of the Company's assets (other than cash and accounts receivable) related to its disk drive business, to ST Chatsworth Pte Ltd, a Singapore corporation and a wholly-owned subsidiary of Singapore Technologies Pte Ltd, a Singapore corporation, pursuant to the terms of an Asset Purchase Agreement dated as of January 24, 1996 (the "Sale"), and (ii) an amendment to the Company's Certificate of Incorporation to change the name of the Company to StreamLogic Corporation (the "Name Change"). b) Matters voted on by written consent and votes cast on each matter were as follows (the number of shares for which proxy cards were not returned are shown as "Not Voted"): 9 . The stockholders voted for the Sale and Name Change as follows: For.......................................... 9,365,018 Against...................................... 103,060 Abstain...................................... 27,695 Not Voted.................................... 6,084,640
c) The Annual Meeting of Stockholders of StreamLogic Corporation was held on May 22, 1996. d) Matters voted on at the meeting and votes cast on each matter were as follows: . The stockholders voted to elect four directors as follows:
NOMINEE FOR WITHHOLD ------- ---------- -------- J. Larry Smart........................................ 9,895,326 291,967 Chriss W. Street...................................... 9,905,522 281,771 Ericson M. Dunstan.................................... 10,097,526 89,767 Greg L. Reyes, Jr..................................... 10,096,801 90,497
There were no broker non-votes in the election of directors. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is traded in the over-the-counter market on the NASDAQ National Market System under the symbol "STLC" (formerly "MLIS"). The following table sets forth for the periods indicated the high and low closing sale prices for the Common Stock.
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- 1996 Transition Period High.................................... 5 1/8 Low..................................... 1 3/8 Fiscal 1995 High.................................... 11 7 1/4 7 3/8 5 3/8 Low..................................... 4 7/8 4 3/4 5 3/8 3 Fiscal 1994 High.................................... 8 3/8 7 7/8 7 1/4 9 1/2 Low..................................... 4 7/8 5 1/4 5 3/8 6 1/8
The price range per share, reflected in the above table, sets forth the highest and lowest closing prices in each fiscal quarter during the 1996 transition period and the 1995 and 1994 fiscal years, as reported by Nasdaq National Market System. No dividends have been declared by the Company during the five-year period ended March 29, 1996. At June 14, 1996, there were 415 record holders of the Company's Common Stock. As of March 29, 1996, StreamLogic's net worth ceased to meet the requirements for continuing quotation on the Nasdaq National Market System. However, as of June 14, 1996 the Company's Common Stock was still included on the Nasdaq National Market System. See Item 7--"Management's Discussion and Analysis of Financial Condition and Results of Operations--Market For StreamLogic Common Stock." 10 ITEM 6. SELECTED FINANCIAL DATA
THREE-MONTH PERIOD YEAR ENDED ---------------------- -------------------------------------------------- MARCH DECEMBER DECEMBER DECEMBER DECEMBER DECEMBER 1996 MARCH 1995 1995 1994 1993 1992 1991 --------- ----------- --------- --------- --------- -------- -------- (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Statement of operations data Net sales............... $ 24,408 $ 40,899 $ 211,264 $ 346,314 $ 382,926 $396,579 $350,875 Cost of sales.......... 40,799 49,768 205,628 286,856 315,436 306,482 285,555 --------- --------- --------- --------- --------- -------- -------- Gross profit (loss)..... (16,391) (8,869) 5,636 59,458 67,490 90,097 65,320 Operating expenses: Research and development.......... 8,874 13,427 42,469 43,648 36,112 27,868 24,065 Selling, general and administrative....... 8,836 13,171 44,274 43,500 41,906 38,656 33,258 Restructuring charge.. -- -- -- -- 5,496 -- -- --------- --------- --------- --------- --------- -------- -------- Total operating expenses........... 17,710 26,598 86,743 87,148 83,514 66,524 57,323 --------- --------- --------- --------- --------- -------- -------- Income (loss) from operations............. (34,101) (35,467) (81,107) (27,690) (16,024) 23,573 7,997 Other expense, net..... 1,854 786 4,242 2,985 3,888 2,683 3,504 --------- --------- --------- --------- --------- -------- -------- Income (loss) before income taxes........... (35,955) (36,253) (85,349) (30,675) (19,912) 20,890 4,493 Income tax provision (benefit)............. 252 (1,166) (1,061) -- 4 1,333 150 --------- --------- --------- --------- --------- -------- -------- Net income (loss)(1).... $(36,207) $(35,087) $(84,288) $(30,675) $(19,916) $ 19,557 $ 4,343 ========= ========= ========= ========= ========= ======== ======== Earnings (loss) per share(1)............... $ (2.32) $ (2.29) $ (5.46) $ (2.03) $ (1.34) $ 1.33 $ .32 ========= ========= ========= ========= ========= ======== ======== Weighted average common and common equivalent shares outstanding..... 15,580 15,311 15,445 15,100 14,835 14,720 13,674 ========= ========= ========= ========= ========= ======== ======== Balance sheet data Working capital......... $ 38,140 $ 87,069 $ 65,957 $ 121,022 $ 144,423 $163,394 $141,850 Total assets............ 92,383 191,054 180,394 233,915 250,429 259,624 244,909 Long term debt (excluding current portion)............... 71,250 77,269 113,102 75,000 75,000 75,000 75,000 Shareholders' equity (deficit).............. (27,084) 54,945 7,173 89,630 118,356 136,257 114,629
- -------- (1) Income from the Company's Singapore and Thailand operations is exempt from income taxes in those countries through 2004 and December 1993, respectively. The income tax exemptions in Singapore and Thailand had no impact in the 1996 transition period nor in 1995, and had an effect of approximately $7,401 and $.49 in 1994, $4,800 and $.33 in 1993 and $12,879 and $.87 in 1992 on net income and earnings per share, respectively, as compared to income taxes at the maximum statutory rates. However, the aforementioned aggregate and per share effects are not necessarily indicative of the Company's consolidated incremental tax liability in the absence of such tax holidays historically (see Notes 1 and 2 to the Company's Consolidated Financial Statements). 11 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RECENT DEVELOPMENTS Acquisition of FWB Inc. On June 10, 1996 the Company entered into a definitive agreement, subject to certain conditions, to purchase all of the net assets related to the hardware business of FWB Inc., a developer of performance computer storage products for pre-press, multi-media and graphics applications. At closing, the Company would pay $5 million, consisting of approximately $2 million in cash and approximately $3 million of assumed debt. In addition, the Company entered into a definitive agreement, subject to certain conditions, to make an 11% equity investment in the software business being retained by FWB. In consideration for such minority equity investment, at closing the Company would issue shares of StreamLogic Common Stock with an aggregate fair market value of $8 million, as defined in the agreement. There can be no assurance that this transaction will be consummated. Bond Agreement On June 17, 1996 the Company announced an agreement (the "Bond Agreement") in principle with Loomis Sayles & Co., L.P. ("Loomis Sayles"), an entity which advises investors that collectively hold approximately 79% of the Company's $75 million issue of 6% Convertible Subordinated Debentures ("Debentures") to exchange such Debentures for a package of cash, common stock and warrants to purchase common stock. Pursuant to the Bond Agreement, the Company plans to commence a tender offer for the Debentures during mid August 1996. In the tender offer, the Company will offer to exchange its Debentures such that, for each $1,000 face amount of debentures tendered, the holders will receive (a) $233.33 in cash, (b) $520 in StreamLogic Common Stock, and (c) warrants to purchase 40 shares of StreamLogic Common Stock at an initial exercise price of 150% of market value of the Common Stock as defined in the Bond Agreement. The exercise price of the warrants is subject to downward adjustment in certain circumstances, and contains antidilution adjustments. The Company expects shareholder approval will be required pursuant to Nasdaq rules and regulations. The obligations of the holders advised by Loomis Sayles to participate in the tender offer under the Bond Agreement is subject to various conditions including satisfaction of all necessary regulatory requirements, 95% participation by bond holders, and the average price of StreamLogic's Common Stock immediately prior to the expiration of the tender offer falling within the range $4.00 to $7.50. As a result, there can be no assurance that the tender offer will be consummated. Offers to exchange the Debentures will be made only pursuant to the tender offer, and no offer is being made at this time. The last reported sales price of the debentures prior to the Companys announcement of the Bond Agreement was $550 per $1,000 face value on June 6, 1996. If the holders of 100% of the outstanding debentures accept the exchange, the Company will exchange the debentures for (a) $17.5 million in cash, (b) issue between 5.2 and 9.8 million shares of common stock, and (c) issue warrants to purchase approximately 3.0 million shares of common stock, therefore, the transaction would increase the Company's net tangible assets by more than $50 million. SALE OF THE DISK DRIVE BUSINESS On March 29, 1996, the Company closed pursuant to a definitive agreement (the "Purchase Agreement") with ST Chatsworth Pte Ltd, a Singapore corporation which was subsequently renamed "Micropolis (S) Pte Ltd" ("MPL"), and a wholly- owned subsidiary of Singapore Technologies Pte Ltd, a Singapore corporation ("ST"), the sale of substantially all of the Company's assets (other than cash and accounts receivable) related to the Company's hard disk drive business to MPL (the "Sale"). The Sale was approved by the Company's stockholders. The Company's remaining business is focused on information storage subsystems and video 12 systems, and the Company has renamed itself StreamLogic Corporation ("StreamLogic"). StreamLogic's principal business is fault tolerant disk storage subsystems, commonly known as RAID systems. Longer term, StreamLogic plans to develop a substantial video server and video disk recorder business, assuming that current tape-based markets for such products transition to disk- based technologies, and that StreamLogic's products are successful in these new markets. For further information covering the Company's present Systems Business, see Item 1--"Business." RESULTS OF OPERATIONS Three Months Ended March 29, 1996 (The "1996 Transition Period") Compared to Three Months Ended March 31, 1995 Net sales decreased 40% to $24.4 million in the 1996 transition period as compared to $40.9 million in the first quarter of 1995. Drive Business revenues declined by 45% in the 1996 transition period as compared to the 1995 quarter and sales made by the Systems Business decreased by approximately 21%. The decrease in revenues was primarily attributable to the low volume of shipments and high level of product returns experienced