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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended January 3, 1998
OR
[ ] Transition Report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from _________ to _________
Commission File No. 0-18033
EXABYTE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 84-0988566
(State of Incorporation) (IRS Employer Identification No.)
1685 38th Street
Boulder, Colorado 80301
(Address of principal executive offices, including zip code)
Area Code(303) 442-4333
(Registrant's Telephone Number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
N/A N/A
(Title of each class) (Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 Par Value
(Title of Class)
Indicate by check mark whether the 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 12 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 ninety days.
Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K 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. ( )
The approximate aggregate market value of the voting stock held by
non-affiliates of the registrant as of March 2, 1998 was $152,250,509 based
on the closing sale price on such date. The aggregate number of shares of
common stock outstanding on March 2, 1998 was 19,333,398(a).
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Document incorporated by reference: Proxy Statement for the 1998 Annual
Meeting of Stockholders scheduled to be held May 4, 1998: Part III, Items
10, 11, 12, and 13.
(a) Excludes 3,146,515 shares of common stock held by directors, executive
officers and stockholders whose ownership exceeds ten percent of the common
stock outstanding at March 2, 1998. Exclusion of shares held by any person
should not be construed to indicate that such person possesses the power,
direct or indirect, to direct or cause the direction of the management or
policies of registrant, or that such person is controlled by or under common
control with the registrant.
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PART I
Item 1.
BUSINESS.
THE COMPANY
- -----------
Exabyte Corporation ("Exabyte" or the "Company") was incorporated in June 1985
under the laws of the State of Delaware. Exabyte designs, manufactures and
markets a full range of 8mm tape drives and 8mm, DLT(TM) and 4mm tape
libraries. Exabyte also provides its own brand of recording media, software
utilities and worldwide service and support.
The Company's strategic focus is the information storage and retrieval tape
drive market for workstations, mid-range computer systems and networks,
primarily for data backup and archival applications. Computer manufacturers
and resellers require a variety of storage products which vary in price,
performance, capacity and form-factor characteristics as their needs for data
backup and archival storage increase. Exabyte's current strategy is to offer a
number of products to address a broad range of these requirements.
In June 1997, Exabyte segmented its operations into four divisions, each
responsible for a specific line of products or services: the Enterprise
division, responsible for Exabyte's line of 8mm tape drive products and media;
the Storage Automation Solutions division, responsible for robotic tape
libraries; the Worldwide Service division, responsible for service programs and
support for Exabyte's products and customers; and the Eagle(RTM) division,
created in 1995, responsible for Exabyte's line of minicartridge drives and
media. In December 1997, Exabyte announced the closure of its Eagle(RTM)
division.
In addition to the historical information contained in this document, the
following discussion contains forward-looking statements that involve future
risks and uncertainties. The actual results that the Company achieves may
differ materially from any forward-looking statements due to such risks and
uncertainties. Words such as "believes," "anticipates," "expects," "intends,"
"plans" and similar expressions are intended to identify forward-looking
statements, but are not the exclusive means of identifying such statements.
The Company undertakes no obligation to revise any forward-looking statements
in order to reflect events or circumstances that may arise after the date of
this report. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in the section entitled "RISK
FACTORS."
PRODUCTS AND SERVICES
- ---------------------
The Company manufactures 8mm tape drive products and robotic libraries, which
incorporate Exabyte's own 8mm tape drives, as well as 4mm and DLT(TM) tape
drives manufactured by others. Exabyte's 8mm tape drives products offer data
capacities ranging from 5GB to 40GB with data compression (described below).
These tape drive products address the mid-range to high-end server markets, the
remainder of which is largely served by 4mm and half-inch linear tape drives
produced by competitors. Exabyte's robotic tape libraries incorporate one or
more tape drives and multiple media cartridges. In addition, Exabyte provides
a variety of services for its products, as well as recording media and
cleaning cartridges for its products.