during the 1996 transition period due to uncertainties within the Company's disk drive customer base regarding the sale of the disk drive business. The Company discontinued manufacturing Systems Business products in its Singapore facility during the 1996 transition period. All Systems Business products are currently manufactured in the Company's Chatsworth, California facility. Such discontinuance of manufacturing in Singapore is not expected to have a significant impact on Systems Business revenue. Overall bookings for the 1996 transition period decreased by 51% from those in the 1995 quarter principally due to uncertainties within the Company's disk drive customer base regarding the sale of the disk drive business. Cost of sales as a percent of sales increased to 167% in the 1996 transition period from 122% in the 1995 quarter resulting in a gross loss of 67% as compared to 22% in the 1995 quarter. The margin loss was the result of price declines in the Company's Javelin family of drives, operating inefficiencies due to low volume production of the 2, 4 and 9 GB drives. Research and development expenses increased to 36.3% of sales in the 1996 transition period as compared to 32.8% in the 1995 quarter. The percentage increase is the result of lower sales offset by a decrease in spending of $4.6 million. The decrease in expense was a result of savings from the Company's cost containment efforts initiated in March 1995 and termination of the Company's funding in 1996 of the research and development costs incurred by Tulip Memory Systems, Inc. ("TMS"), a start-up company formed to develop substrates which are to be used in the manufacture of computer disk drives. During the 1995 quarter, the Company recorded a provision to recognize the guarantee obligation under its agreement with TMS. In the 1996 transition period and the 1995 quarter, approximately one-third of the Company's research and development expenses were incurred by the ongoing Systems Business. Selling, general and administrative expenses were 36.2% of sales in the 1996 transition period as compared to 32.2% in the 1995 quarter. The percentage increase is the result of lower sales offset by a decrease in expense of $4.3 million. The decrease in expense was the result of decreased expenditures for advertising and sales promotion activities for new products, costs associated with a work force reduction in the U.S. and Europe completed in March 1995, and lower costs resulting from employee reductions made in early January 1996. Interest expense increased to $2 million in the 1996 transition period (8.3% of sales) as compared to $1.3 million (3.3% of sales) in the 1995 quarter, primarily as a result of the interest expense on the Company's 10% Subordinated Notes dated October 11, 1995 and fees associated with terminating the Company's Loan Facility. Interest income was $169,000 in the 1996 transition period as compared to $547,000 in the 1995 quarter as a result of lower cash equivalent and short-term investment balances. As a result of the above, loss before income taxes was $36.0 million in the 1996 transition period as compared to $36.3 million in the 1995 quarter. 13 The Company recorded an income tax provision of $252,000 in the 1996 transition period, primarily representing Federal taxes on undistributed foreign earnings since such earnings would be remitted due to the Sale. In the 1995 quarter, the Company recorded an income tax benefit of $1.2 million, primarily representing a refund of certain foreign income taxes paid in a prior year. The Company's income tax provision benefits from the tax holiday afforded the Company's Singapore operation. The income tax exemption in Singapore had no impact in the 1996 transition period or the 1995 quarter. A net operating loss of approximately $124.2 million is available to be carried forward to the years 2004-2011. General business tax credit carryforwards of approximately $8.6 million expiring between 2000 and 2009, are also available to reduce future federal income taxes. However, under Internal Revenue Code Sections 382 and 383, the amount of the operating loss and general business tax credit carryforwards that can be used annually may be limited due to certain changes in ownership. The potential issuance of Common Stock in connection with the Bond Agreement discussed above, or other trading activities, may create such a change in ownership. Net loss for the 1996 transition period was $36.2 million compared to a net loss of $35.1 million in the 1995 quarter. Fiscal 1995 Compared to Fiscal 1994 Net sales decreased 39% to $211.3 million in 1995 as compared to $346.3 million in 1994. Drive Business revenues declined by 44% in 1995 as compared to 1994 and sales made by the Systems Business decreased by approximately 4%. The decrease in revenues was primarily attributable to sharply lower drive orders than anticipated in the distribution channel during the first quarter of 1995 for the Company's 4 GB 3 1/2-inch and 9 GB 5 1/4-inch drives. In addition, a component problem, and other technical issues, effectively shut down production of the Company's 2 GB 3 1/2-inch drive for most of the first quarter of 1995. During the second quarter of 1995, the Company resumed full production of its 2 GB 3 1/2-inch drives and met the increased demand for these drives and its SuperCapacity 4 and 9 GB drives. During the third and fourth quarters of 1995, the Company's OEM revenue declined due to reduced shipments to certain large customers. The Company anticipated that such revenue reduction would be offset by new OEM customers in qualification. However, the Company experienced delays in such OEM qualifications and unexpected difficulties in the manufacture of 3 1/2-inch disk drives resulting in higher manufacturing costs, excessive warranty cost, inventory build-up and lost sales. During the fourth quarter of 1995 the Company announced a price reduction on its Javelin family of drives. Overall bookings for 1995 decreased by 45% from those in 1994 principally due to manufacturing difficulties, component problems and delays in OEM qualifications in the Company's 2, 4 and 9 GB drives. Cost of sales as a percent of sales increased to 97.3% in 1995 from 82.8% in 1994 resulting in a gross margin of 2.7% as compared to 17.2% in 1994. The decrease in margin was the result of price declines in the Company's Javelin family of drives, operating inefficiencies due to low volume production of the 2 and 4 GB drives, and a provision recorded during the first quarter of 1995 for certain unusable components of the 2 GB drives. Research and development expenses increased to 20.1% of sales in 1995 as compared to 12.6% in 1994. The percentage increase is the result of lower sales offset by a decrease in spending of $1.2 million. The decrease in spending was a result of savings from the Company's cost containment efforts initiated in March 1995, offset by the recognition of the research and development costs incurred by TMS, and research and development on the Company's high capacity 3 1/2-inch and 5 1/4-inch drives and subsystem products. In 1995, approximately one-third of the Company's research and development expenses were incurred by the ongoing Systems Business. Selling, general and administrative expenses were 20.2% of sales in 1995 as compared to 12.6% in 1994. The percentage increase is the result of lower sales and an increase in expense of $774,000. The increase in expense was the result of increased expenditures for advertising and sales promotion activities for new products, costs associated with a work force reduction in the U.S. and Europe completed in March 1995, and the retention of outside assistance to help the Company in formulating and implementing its recovery plan, offset by the Company's cost containment efforts initiated in March 1995. 14 Interest expense increased to $6 million in 1995 (2.8% of sales) as compared to $5.1 million (1.5% of sales) in 1994, primarily as a result of fees associated with the Company's Term Loan Facility and the interest expense of the Company's 10% Convertible Subordinated Debentures dated October 11, 1995. Interest income was $1.7 million in 1995 as compared to $2.1 million in 1994 as a result of lower cash equivalent and short-term investment balances. As a result of the above, loss before income taxes was $85.3 million in 1995 as compared to $30.7 million in 1994. The Company recorded an income tax benefit of $1.1 million in 1995, primarily representing a refund of certain foreign income taxes paid in a prior year. The Company's income tax provision benefits from the tax holiday afforded the Company's Singapore operation. The income tax exemption in Singapore had no impact in 1995 and had an effect of approximately $7.4 million and $.49 on net income and earnings per share, respectively, as compared to income taxes at the maximum statutory rates in 1994. Net loss for 1995 was $84.3 million compared to a net loss of $30.7 million in 1994. Fiscal 1994 Compared to Fiscal 1993 Net sales decreased by 10.5% to $346.3 million in 1994 as compared to $382.9 million in 1993. OEM revenues declined substantially in 1994 as a result of a decrease in shipments in the Company's 5 1/4-inch 3600 rpm drives and the 3 1/2-inch 5400 rpm 1 gigabyte (GB) drives. The decline in OEM sales was only partially offset by increases in the Company's Storage Systems Division (SSD) and Video Systems Division. The increase in SSD sales was primarily the result of an increase in shipments of the 3 1/2-inch, 1 inch high 1 GB drive, 1.7 GB full height drives and storage subsystems. The increase in the Video Systems Division, which had no sales in 1993, came primarily in the second half of 1994 and related to shipments of the AV Server 100. Backlog as of December 30, 1994 was $27.8 million, as compared to $29.2 million as of December 31, 1993. Cost of sales as a percentage of sales was 82.8% in 1994, comparable to the 82.4% in 1993, resulting in gross margins of 17.2% (17.6% in 1993). Gross margins in the first three quarters of 1994 were adversely impacted by competitive pricing on the 1 GB, 1 inch high 3 1/2-inch drives. Margins increased substantially in the fourth quarter, to 26.5%, as a result of the increased shipments of the Company's Javelin class SuperCapacity drives and storage and video subsystems. Research and development as a percentage of sales increased to 12.6% in 1994 as compared to 9.4% in 1993. The increase in spending of $7.5 million relates to increased research and development for high capacity 3 1/2-inch and 5 1/4- inch drives, subsystem products and development of new disk substrates at TMS. Selling, general and administrative expense increased to 12.6% in 1994 as compared to 10.9% in 1993. The increase in spending of $1.6 million relates primarily to increased sales and marketing costs in the Company's Storage Systems Division. Interest expense was $5.1 million (1.5% of sales) in 1994 which is comparable to 1993. Interest income was $2.1 million in 1994 as compared to $2.3 million in 1993. As a result of the above, the loss before income taxes was $30.7 million in 1994 versus a loss of $19.9 million in 1993. The Company provided for no income tax in 1994 versus $4,000 provided in 1993. The Company's income tax provision benefits from a tax holiday afforded the Company's Singapore operation. The effect on net income and earnings per share of the income tax exemptions in Singapore as compared to income taxes at the maximum statutory rates for 1994 and 1993, was approximately $7.4 million and $.49 and $4.8 million and $.33, respectively. Net loss was $30.7 million in 1994, as compared to net loss of $19.9 million in 1993. LIQUIDITY AND CAPITAL RESOURCES Cash, cash equivalents and short-term investments increased to $40.5 million as of March 29, 1996 from $27.9 million as of December 29, 1995. Net cash used in operations of $12.8 million is primarily due to the 15 Company's net loss of $36.2 million, offset by a reduction in accounts receivable of $14.1 million, and an increase (prior to giving effect to the Sale) in accounts payable and other accrued liabilities of $12.6 million. The reduction in accounts receivable is due principally to decreased sales in the 1996 transition period compared to the fourth quarter of 1995. Accounts payable and other accrued liabilities increased (prior to giving effect to the Sale) due to extended supplier payments. The Company's capital expenditures in the 1996 transition period were $14.8 million as compared to $6.1 million in the three months ended March 31, 1995. Capital expenditures related primarily to the construction of a new manufacturing facility in Singapore to replace the current leased facility. The new facility was completed in March 1996. The Company had obtained a term loan facility to fund the expenditures associated with the construction of the building. On March 29, 1996 pursuant to the Agreement, MPL acquired the Company's new factory in Singapore and assumed the Company's $21.5 million term loan facility (the "Loan Facility") used to finance the construction of the factory. In addition, MPL assumed the Company's obligations under contracts to build an ESD safe cleanroom for the production of MR-based disk drives, and certain other contracts for the facilitization of the factory, all in an amount of approximately $9.0 million. The Company currently anticipates that as a result of the Sale its 1997 capital spending will be significantly lower than that of the 1996 transition period and will be principally for equipment and tooling required for the Company's new products. During March 1996, after evaluating the costs of maintaining the Company's $25 million credit facility and because the Agreement required assets to be transferred free of all liens, pledges and encumbrances, the Company elected to terminate its credit facility. During October 1995, the Company completed the private placement to an institutional investor of $20,000,000 aggregate principal amount of 10% Convertible Subordinated Notes (the "Notes"), due October 15, 1998. The Notes were convertible at the option of the holder into shares of Common Stock of the Company at a conversion price of $6.00 per share, a premium to the market price of the Company's Common Stock at the time of issuance. The Notes are senior to the Debentures and are collateralized by substantially all of the assets of the Company. During March 1996, the Company obtained the required consent of the holder of the Notes to allow consummation of the Sale and in consideration for such consent, agreed to repay the Notes on July 2, 1996 and issued warrants to purchase 1,500,000 shares of the Company's Common Stock at a price of $4 per share. Accordingly, the Company has recorded a charge of $1,800,000 for the warrants against the proceeds of the Sale in the Statement of Operations for the 1996 transition period. On April 5, 1996 the Company repaid $10,000,000 of the Notes, and on July 1, 1996 the Company paid the remaining $10,000,000 of the Notes. Interest on the Notes was payable semiannually on April 15 and October 15. On February 16, 1996, the Company entered into a $10 Million Facility Agreement (the "Facility") with MPL for the purpose of providing additional liquidity to the Company to pay accounts payable between the date of the Facility and March 29, 1996. As of March 29, 1996, the Company had borrowed $10 million under the Facility and all amounts outstanding under the Facility were repaid as of that date. The Facility was then canceled. Advances bore interest at U.S. dollar prime rate plus 1%. In consideration of the Sale on March 29, 1996, the Company received total cash consideration of approximately $54 million. $39.7 million of such cash consideration was received as of the March 29, 1996 closing, $13 million in cash consideration was received on June 6, 1996, and a final payment of $1 million, which will be held in escrow and is subject to certain conditions, is expected to be received in early August. In addition, the Company expects to liquidate the trade accounts receivable related to the Drive Business but retained by the Company at closing of the Sale. Market for StreamLogic Common Stock As of March 29, 1996 the Company's net tangible assets did not meet the criteria for continued inclusion on the Nasdaq National Market System. If the Company's Common Stock is no longer approved for inclusion on the Nasdaq National Market System, and the Company cannot obtain listing elsewhere, trading, if any, in the 16 Company's Common Stock may thereafter be conducted in the over-the-counter market and its stock quoted in the so-called "pink sheets" or, if then available, the "OTC Bulletin Board Service." As a result, it could be more difficult to trade, or to obtain accurate quotations as to the value of, the Company's Common Stock and the spread between the "bid" and "ask" prices for the Common Stock could materially increase. However, as of June 14, 1996 the Company's Common Stock was still included on the Nasdaq National Market System. The Company has undertaken discussions with Nasdaq seeking the continued inclusion of the Company's Common Stock on the Nasdaq National Market System based on the Company's plans for increasing its net tangible assets, however there can be no assurance that the Common Stock will continue to be approved for inclusion. StreamLogic Strategic and Financial Alternatives Although the Company anticipates operating losses in the near term, the Company is considering and will consider strategic and financial alternatives to improve its results of operations, cash flows and net worth, including restructuring of debt, acquisitions and other alternatives. Management believes its cash, cash equivalents, short term investments and other working capital will be sufficient to fund operations over the next year. 17 STREAMLOGIC CORPORATION ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Report of Ernst & Young LLP, Independent Auditors......................... 19 Consolidated Statements of Operations for the three-months ended March 29, 1996 and March 31, 1995 (unaudited) and the years ended December 29, 1995, December 30, 1994 and December 31, 1993............................ 20 Consolidated Balance Sheets as of March 29, 1996, December 29, 1995 and December 30, 1994........................................................ 21 Consolidated Statements of Cash Flows for the three-months ended March 29, 1996 and March 31, 1995 (unaudited) and the years ended December 29, 1995, December 30, 1994 and December 31, 1993............................ 22 Consolidated Statements of Shareholders' Equity (Deficit) for the three months ended March 29, 1996 and the three years ended December 29, 1995.. 23 Notes to Consolidated Financial Statements................................ 24
18 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Shareholders StreamLogic Corporation We have audited the accompanying consolidated balance sheets of StreamLogic Corporation as of March 29, 1996, December 29, 1995 and December 30, 1994, and the related consolidated statements of operations, shareholders' equity (deficit), and cash flows for the three months ended March 29, 1996 and each of the three years in the period ended December 29, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of StreamLogic Corporation at March 29, 1996, December 29, 1995 and December 30, 1994, and the consolidated results of its operations and its cash flows for the three months ended March 29, 1996 and each of the three years in the period ended December 29, 1995, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Los Angeles, California June 28, 1996 19 STREAMLOGIC CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED FISCAL YEAR ENDED ---------------------- -------------------------------------- MARCH 29, MARCH 31, DECEMBER 29, DECEMBER 30, DECEMBER 31, 1996 1995 1995 1994 1993 --------- ----------- ------------ ------------ ------------ (UNAUDITED) Net sales............... $ 24,408 $ 40,899 $ 211,264 $ 346,314 $ 382,926 Cost of sales........... 40,799 49,768 205,628 286,856 315,436 -------- -------- --------- --------- --------- Gross profit (loss)..... (16,391) (8,869) 5,636 59,458 67,490 Operating expenses: Research and develop- ment................. 8,874 13,427 42,469 43,648 36,112 Selling, general and administrative....... 8,836 13,171 44,274 43,500 41,906 Restructuring charge.. -- -- -- -- 5,496 -------- -------- --------- --------- --------- Total operating ex- penses............. 17,710 26,598 86,743 87,148 83,514 -------- -------- --------- --------- --------- Loss from operations.... (34,101) (35,467) (81,107) (27,690) (16,024) -------- -------- --------- --------- --------- Interest income....... 173 547 1,719 2,090 2,335 Interest expense...... (2,027) (1,333) (5,961) (5,075) (5,093) Other expense......... -- -- -- -- (1,130) -------- -------- --------- --------- --------- Loss before income taxes.................. (35,955) (36,253) (85,349) (30,675) (19,912) Income tax provision (benefit).............. 252 (1,166) (1,061) -- 4 -------- -------- --------- --------- --------- Net loss................ $(36,207) $(35,087) $ (84,288) $ (30,675) $ (19,916) ======== ======== ========= ========= ========= Net loss per share...... $ (2.32) $ (2.29) $ (5.46) $ (2.03) $ (1.34) ======== ======== ========= ========= ========= Weighted average common outstanding............ 15,580 15,311 15,445 15,100 14,835 ======== ======== ========= ========= =========
See accompanying notes. 20 STREAMLOGIC CORPORATION CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
MARCH 29, DECEMBER 29, DECEMBER 30, 1996 1995 1994 --------- ------------ ------------ ASSETS Current assets: Cash, cash equivalents and short-term investments........................... $ 40,477 $ 27,896 $ 63,216 Accounts receivable, less allowance for doubtful accounts and customer returns of $5,667 ($5,427 in 1995 and $4,455 in 1994).............................. 19,139 33,249 61,724 Receivable from Singapore Technologies. 13,966 -- -- Inventories............................ 10,022 59,777 56,746 Other current assets................... 1,033 3,433 6,405 --------- --------- -------- Total current assets................. 84,637 124,355 188,091 Property, plant and equipment, at cost: Land................................... 986 1,675 1,675 Buildings and improvements............. 6,632 22,520 22,246 Machinery and equipment................ 18,029 87,094 85,479 Construction in progress............... 238 24,400 3,524 --------- --------- -------- 25,885 135,689 112,924 Less accumulated depreciation and amor- tization.............................. 20,035 81,544 68,672 --------- --------- -------- 5,850 54,145 44,252 Other assets............................. 1,896 1,893 1,572 --------- --------- -------- $ 92,383 $ 180,393 $233,915 ========= ========= ======== LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current liabilities: 10% Subordinated Notes................. $ 20,000 $ -- $ -- Current maturities of long term debt... 3,750 2,687 -- Accounts payable....................... 8,610 34,209 46,388 Other accrued liabilities.............. 14,137 21,502 20,681 --------- --------- -------- Total current liabilities................ 46,497 58,398 67,069 Term Loan Facility....................... -- 18,102 -- 10% Subordinated Notes................... -- 20,000 -- 6% Convertible Subordinated Debentures due 2012................................ 71,250 75,000 75,000 Deferred income taxes.................... 1,720 1,720 2,216 Commitments and contingencies Shareholders' equity (deficit): Preferred stock, $1.00 par value; 2,000,000 shares authorized, none issued................................ -- -- -- Common stock, $1.00 par value, 50,000,000 shares authorized; 15,580,413 shares issued and outstand- ing (15,580,413 in 1995 and 15,266,440 in 1994).............................. 15,580 15,580 15,266 Additional paid-in capital............. 112,330 110,380 108,863 Accumulated deficit.................... (154,994) (118,787) (34,499) --------- --------- -------- Total shareholders' equity (deficit). (27,084) 7,173 89,630 --------- --------- -------- $ 92,383 $ 180,393 $233,915 ========= ========= ========
See accompanying notes. 21 STREAMLOGIC CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
THREE MONTHS ENDED FISCAL YEAR ENDED ---------------------- -------------------------------------- MARCH 29, MARCH 31, DECEMBER 29, DECEMBER 30, DECEMBER 31, 1996 1995 1995 1994 1993 --------- ----------- ------------ ------------ ------------ (UNAUDITED) Cash flows from operating activities: Net loss............... $(36,207) $(35,087) $(84,288) $(30,675) $(19,916) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization......... 5,031 5,393 20,679 23,932 25,364 (Gain) loss on disposition of property, plant and equipment............ (1,023) (12) (51) (182) 54 Deferred income taxes. -- (496) (496) (201) (3,000) Increase (decrease) from changes in: Accounts receivable.... 14,110 34,440 28,475 (13,493) 1,760 Inventories............ (3,204) (8,739) (3,031) 2,931 5,934 Other current assets... (339) 2,281 2,972 (2,016) (896) Accounts payable and other accrued liabilities........... 9,283 (9,948) (11,358) 12,644 12,240 Other assets........... (477) (325) (393) 1,226 (432) -------- -------- -------- -------- -------- Net cash provided by (used in) operating activities............. (12,826) (12,493) (47,491) (5,834) 21,108 -------- -------- -------- -------- -------- Cash flows from investing activities: Proceeds from sale of Drive Business........ 39,719 -- -- -- -- Proceeds from sale of equipment............. -- 35 51 254 57 Additions to property, plant and equipment... (14,803) (6,132) (30,500) (19,704) (22,766) Net change in short- term investments...... (11,792) 14,159 12,254 12,186 1,826 -------- -------- -------- -------- -------- Net cash used in investing activities... 13,124 8,062 (18,195) (7,264) (20,883) -------- -------- -------- -------- -------- Cash flows from financing activities: Proceeds from Term Loan Facility.............. 491 2,269 20,789 -- -- Proceeds from 10% Subordinated Notes.... -- -- 20,000 -- -- Proceeds from sale of common stock, net..... -- 401 1,831 1,949 2,015 Payment on capital lease obligation...... -- -- -- (231) (534) -------- -------- -------- -------- -------- Net cash provided by financing activities... 491 2,670 42,620 1,718 1,481 -------- -------- -------- -------- -------- Net increase (decrease) in cash and equivalents............ 789 (1,761) (23,066) (11,380) 1,706 Cash and equivalents at beginning of period.... 14,654 37,720 37,720 49,100 47,394 -------- -------- -------- -------- -------- Cash and equivalents at end of period.......... 15,443 35,959 14,654 37,720 49,100 Short term investments.. 25,034 11,337 13,242 25,496 37,682 -------- -------- -------- -------- -------- Total cash, cash equivalents and short- term investments....... $ 40,477 $ 47,296 $ 27,896 $ 63,216 $ 86,782 ======== ======== ======== ======== ======== Supplemental cash flow information: Interest payments...... $ 2,652 $ 2,439 $ 5,791 $ 5,076 $ 4,821 Tax payments (recoveries).......... $ 72 $ (963) $ (460) $ 2,964 $ 278 Non-cash investing and financing activities: Note receivable from sale of Drive Business.............. $ 13,966 $ -- $ -- $ -- $ --
See accompanying notes. 22 STREAMLOGIC CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) FOR THE THREE YEARS ENDED DECEMBER 29, 1995 AND THE THREE MONTH PERIOD ENDED MARCH 29, 1996 (IN THOUSANDS)
NUMBER OF ADDITIONAL RETAINED COMMON COMMON PAID-IN EARNINGS SHARES STOCK CAPITAL (DEFICIT) TOTAL --------- ------- ---------- --------- -------- Balances at December 25, 1992........................ 14,532 $14,532 $105,633 $ 16,092 $136,257 Common stock sold for cash. 356 356 1,659 -- 2,015 Net Loss................... -- -- -- (19,916) (19,916) ------ ------- -------- --------- -------- Balances at December 31, 1993........................ 14,888 14,888 107,292 (3,824) 118,356 Common stock sold for cash. 378 378 1,571 -- 1,949 Net Loss................... -- -- -- (30,675) (30,675) ------ ------- -------- --------- -------- Balances at December 30, 1994........................ 15,266 15,266 108,863 (34,499) 89,630 Common stock sold for cash. 314 314 1,517 -- 1,831 Net Loss................... -- -- -- (84,288) (84,288) ------ ------- -------- --------- -------- Balances at December 29, 1995........................ 15,580 $15,580 $110,380 $(118,787) $7,173 Warrants granted........... -- -- 1,950 -- 1,950 Net Loss................... -- -- -- (36,207) (36,207) ------ ------- -------- --------- -------- Balances at March 29, 1996... 15,580 $15,580 $112,330 $(154,994) $(27,084) ====== ======= ======== ========= ========
See accompanying notes. 23 STREAMLOGIC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTH PERIOD ENDED MARCH 29, 1996 AND THE THREE YEARS ENDED DECEMBER 29, 1995 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BUSINESS INFORMATION RECENT DEVELOPMENTS As further described in Note 10, on January 24, 1996, the Company entered into a definitive agreement (the "Purchase Agreement") with ST Chatsworth Pte Ltd, a Singapore corporation ("MPL"), and a wholly-owned subsidiary of Singapore Technologies Pte Ltd, a Singapore corporation ("ST"), to sell substantially all of the Company's assets (other than cash and accounts receivable) related to the Company's hard disk drive business to MPL (the "Sale"). On March 29, 1996, the Company consummated the Sale. Accordingly, the accompanying balance sheet as of March 29, 1996 reflects the Sale and includes a receivable from ST for the remaining amount of the Sale proceeds. However, the accompanying statements of operations and cash flows for the three months ended March 29, 1996 reflect operating results and cash flows of both the hard disk drive business and the remaining systems business (see Note 10). BASIS OF PRESENTATION Although the Company anticipates operating losses in the near term, the Company is considering and will consider strategic and financial alternatives to improve its results of operations, cash flows and net worth, including restructuring of debt, acquisitions and other alternatives. Management believes its cash, cash equivalents, short term investments and other working capital will be sufficient to fund operations over the next year. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Intercompany accounts and transactions have been eliminated. On May 13, 1996 the Company elected to change its fiscal year from the last Friday in December to the last Friday in March, beginning with March 1996. The three-month periods ended March 29, 1996 (the "1996 transition period") and March 31, 1995 each had 13 weeks. Fiscal years 1995 and 1994 were fifty-two week years versus a fifty-three week 1993. SALES StreamLogic is a designer and manufacturer of information storage and video systems and, through March 29, 1996, high capacity disk drives,. The Company sells these products and systems directly to original equipment manufacturers ("OEMs") and systems integrators and through independent distributors and value added resellers ("VARs") for resale to end users. The Company generally warrants its products against defects for periods from one to five years. The Company provides for estimated future product warranty costs when products are shipped. In addition, the Company performs ongoing credit evaluations of its customers' financial condition, and generally requires no collateral from its customers. Trade credit is generally granted to its customers, typically on net 30 day terms. Historically, the Company has not experienced significant bad debt write-offs. The Company has policies and/or contractual agreements which allow distributors to receive price protection credit under certain circumstances when the Company lowers its sales prices. In addition, the Company permits customers to return products under certain circumstances. The Company makes a provision for the estimated amount of price protection credits and for product returns that may occur under these programs and contracts in the period of sale. Sales, most of which are denominated in U.S. dollars, are recorded upon shipment. No customer accounted for more than 10% of total sales during the 1996 transition period, or 1995, 1994 or 1993. DEPENDENCE ON SUPPLIER Effective March 29, 1996 the Company and MPL have entered into an OEM supply agreement. Among other things, the OEM Supply Agreement allows StreamLogic to buy at prices equal to or slightly lower than the most favored OEM customer of MPL. StreamLogic must offer all its disk drive business and requirements to 24 STREAMLOGIC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) MPL on a right-of-first-refusal basis, subject to the ability of MPL to meet certain delivery and other standards. The agreement has an initial two-year term, after which it may be renewed annually by mutual agreement. Also effective March 29, 1996, the Company entered into a non-exclusive European Distribution Handling Agreement with MPL, under which MPL provides distribution services to the Company in Europe and other locations specified in such agreement. FOREIGN EXCHANGE CONTRACTS The functional currency of the Company's Singapore and Thailand subsidiaries is the U.S. dollar. The Company enters into foreign exchange contracts to minimize the effects of foreign currency fluctuations related to certain known local expenditures for operations and for the new facility while under construction in Singapore. These foreign exchange contracts hedged approximately $2.3 million, $17.2 million and $19.9 million of transaction exposures as of March 29, 1996, December 29, 1995 and December 30, 1994, respectively. There were no significant deferred unrealized gains or losses at March 29, 1996, December 29, 1995 or December 30, 1994. CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Short-term investments consist primarily of commercial paper, certificates of deposit, and U.S. government agency securities and are considered available for sale under Statement of Financial Accounting Standards No. 115. These investments generally mature within six months and are carried at cost which approximates fair values. INVENTORIES Inventories are stated at the lower of standard cost, which approximates first-in, first-out, or market.
MARCH 29, DECEMBER 29, DECEMBER 30, 1996 1995 1994 --------- ------------ ------------ (IN THOUSANDS) Raw materials and purchased parts.... $ 4,564 $20,207 $18,634 Work-in-process...................... 1,487 23,289 20,771 Finished goods....................... 3,971 16,281 17,341 ------- ------- ------- $10,022 $59,777 $56,746 ======= ======= =======
DEPRECIATION AND AMORTIZATION Depreciation and amortization are provided on the straight-line method over the estimated useful life of the assets or term of related lease, whichever is shorter; for buildings and improvements, 10 to 30 years; machinery and equipment, 3 to 5 years. 25 STREAMLOGIC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) OTHER ACCRUED LIABILITIES Other accrued liabilities are comprised of the following:
MARCH 29, DECEMBER 29, DECEMBER 30, 1996 1995 1994 --------- ------------ ------------ (IN THOUSANDS) Accrued salaries and wages............ $ 3,636 $ 5,956 $ 5,622 Accrued warranty...................... 2,000 8,006 8,614 Income taxes payable.................. 394 137 243 Other................................. 8,107 7,403 6,202 ------- ------- ------- $14,137 $21,502 $20,681 ======= ======= =======
ADVERTISING EXPENSE The cost of advertising is expensed as incurred. The Company incurred $1,515,000, $4,606,000, $4,317,000 and $4,799,000 in advertising costs during the 1996 transition period and the 1995, 1994 and 1993 fiscal years, respectively. RESTRUCTURING CHARGE In the third quarter of 1993, the Company recorded a restructuring charge of $5.5 million. This charge related primarily to separation costs recognized in connection with a reduction in workforce and a write-down of certain assets which were no longer in use due to changes in the Company's production requirements and new product specifications. All related expenditures were completed in fiscal year 1994. INCOME TAXES The Company applies an asset and liability approach in accounting for income taxes. Through December 29, 1995, Federal taxes were not provided currently on undistributed foreign earnings since it was the Company's intention that these earnings be reinvested indefinitely in such subsidiaries, or remitted in a manner which would not result in a Federal tax liability. During the 1996 transition period, the Company provided for Federal taxes on such undistributed foreign earnings since such earnings would be remitted due to the Sale. PER SHARE INFORMATION Loss per share is computed by dividing net loss by the weighted average number of shares of common stock. Applicable common stock equivalents outstanding during the period have not been considered as their effect is antidilutive. Primary and fully diluted earnings per share are the same. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 121 In March 1995, the Financial Accounting Standards Board issued Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the 26 STREAMLOGIC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. Statement 121 also addresses the accounting for long-lived assets that are expected to be disposed of. The Company has adopted Statement 121 in the 1996 transition period and the effect of its adoption was not material. 2. INCOME TAXES The provision (credit) for income taxes is composed of the following:
TRANSITION FISCAL YEAR ENDED ---------- -------------------------------------- MARCH 9, DECEMBER 29, DECEMBER 30, DECEMBER 31, 1996 1995 1994 1993 ---------- ------------ ------------ ------------ (IN THOUSANDS) Current Federal............... $242 $ -- $-- $(105) State................. 2 82 (52) 73 Foreign............... 8 (1,143) 52 36 ---- ------- ---- ----- Total................ $252 $(1,061) $-- $ 4 ==== ======= ==== =====
Deferred income taxes result from differences in the timing of the recognition of expense and income items for tax and financial statement purposes. During 1993 $3,000,000 was reclassified from deferred income taxes to current income taxes payable for payments during 1994 for years covering 1986 through 1990. Deferred tax assets and liabilities are comprised of the following:
MARCH 29, DECEMBER 29, DECEMBER 30, 1996 1995 1994 ------- ------------ ------------ (IN THOUSANDS) Deferred tax asset: Reserves not currently tax deductible... $ 5,747 $ 5,371 $ 4,639 Excess of book over tax depreciation.... 600 2,130 1,798 Net operating loss...................... 50,179 46,641 31,996 Income tax credits...................... 9,545 9,668 7,514 Other................................... 673 768 862 ------- -------- -------- Total before valuation allowance....... 66,744 64,578 46,809 Valuation allowance..................... (58,916) (63,756) (45,248) ------- -------- -------- 7,828 822 1,561 ------- -------- -------- Deferred tax liability: Reserves not currently tax deductible... -- -- (2,216) Foreign operations...................... (7,468) -- -- State income taxes...................... (1,962) (2,275) (1,327) Other................................... (118) (267) (234) ------- -------- -------- (9,548) (2,542) (3,777) ------- -------- -------- Deferred tax liability, net............. $(1,720) $ (1,720) $ (2,216) ======= ======== ========
The Company has determined a valuation allowance is required for the deferred tax assets due to the uncertainty of ultimately realizing certain tax benefits. The change in the valuation allowance was a result of current year losses and settlement of prior year tax audits. 27 STREAMLOGIC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The following table reconciles the provision for income taxes to the statutory federal income tax rate of 35%:
TRANSITION 1996 1995 1994 1993 ---------- -------- -------- ------- (IN THOUSANDS) Tax benefit at statutory rate.......... $(12,584) $(29,872) $(10,736) $(6,969) Increases (decreases) related to: Federal alternative minimum tax on foreign earnings..................... 242 -- -- -- Losses without current benefit (benefit of loss carryforwards)...... (6,312) 15,906 13,267 1,510 State income tax expense (benefit) net of federal income tax................ 1 53 (34) 48 Foreign operations.................... -- (5,671) (10,234) (5,090) Repatriation of foreign earnings...... 18,760 18,498 7,700 10,500 Other, net............................ 145 25 37 5 -------- -------- -------- ------- $ 252 $ (1,061) $ 0 $ 4 ======== ======== ======== =======
Income from the Company's Singapore and Thailand subsidiaries was exempt from income taxes in those countries through August 2004 and December 1993, respectively. Income (loss) from these operations for the periods under exemption was $(6,183,000) in the 1996 transition period, $(15,310,000) in 1995, $27,411,000 in 1994 and $17,182,000 in 1993. A net operating loss of approximately $124,162,000 is available to be carried forward to the years 2004-2011. General business tax credit carryforwards of approximately $8,562,000, expiring between 2000 and 2009, are also available to reduce future federal income taxes. However, under Internal Revenue Code Sections 382 and 383, the amount of the operating loss and general business credit carryforwards that can be used annually may be limited due to certain changes in ownership. The potential issuance of Common Stock in connection with the Bond Agreement discussed in Note 11, or other trading activities, may create such a change in ownership. 3. CREDIT FACILITY AGREEMENT During March 1996, after evaluating the costs of maintaining the Company's $25 million credit facility and because the Agreement required assets to be transferred free of all liens, pledges and encumbrances, the Company elected to terminate its credit facility. 4. LEASE COMMITMENTS Minimum annual lease commitments at March 29, 1996 under noncancellable operating leases, principally for operating facilities, are payable as follows:
(IN THOUSANDS) -------------- 1997....................................................... $1,122 1998....................................................... 111 1999....................................................... 98 2000....................................................... 98 2001....................................................... 98 Thereafter................................................. 1,014 ------ Total future minimum lease payments.................... $2,541 ======
28 STREAMLOGIC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Rent expense amounted to $1,101,000 in the 1996 transition period, $4,923,000 in 1995, $4,182,000 in 1994 and $4,643,000 in 1993. 5. LONG TERM DEBT Term Loan Facility In December 1994, Singapore Technologies Construction Pte Ltd. ("ST Construction"), a subsidiary of ST, was hired by the Company as the general contractor for construction of its new factory in Singapore. During the third quarter of 1995, the Company refinanced, with ST Construction together with ST Capital Ltd (another subsidiary of ST) as lenders, its existing term loan facility used to finance the new factory with a new $21.5 million loan facility (the "Loan Facility"). On March 29, 1996 the Loan Facility was retired in connection with the Sale. 10% Subordinated Notes During October 1995, the Company completed the private placement to an institutional investor of $20,000,000 aggregate principal amount of 10% Convertible Subordinated Notes (the "Notes"), due October 15, 1998. The Notes are convertible at the option of the holder into shares of Common Stock of the Company at a conversion price of $6.00 per share, a premium to the market price of the Company's Common Stock at the time of issuance. The Notes are senior to the Company's existing 6% Convertible Subordinated Debentures due 2012 and are collateralized by substantially all of the assets of the Company. During March 1996, the Company obtained the required consent of the holder of the Notes to allow consummation of the Sale and in consideration for such consent, agreed to repay the Notes on June 28, 1996 and issued warrants to purchase 1,500,000 shares of the Company's Common Stock at a price of $4 per share. Accordingly, the Company has recorded a charge of $1,800,000, representing the estimated fair market value, for the warrants against the proceeds of the Sale in the Statement of Operations for the 1996 transition period. On April 5, 1996 the Company repaid $10,000,000 of the Notes. Interest on the Notes is payable semiannually on April 15 and October 15. Interest expense amounted to $500,000 in the 1996 transition period and $444,000 in 1995. Because of the recent agreement to repay the Notes and issue the Warrants, the fair market value of the Notes approximates carrying value as of March 29, 1996. 6% Convertible Subordinated Debentures In March 1987, the Company issued $75,000,000 principal amount of 6% Convertible Subordinated Debentures due 2012 (the "Debentures"). The Debentures are convertible into common stock at a price of $48.50 at any time prior to redemption or maturity (1,546,000 shares of common stock have been reserved for issuance upon conversion.) Mandatory annual sinking fund payments of 5% of the aggregate principal amount of the Debentures issued will be made on each March 15, commencing March 15, 1997. Debentures converted to common stock or reacquired or otherwise redeemed by the Company may be used to reduce the amount of any sinking fund payment. The Debentures may be redeemed early, at the Company's option, upon the payment of a premium. Interest on the debentures is payable semi-annually on March 15 and September 15. Interest expense amounted to $1,125,000 in the 1996 transition period and $4,500,000 in the 1995, 1994 and 1993 fiscal years. The fair market value of the Debentures using over-the-counter market prices, was approximately $34.1 million at March 29, 1996. Maturities and sinking fund requirements of long-term debt are $3,750,000 in each of the five years succeeding March 29, 1996. During the 1996 transition period and the 1995, 1994 and 1993 fiscal years interest paid totaled $2,652,000, $5,791,000, $5,076,000 and $4,821,000 respectively, of which $456,000 and $347,000 was capitalized in the 1996 transition period and the 1995 fiscal year, respectively, as part of the cost of the Company's new factory in Singapore. 29 STREAMLOGIC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 6. CAPITAL STOCK Under the Company's various stock option plans, options may be granted at prices equal to fair market value at the date of grant. Options for key employees and officers generally become exercisable in equal annual amounts over five years commencing one year from the date of grant, and expire five years from the date of grant. Options for directors are exercisable over three years. At March 29, 1996, there were options for 970,697 shares available for future option grants. There are currently 432 employees participating in the various plans. Expiration dates for all options range from 1996 to 2000. A summary of certain information with respect to options under the Plans follows:
PERIODS ENDED -------------------------------------------------- MARCH 29, DECEMBER 29, DECEMBER 30, DECEMBER 31, 1996 1995 1994 1993 ---------- ------------ ------------ ------------ Options outstanding, beginning of period........ 1,624,160 1,265,470 1,316,970 1,160,444 Options granted............. -- 1,100,100 476,500 552,000 Options exercised........... -- (91,444) (166,750) (176,326) Weighted average exercise price...................... -- $ 6.39 $ 4.50 $ 5.72 Options canceled............ (893,893) (649,966) (361,250) (219,148) ---------- ---------- ---------- ---------- Options outstanding, end of period..................... 730,267 1,624,160 1,265,470 1,316,970 ========== ========== ========== ========== Weighted average price...... $ 5.86 $ 6.14 $ 7.15 $ 7.15 ========== ========== ========== ========== Exercisable................. 178,567 248,787 381,241 458,638 ========== ========== ========== ==========
The Company also has an employee stock purchase plan under Section 423 of the Internal Revenue Code, with 1,400,000 shares of common stock authorized to be issued. All full time employees are eligible to participate through payroll deductions of up to 10% of their compensation. Participants may, at their option, purchase common stock from the Company at the lower of 85% of the fair market value of the common stock at either the beginning or end of each one year option period. During 1995, 222,095 shares were issued pursuant to this plan at prices ranging from $5.53 to $6.16. During 1994, 207,845 shares were issued pursuant to this plan at a price of $5.66, and in 1993, 178,898 shares were issued pursuant to this plan at a price of $5.42. As of March 29, 1996, 303,848 shares were available for issuance under this plan. On March 29, 1996, in partial consideration for the required consent of the holder of the Notes to allow consummation of the Sale, the Company issued warrants to purchase 1,500,000 shares of the Company's common stock at a price of $4 per share. Such warrants had an estimated fair market value of $1,800,000 at March 29, 1996 and will expire on March 29, 1998. In addition, warrants to purchase 80,081 shares of the Company's common stock at a price of $5 were issued to the Company's investment banker in partial consideration for work in connection with the Sale. Such warrants had an estimated fair market value of $150,000 at issuance and will expire on March 28, 1997. Accordingly, the Company has recorded a charge of $1,950,000 for the warrants in the Statement of Operations for the 1996 transition period. The Board of Directors of the Company declared a dividend distribution of one Right for each share of common stock of the Company outstanding at the close of business on June 2, 1989. When exercisable, each Right entitles the registered holder to purchase from the Company one share of common stock at a price of $40.00 per share, subject to adjustment. Initially, the Rights attach to all outstanding shares of common stock, and no separate Rights Certificates will be distributed. The Rights will become exercisable and will detach from the common stock in the event any individual or group acquires 20% or more of the Company's common stock, or announces a tender or exchange offer, other than through conversion of the Notes or any warrants, which, if consummated, would result in that person or group owning at least 30% of the Company's common stock. If an 30 STREAMLOGIC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) individual or group acquires 20% or more of the Company's common stock (except pursuant to certain cash tender offers for all of the Company's common stock), each Right will entitle the holder of a Right, other than Rights that are or were acquired or beneficially owned by the 20% stockholder (which rights will thereafter be void) to purchase, at the Right's then current exercise price, the Company's common stock in an amount having market value equal to twice the exercise price. Similarly, with certain exceptions, if the Company merges or consolidates with or sells 20% or more of its assets or earning power to another person, each Right then will entitle the holder to purchase, at the Right's then current exercise price, the stock of the acquiring company in an amount having a market value equal to twice the exercise price. The Rights do not have voting or dividend rights, and, until they become exercisable, have no dilutive effect on the earnings of the Company. The Company may redeem the rights at $0.01 per Right at any time on or prior to the tenth day after acquisition by a person or group of 20% or more of the Company's outstanding common stock. The Rights will expire on May 18, 1999, unless earlier redeemed. No dividends were declared by the Company during the five-year period ended March 29, 1996. 7. COMMITMENTS AND CONTINGENCIES In the third quarter of 1992, the Company purchased an equity interest of approximately 27% in Tulip Memory Systems, Inc. (TMS), a start-up company formed to develop substrates which are to be used in the manufacture of computer disk drives. During 1994, the Company increased its ownership to approximately 60%, pending anticipated outside investment. Operating expenses attributable to TMS are included in the financial results of the Company. In connection with its original investment, StreamLogic agreed to guarantee the obligations of TMS to pay the acquisition cost of equipment. The cost of such guaranty obligation was recorded in the Company' 1995 Statement of Operations. In March 1996, in order to consummate the Sale, the Company paid its $1.3 million guaranty obligation under the agreement. At March 29, 1996, the Company had letters of credit outstanding totaling approximately $4.8 million, which guarantee various trade activities. These letters of credit are secured by pledges of cash. In addition, the Company is involved in routine legal matters and contingencies in the ordinary course of business which management believes will not have a material effect upon the Company's financial position. 31 STREAMLOGIC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 8. GEOGRAPHIC INFORMATION The following summarizes the Company's sales, income (loss) before income taxes, and assets by geographic area. Foreign sales originate primarily from the Company's Singapore location. The sales described below represent the geographic origination of such sales. Export sales (sales originating in the United States to customers in foreign countries), were less than 10% of total sales in each of the 1996 transition period and the 1995, 1994 and 1993 fiscal years. Sales to affiliates are at arms-length prices.
TRANSITION FISCAL YEARS ENDED ---------- ------------------------------- 1996 1995 1994 1993 ---------- --------- --------- --------- (IN THOUSANDS) Customer sales: Domestic......................... $ 5,986 $ 25,149 $ 63,892 $ 128,781 Foreign.......................... 18,422 186,115 282,422 254,145 Affiliate sales: Domestic......................... 11,259 64,309 49,851 55,006 Foreign.......................... 16,600 110,812 178,881 234,477 Eliminations..................... (27,859) (175,121) (228,732) (289,483) -------- --------- --------- --------- $ 24,408 $ 211,264 $ 346,314 $ 382,926 ======== ========= ========= ========= Income (loss) before income taxes: Domestic......................... $(26,994) $ (66,406) $ (58,609) $ (34,425) Foreign.......................... (8,961) (18,943) 27,934 14,513 -------- --------- --------- --------- $(35,955) $ (85,349) $ (30,675) $ (19,912) ======== ========= ========= ========= Assets: Domestic......................... $ 70,097 $ 20,732 $ 66,063 $ 74,520 Foreign.......................... 22,286 159,661 167,852 175,909 -------- --------- --------- --------- $ 92,383 $ 180,393 $ 233,915 $ 250,429 ======== ========= ========= =========
9. COMPARATIVE QUARTERLY FINANCIAL SUMMARY (UNAUDITED)
QUARTERS ---------------------------------------------------- FISCAL 1995 FIRST SECOND THIRD FOURTH YEAR - ----------- -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net sales............... $ 40,899 $ 70,076 $ 58,785 $ 41,504 $211,264 Gross profit (loss)..... (8,869) 15,369 2,491 (3,355) 5,636 Loss before income tax- es..................... (36,253) (6,323) (17,445) (25,328) (85,349) Net loss................ (35,087) (6,344) (17,481) (25,376) (84,288) Loss per share.......... (2.29) (.41) (1.12) (1.63) (5.46) QUARTERS ---------------------------------------------------- FISCAL 1994 FIRST SECOND THIRD FOURTH YEAR - ----------- -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net sales............... $83,658 $ 75,761 $ 79,285 $107,610 $346,314 Gross profit............ 12,296 7,245 11,446 28,471 59,458 Income (loss) before in- come taxes............. (9,760) (14,793) (10,948) 4,826 (30,675) Net income (loss)....... (9,760) (14,793) (10,948) 4,826 (30,675) Earnings (loss) per share.................. (.65) (.99) (.72) .31 (2.03)
32 STREAMLOGIC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 10. SALE OF THE DISK DRIVE BUSINESS On January 24, 1996, the Company entered into a definitive agreement (the "Purchase Agreement") with ST Chatsworth Pte Ltd, a Singapore corporation ("MPL"), and a wholly-owned subsidiary of Singapore Technologies Pte Ltd, a Singapore corporation ("ST"), to sell substantially all of the assets, other than cash and accounts receivable, of the Company's hard disk drive business (the "Drive Business") including the name "Micropolis," certain other intangibles, the capital stock of the Company's subsidiary Micropolis Corporation (Thailand) Ltd. and either the capital stock or assets of five of the Company's European and Asian sales and marketing subsidiaries (such assets, collectively, the "Subject Assets") to MPL, and MPL assumed certain of the Company's liabilities relating to the Drive Business (the "Sale"). The Sale was subject to stockholder approval and such approval was received. In consideration of the Sale on March 29, 1996, the Company received total cash consideration of approximately $54 million. $39.7 million of such cash consideration was received as of the March 29, 1996 closing, $13 million in cash consideration was received on June 6, 1996, and a final payment of $1 million, which will be held in escrow and is subject to certain conditions, is expected to be received in early August. The net gain on the Sale was not significant to the 1996 transition period Statement of Operations. The following unaudited pro forma condensed consolidated financial information for the three months ended March 29, 1996 and March 31, 1995 and the year ended December 31, 1995 has been prepared to illustrate the effect of the Sale as though the Sale had occurred on December 30, 1995, December 31, 1994 and December 31, 1994, respectively. The unaudited pro forma condensed consolidated financial information is presented for illustrative purposes only and is not necessarily indicative of the consolidated results of operations of StreamLogic Corporation that would have been reported had the Sale occurred on the dates indicated, nor does it represent a forecast of the consolidated results of operations of StreamLogic Corporation for any future period. Furthermore, no effect has been given in the condensed consolidated financial information for operating benefits that may have been realized by virtue of the Sale and no effect has been given for any additional expense control or restructuring activities which the Company may have undertaken with respect to the remaining business. The unaudited pro forma condensed consolidated financial information should be read in conjunction with the historical consolidated financial statements of StreamLogic Corporation, which are included herein.
THREE MONTH PERIOD ENDED YEAR ENDED --------------------- ------------ MARCH 29, MARCH 31, DECEMBER 29, 1996 1995 1995 --------- ----------- ------------ (UNAUDITED) Net sales.................................... $ 6,738 $ 9,527 $ 39,343 Gross profit(1).............................. 1,048 2,642 7,679 Net loss(2).................................. (6,533) (5,349) (22,805) Loss per share............................... (.35) (.35) (1.48) ======= ======= ======== Weighted average shares outstanding.......... 15,580 15,311 15,445 ======= ======= ========
- -------- (1) The Company and MPL have entered into an OEM supply agreement. Among other things, the OEM Supply Agreement allows StreamLogic to buy at prices equal to or slightly lower than the most favored OEM customer of MPL. StreamLogic must offer all its disk drive business and requirements to MPL on a right-of-first-refusal basis, subject to the ability of MPL to meet certain delivery and other standards. The agreement has an initial two- year term, after which it may be renewed annually by mutual agreement. The pro forma adjustment incorporates the provisions contained in the agreement. (2) The costs of TMS are included in the StreamLogic Corporation pro forma net loss. Such costs were $88,000, $3.1 million and $5.1 million in the 1996 transition period, the 1995 quarter, and the 1995 year, respectively. The Company discontinued funding of TMS in the 1996 transition period. 33 STREAMLOGIC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 11. SUBSEQUENT EVENTS Acquisition of FWB Inc. On June 10, 1996 the Company entered into a definitive agreement, subject to certain conditions, to purchase all of the net assets related to the hardware business of FWB Inc., a developer of performance computer storage products for pre-press, multi-media and graphics applications. At closing, the Company would pay $5 million, consisting of approximately $2 million in cash and approximately $3 million of assumed debt. In addition, the Company entered into a definitive agreement, subject to certain conditions, to make an 11% equity investment in the software business being retained by FWB. In consideration for such minority equity investment, at closing the Company would issue shares of StreamLogic Common Stock with an aggregate fair market value of $8 million, as defined in the agreement. There can be no assurance that this transaction will be consummated. Bond Agreement On June 14, 1996 the Company announced an agreement (the "Bond Agreement") in principle with Loomis Sayles & Co., L.P. ("Loomis Sayles"), an entity which advises investors that collectively hold approximately 79% of the outstanding Debentures, to exchange the Debentures for a package of cash, common stock and warrants to purchase common stock. Pursuant to the Bond Agreement, the Company plans to commence a tender offer for the Debentures during mid August 1996. In the tender offer, the Company will offer to exchange its Debentures such that, for each $1,000 face amount of Debentures tendered, the holders will receive (a) $233.33 in cash, (b) $520 in Common Stock, and (c) warrants to purchase 40 shares of Common Stock at an initial exercise price of 150% of market value as defined in the Bond Agreement. The exercise price of the warrants is subject to downward adjustment in certain circumstances, and contains antidilution adjustments. The Company expects shareholder approval will be required pursuant to Nasdaq rules and regulations. The obligations of the holders advised by Loomis Sayles to participate in the tender offer under the Bond Agreement is subject to various conditions including satisfaction of all necessary regulatory requirements, 95% participation by bond holders, and the average price of StreamLogic's Common Stock immediately prior to the expiration of the tender offer falling within the range $4.00 to $7.50. As a result, there can be no assurance that the tender offer will be consummated. If the holders of 100% of the outstanding debentures accept the exchange, the Company will exchange the debentures for (a) $17.5 million in cash, (b) issue between 5.2 and 9.8 million shares of common stock, and (c) issue warrants to purchase approximately 3.0 million shares of common stock, therefore, the transaction, as currently proposed, would increase the Company's net tangible assets by more than $50 million. 34 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information required by this item is incorporated by reference from the information under the caption "Election of Directors" contained in the Proxy Statement relating to the Company's 1996 Annual Meeting of Stockholder, which will be filed within 120 days of the end of the fiscal year covered by this Report. EXECUTIVE OFFICERS OF THE REGISTRANT
SERVED AS NAME AGE POSITION OFFICER SINCE ---- --- -------- ------------- J. Larry Smart 48 President, Chief Executive Officer and 1995 Chairman of the Board of Directors Barbara V. Scherer 40 Senior Vice President-Operations 1988 Lee N. Hilbert 36 Chief Financial Officer 1996 David W. Baxter 40 Vice President, Engineering 1995 Michael C. Downs 37 Vice President, Sales 1996
MR. SMART was elected by the Board of Directors to the position of President and Chief Executive Officer in July 1995 and serves as Chairman. He served as President and Chief Executive Officer of Maxtor Corporation from March 1994 to February 1995. He has served as Chairman of the Board of Southwall Technologies Inc. since March 1994, and was President and Chief Executive Officer of Southwall Technologies Inc. from June 1991 to March 1994. From November 1987 to June 1991, he was Senior Vice President at SCI Systems. MS. SCHERER joined the Company in November 1987 as Treasury Director, and became Treasurer in October 1988. In November 1989, she became Vice President and Treasurer and in March 1995, became Vice President--Finance and Chief Financial Officer. In April 1996, she was promoted to Senior Vice President-- Operations. Ms. Scherer was previously employed by the Boston Consulting Group from May 1985 to November 1987. MR. HILBERT joined the Company in August 1990 as Corporate Accounting Manager and became Corporate Controller in April 1995. In April 1996 he was appointed Chief Financial Officer of StreamLogic. Prior to joining the Company, Mr. Hilbert held various positions with KPMG Peat Marwick, most recently Senior Manager. MR. BAXTER joined the Company in August 1995 as Vice President--Engineering. Prior to that he was the Vice President of Research and Development for Recognition International. He also served as Vice President of Engineering for Adept Technology, and has held various management positions with Convergent Technology and Motorola. MR. DOWNS joined the Company in 1994 as Director of Sales--Western U.S. Region. In 1996, he was named Vice President of Sales. Prior to joining the Company, Mr. Downs was Director of Sales for Storage Dimensions from 1987 to 1994. Officers serve at the discretion of the Board of Directors. 35 ITEM 11. EXECUTIVE COMPENSATION Information required by this item is incorporated by reference from the information under the caption "Executive Compensation" contained in the Proxy Statement relating to the Company's 1996 Annual Meeting of Stockholders, which was filed on April 23, 1996. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information required by this item is incorporated by reference from the information under the caption "Security Ownership of Certain Beneficial Holders and Management" contained in the Proxy Statement relating to the Company's 1996 Annual Meeting of Stockholders, which was filed on April 23, 1996. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information required by this item is incorporated by reference from the information under the caption "Executive Compensation" contained in the Proxy Statement relating to the Company's 1996 Annual Meeting of Stockholders, which was filed on April 23, 1996. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as a part of this Report: 1. FINANCIAL STATEMENTS Report of Independent Auditors. See Index to Consolidated Financial Statements at Item 8 on page of this Report. 2. FINANCIAL STATEMENT SCHEDULES. The following consolidated financial statement schedule of StreamLogic Corporation is filed as part of the Report and should be read in conjunction with the Consolidated Financial Statements of StreamLogic Corporation:
SCHEDULE PAGE -------- ---- II Valuation and Qualifying Accounts............. S-2
Schedules not listed above have been omitted because they are not applicable or are not required or the information to be set forth therein is included in the Consolidated Financial Statements or notes thereto. 3. EXHIBITS: INCORPORATED BY REFERENCE 3.1 Certificate of Incorporation(1) 3.2 By-Laws, as amended to date(2) 4.1 Indenture, dated March 15, 1987, between Micropolis Corporation and First Interstate Bank of California as trustee, relating to $75,000,000 principal amount of 6% Convertible Subordinated Debentures due 2012(3) 4.2 Rights Agreement dated as of May 1989 between the Company and First Interstate Bank of California(4) 4.3 Amendment No. 1 to Rights Agreement(14) 10.15* Micropolis Corporation Employees' Stock Purchase Plan(5) 10.19* Micropolis Corporation Employee Savings and Retirement Plan(6) 10.20* Form of Indemnification Agreement between the Company and each of its directors and officers(7) 10.21* Executive and Key Employees' Stock Option Plan, dated October 1987(1) 10.22* Directors' Stock Option Plan, dated October 1987(1)
36 10.23* Form of Incentive Stock Option Agreement for Executive and Key Employees' Stock Option Plan, dated October 1987(1) 10.24* Form of Non-Qualified Stock Option Agreement for Executive and Key Employees' Stock Option Plan, dated October 1987(1) 10.26* Form of Stock Option Agreement for Directors' Stock Option Plan, dated October 1987(1) 10.31* First Amendment to Micropolis Corporation Employee Savings and Retirement Plan(8) 10.32* Second Amendment to Micropolis Corporation Employee Savings and Retirement Plan(8) 10.33* Third Amendment to the Micropolis Corporation Employee Savings and Retirement Plan(8) 10.34* Fourth Amendment to Micropolis Corporation Employee Savings and Retirement Plan(8) 10.35 Loan Agreement between the Company and CIT Group Business Credit(8) 10.37* Severance Agreement between Micropolis Corporation and Taroon Kamdar(9) 10.38* Severance Agreement between Micropolis Corporation and Robert Ganter 10.39* Severance Agreement between Micropolis Corporation and Nigel Macleod(10) 10.40* Summary of Stock Appreciation Bonus Plan(10) 10.41* Summary of Storage System Division Bonus Plan(10) 10.42* Summary of Key Performance Bonus Plan(10) 10.43* Severance Agreement between Micropolis Corporation and Joel Appelbaum(11) 10.44* Amendment to the Micropolis Corporation Employee Stock Purchase Plan(12) 10.45* Amended and Restated Stock Option Plan for Independent Directors of Micropolis Corporation(12) 10.46* Stock Option Plan for Executive and Key Employees of Micropolis Corporation, as amended(12) 10.47* Agreement for Services between Micropolis Corporation and J. Larry Smart(13) 10.48* Employment Agreement between Micropolis Corporation and J. Larry Smart(14) 10.49 Loan Agreement between Micropolis Limited and ST Capital Limited, and related Guarantee Agreement between Micropolis Corporation and Singapore Technologies Construction PTE LTD(14) 10.50* Consulting Agreement between Micropolis Corporation and Chriss Street & Company(14) 10.51 Note Agreement Re: $20,000,000 10% Convertible Secured Notes Due October 15, 1998, dated as of October 11, 1995 between Micropolis Corporation and Lindner Dividend Fund, a Series of Lindner Investments(15) 10.52* Promissory Note between Micropolis Corporation and J. Larry Smart(15) 10.53 Asset Purchase Agreement dated January 24, 1996 between Micropolis Corporation and ST Chatsworth Pte Ltd, a Singapore corporation(15) 10.54 Development Agreement dated September 15, 1995 between Micropolis Corporation and BTS Broadcast Television Systems GmbH(15) 10.55 $10 Million Facility Agreement dated February 16, 1996 between Micropolis Corporation and ST Chatsworth Pte Ltd.(15) 10.56 StreamLogic OEM Supply Agreement dated March 4, 1996, between Micropolis Corporation and ST Chatsworth Pte Ltd.(15) 21 Subsidiaries of Registrant 23 Consent of Independent Auditors (See Exhibit 23) 27 Article 5 Financial Data Schedule for 1995 10-K - -------- *Management contract or compensatory plan or arrangement required to be filed as an Exhibit to this Form 10-K Report pursuant to Item 14(c). Filed Herewith 4.4 Amendment No. 2 to Rights Agreement
37 - ------------------------------------------------------------------------------- - -------- (1)Incorporated by reference to Exhibits 3.1, 10.21, 10.22, 10.23, 10.24 and 10.26, respectively, filed in the Company's Annual Report on Form 10-K, for the fiscal year ended December 25, 1987. (2)Incorporated by reference to Exhibit 3.2 filed in the Company's Annual Report on Form 10-K for the fiscal year ended December 30, 1988. (3)Incorporated by reference to Exhibit 4.1 of the Company's Registration Statement on Form S-3 No. 33-12374. (4)Incorporated by reference to Exhibit I filed in the Company's Form 8-K Report dated June 2, 1989. (5)Incorporated by reference to Exhibit 4.3 of the Company's Registration Statement on Form S-8 No. 2-90423. (6)Incorporated by reference to Exhibits 10.18 and 10.19 respectively, filed in the Company's Annual Report on Form 10-K for the fiscal year ended December 27, 1985. (7)Incorporated by reference to Exhibit D of the Company's Proxy Statement for the 1987 Annual Meeting of Shareholders. (8)Incorporated by reference to Exhibits 10.30, 10.31, 10.32, 10.33 and 10.34, respectively, filed in the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 1990. (9)Incorporated by reference to Exhibits 10.36 and 10.37, respectively, filed in the Company's Annual Report on Form 10-K for the fiscal year ended December 27, 1991. (10)Incorporated by reference to Exhibits 10.39, 10.40, 10.41 and 10.42, respectively, filed in the Company's Annual Report on Form 10-K for the fiscal year ended December 26, 1992. (11)Incorporated by reference to Exhibit 10.43 filed in the Company's Quarterly Report on Form 10-Q for the quarterly period ended April 1, 1994. (12)Incorporated by reference to Exhibits 10.44, 10.45 and 10.46, respectively, filed in the Company's Quarterly Report on Form 10-Q for the quarterly period ended July 1, 1994. (13)Incorporated by reference to Exhibit 10.47 filed in the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1995. (14)Incorporated by reference to Exhibits 4.3, 10.48, 10.49 and 10.50, respectively, filed in the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 29, 1995. (15)Incorporated by reference to Exhibits 10.51, 10.52, 10.53, 10.54, 10.55 and 10.56, respectively, filed in the Company's Annual Report on Form 10- K for the fiscal year ended December 29, 1995. (b) No reports on Form 8-K were filed by the Registrant during the three month period ended March 29, 1996. (c) Those exhibits, and the index thereto, required to be filed by Item 601 of Regulation S-K are attached hereto or incorporated by reference herein. 38 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. STREAMLOGIC CORPORATION Dated: July 3, 1996 By: /s/ Lee N. Hilbert ----------------------------------- Lee N. Hilbert Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ J. Larry Smart President and Chairman of July 3, 1996 ____________________________________ the Board (Chief Executive J. Larry Smart Officer)
/s/ Barbara V. Scherer Senior Vice President-- July 3, 1996 ____________________________________ Operations Barbara V. Scherer /s/ Lee N. Hilbert Chief Financial Officer July 3, 1996 ____________________________________ (Principal Financial and Lee N. Hilbert Accounting Officer) /s/ Ericson M. Dunstan Director July 3, 1996 ____________________________________ Ericson M. Dunstan /s/ Chriss W. Street Director July 3, 1996 ____________________________________ Chriss W. Street /s/ Greg L. Reyes, Jr. Director July 3, 1996 ____________________________________ Greg L. Reyes, Jr.
39 STREAMLOGIC CORPORATION SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS TRANSITION PERIOD ENDED MARCH 29, 1996 AND YEARS ENDED DECEMBER 29, 1995, DECEMBER 30, 1994 AND DECEMBER 31, 1993
BALANCE ADDITIONS BALANCE AT BEGINNING CHARGED TO END OF OF YEAR EXPENSES DEDUCTIONS(1) YEAR ---------- ---------- ------------- ---------- 1996: Allowance for doubtful accounts, customer returns and price protection..................... $5,427,000 $ 767,000 $ 527,000 $5,667,000 1995: Allowance for doubtful accounts, customer returns and price protection..................... $4,455,000 $2,950,000 $1,978,000 $5,427,000 1994: Allowance for doubtful accounts, customer returns and price protection..................... $1,375,000 $5,736,000 $2,656,000 $4,455,000 1993: Allowance for doubtful accounts, customer returns and price protection..................... $1,390,000 $ 323,000 $ 338,000 $1,375,000
- -------- (1) Write-offs against reserves 40 STREAMLOGIC CORPORATION INDEX TO EXHIBITS (ITEM 14 (C)) 4.4 Amendment No. 2 to Rights Agreement 21 Subsidiaries of Registrant 23 Consent of Independent Auditors 27 Article 5 Financial Data Schedule for 1996 transition report on Form 10-K
41 EX-4.4 2 AMEND #2 TO RIGHTS AGREEMENT EXHIBIT 4.4 AMENDMENT NO. 2 TO RIGHTS AGREEMENT AMENDMENT NO. 2 (the "Amendment"), dated as of March 25, 1996, to the Rights Agreement, dated as of May 18, 1989 (the "Rights Agreement"), between Micropolis Corporation, a Delaware corporation (the "Company"), and First Interstate Bank of California, as rights agent (the "Rights Agent"). WHEREAS, at a meeting of the Board of Directors of the Company (the "Board") held on March 22, 1996, the Board considered the operation of the Rights Agreement should the Company enter into a proposed transaction in which the Company would issue warrants (the "Warrants") to purchase 1.5 million shares of the Company's Common Shares (as such term is defined in the Rights Agreement) to an investor pursuant to a proposed Warrant Agreement (the "Warrant Agreement"); WHEREAS, the investor has indicated that as a precondition to accepting the Warrants in connection with a restructuring of certain existing convertible notes of the Company, the investor would require that the Company take all action necessary to ensure that no holder of such Warrants or the shares of the Company's Common Shares to be issued upon the exercise of any Warrants will be deemed an "Acquiring Person" under the Rights Agreement by virtue of entering into the Warrant Agreement or holding or acquiring any Warrants (or Common Shares issued on exercise of such Warrants) issued thereunder; WHEREAS, the Board has determined that amendment of the Rights Agreement to ensure that no such holder will be deemed an Acquiring Person is in the best interests of the Company and its stockholders and has authorized such an amendment: WHEREAS, the Company and the Rights Agent desire to amend the Rights Agreement, as authorized by Section 26 of the Rights Agreement, by altering, adding and deleting the provisions set forth herein in the manner set forth below; and WHEREAS, the parties have complied with or satisfied all conditions necessary to the amendment of the Rights Agreement; NOW, THEREFORE, the parties hereto agree as follows: SECTION 1. Definitions. ----------- All terms used herein as defined terms which are not defined in this Amendment shall have the meanings ascribed to them in the Rights Agreement. SECTION 2. Amendment to Rights Plan. ------------------------ (a) Section 1(a) of the Rights Agreement shall be deleted in its entirety and replaced by a new Section 1(a), which shall read as follows: (a) "Acquiring Person" shall mean any Person (as such term is hereinafter defined) who or which, together with all Affiliates and Associates (as such terms are hereinafter defined) of such Person, shall be the Beneficial Owner (as such term is hereinafter defined) of 20% or more of the Common Shares of the Company then outstanding but shall not include the Company, any Subsidiary of the Company or any employee benefit plan of the Company or of any Subsidiary of the Company or any entity holding shares of capital stock of the Company for or pursuant to the terms of any such plan, in its capacity as an agent or trustee for any such plan. Notwithstanding anything to the contrary in the foregoing, for purposes of this Agreement and the definition of Acquiring Person, no Person shall be deemed to be the Beneficial Owner of, or to beneficially own, securities which such Person or any of such Person's Affiliates or Associates may acquire, does or do acquire or may be deemed to have the right to acquire, pursuant to (a) any Note Agreement, (b) any Convertible Notes, (c) any Common Shares issued or issuable on conversion of any Convertible Notes, (d) any Warrant Agreement, (e) any Warrants or (f) any Common Shares issued or issuable on exercise of any Warrants. "Note Agreement" shall mean any agreement approved by resolution of the Board entered into after the date of Amendment No. 1 to this Agreement between the Company and Lindner Dividend Fund, A Series of Lindner Investments, a Massachusetts business trust, relating to the issuance of a newly created series of Convertible Notes. "Convertible Notes" shall mean any debt securities convertible into Common Shares which are issued by the Company after the date of Amendment No. 1 to this Agreement pursuant to any Note Agreement. "Warrant Agreement" shall mean any agreement approved by resolution of the Board entered into after the date of Amendment No. 2 to this Agreement between the Company and Lindner Dividend Fund. A Series of Lindner Investments, a Massachusetts business trust, relating to the issuance of Warrants. "Warrants" shall mean any common stock purchase warrants for Common Shares which are issued by the Company after the date of Amendment No. 2 to this Agreement pursuant to any Warrant Agreement. SECTION 3. Miscellaneous. This Amendment may be executed in one or more ------------- counterparts, each of which shall be deemed to be an original, but all of which taken together shall constitute one and the same agreements. This Amendment shall be governed by any interpreted in accordance with the laws of the State of Delaware. IN WITNESS WHEREOF, the Company and the Rights Agent have caused this Amendment to be executed as of the date and year first above written. COMPANY ------- MICROPOLIS CORPORATION Attest: By: /s/ Vivien Avella By: /s/ J. Larry Smart ---------------------- ---------------------- Name: Vivien Avella Name: J. Larry Smart Its: Manager, Banking & Finance Its: President, CEO RIGHTS AGENT ------------ FIRST INTERSTATE BANK OF CALIFORNIA Attest: By: By: ---------------------- ---------------------- Name: Name: Its: Its: IN WITNESS WHEREOF, the Company and the Rights Agent have caused this Amendment to be executed as of the date and year first above written. COMPANY ------- MICROPOLIS CORPORATION Attest: By: By: ---------------------- ---------------------- Name: Name: Its: Its: RIGHTS AGENT ------------ FIRST INTERSTATE BANK OF CALIFORNIA Attest: By: /s/ Sharon Knepper By: /s/ Ronald E. Lug ---------------------- ---------------------- Name: Sharon Knepper Name: Ronald E. Lug Its: Vice President Its: Vice President EX-21 3 SUBSIDIARIES OF REGISTRANT EXHIBIT 21 SUBSIDIARIES OF REGISTRANT MICROPOLIS, INC. c/o Professional Corporate Service Group, Inc. Post Office Box 3627 Christiansted St. Croix, U.S. Virgin Islands 00820 MICROPOLIS LIMITED c/o Roy West Trust Corporation (Cayman) Limited Post Office Box 707 Grand Cayman British West Indies MICROPOLIS LTD. MICROPOLIS GMBH 4 Worton Drive Behringstrasse 10 Worton Grange 8033 Planegg bei Munchen Reading, Berkshire West Germany RG2 ODW England MICROPOLIS AUSTRALIA PTY. MICROPOLIS BV LIMITED c/o Executive Management Level 21, 201 Miller Street Trustmij BV North Sydney, NSW DeBoeleaan 14 2060 Australia 1083 HJ Amsterdam The Netherlands MICROPOLIS CORPORATION--TAIWAN BRANCH Room 1111, 11F, No. 333 Keelung Road, Sec. 1 Taipei, Taiwan, R.O.C. EX-23 4 CONSENT OF ERNST & Y0UNG LLP EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Forms S-8 Nos. 2-86334, 2-90423, 2-96906, 33-4569, 33-22619, 33-29469, 33- 42454, 33-44456, 33-50204, 33-64706, 33-53313 and 33-55737) pertaining to the Stock Option Plan for Executive and Key Employees of StreamLogic Corporation (formerly Micropolis Corporation), as amended, Employees' Stock Option Plan, as amended, the Stock Option Plan for Directors of StreamLogic Corporation, as amended, and Employee Stock Purchase Plan of StreamLogic Corporation and in the related Prospectuses of our report dated June 28, 1996, with respect to the consolidated financial statements and schedule of StreamLogic Corporation included in the Annual Report (Form 10-K) for the three month period ended March 29, 1996. Our audits also included the financial statement schedule of StreamLogic Corporation listed in item 14(a). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. ERNST & YOUNG LLP Los Angeles, California June 28, 1996 EX-27 5 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ACCOMPANYING CONSOLIDATED FINANCIAL STATEMENTS OF STREAMLOGIC CORPORATION AS OF AND FOR THE TRANSITION PERIOD ENDED MARCH 29, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS. 1,000 3-MOS MAR-29-1996 MAR-29-1996 40,477 0 24,806 5,667 10,022 84,637 25,885 20,035 92,383 46,497 71,250 0 0 15,580 (42,664) 92,383 24,408 24,408 40,799 40,799 17,710 0 2,027 (35,955) 252 (36,207) 0 0 0 (36,207) (2.32) (2.32)
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