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There can be no assurance that any of the current or announced products or
services listed below will be successfully developed, made commercially
available on a timely basis or achieve market acceptance. Exabyte encounters
a number of risks in producing and selling its products and services. For a
description of the risks associated with Exabyte's products and services
please refer to the "RISK FACTORS--Product Development," "RISK FACTORS--Media
Constraints," "RISK FACTORS--Product Quality and Performance" and "RISK
FACTORS--Management of Business and Product Transitions" sections below.
8mm Tape Drive Products
=======================
Exabyte's 8mm tape drive products and media are the responsibility of the
Enterprise division. These products address the mid-range markets including
UNIX, and NT server markets and are sold primarily to Exabyte's reseller and
original equipment manufacturer ("OEM") customers. In 1997, sales of 8mm tape
drive products represented 59% of revenue, while in 1996 and 1995, sales
represented 65% and 60% of total revenue, respectively. Exabyte's 8mm tape
drive products are based on helical scan technology and utilize a SCSI
interface. The tape drive products also incorporate a licensed compression
algorithm for data compression. All data capacities and transfer rates
indicated for the products listed below assume a compression ratio of two to
one. Actual compression will vary depending on the nature of the data and the
drive and media quality.
The primary factors distinguishing the Company's tape drive products from one
another are form factor, data capacity, and transfer rate.
Form Factor - the physical size of the device with respect to
industry standard formats.
Data Capacity - the total amount of data which can be stored on a
single media cartridge.
Transfer Rate - the speed that data may be transferred to or from the
tape drive.
Current 8mm Tape Drive Products
- -------------------------------
Exabyte Mammoth
The Company's Mammoth 8mm tape drive targets large department networks and
application servers and may be incorporated into most of Exabyte's 8mm
libraries. Mammoth is Exabyte's fastest, highest capacity 8mm tape drive with a
data capacity of 40GB and a transfer rate of 6MB per second. Mammoth features
an industry-standard 5 1/4" half-high form factor and is compatible with all
Exabyte 8mm tape drive products. Mammoth is dependent upon and only writes to
Advanced Metal Evaporated ("AME") media, but can read media cartridges written
by Exabyte's other 8mm tape drive products. AME media is supplied to Exabyte
exclusively by Sony Corporation, a competitor to the Company. The Company has
experienced constraints in the supply of AME media. Please refer to the "RISK
FACTORS--Media Constraints" and "RISK FACTORS--Supplier Dependence" sections
below.
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Exabyte Eliant(TM) 820
The Eliant(TM) 820 tape drive, which targets mid-range networks and smaller
mixed workstations, features a 14GB data capacity and a transfer rate of 2MB
per second. The Eliant(TM) 820 may be incorporated into Exabyte's 8mm
libraries and comes in an industry-standard 5 1/4" half-high form factor.
Exabyte 8700
The Exabyte 8700, which targets entry-level networks, features a data capacity
of 14GB and a 1MB-per-second transfer rate. The Exabyte 8700 comes in a stand-
alone design that includes its own power supply and is housed in a desktop
enclosure.
Media
- -----
Exabyte provides various types of media cartridges, as well as cleaning
cartridges and data cartridge holders, for its 8mm tape drive products. The
high-quality media, produced by one or more third parties, is available in
different lengths to handle various data storage requirements. The growth of
Exabyte's Mammoth and follow-on Mammoth drives is dependent upon the supply of
AME media. There are several risks associated with Mammoth media dependence.
For a description of those risks, please refer to the "RISK FACTORS-- Media
Constraints" section below. Sales of media and media related products
represented approximately 15%, 12% and 9% of sales in 1997, 1996 and 1995,
respectively.
Robotic Tape Library Products
=============================
Exabyte's robotic tape libraries and associated products are the responsibility
of the Storage Automation Solutions division. Exabyte offers a family of
robotic tape libraries which automate the storage and retrieval of substantial
amounts of data. Each library incorporates one or more tape drives and
multiple media cartridges. The primary sales channels for Exabyte's robotic
tape libraries are OEMs and resellers. The libraries are targeted for use in
applications ranging from small department networks to large application
servers. In 1997, revenues from robotic tape library sales were 18% of total
revenue, while in both 1996 and 1995, sales represented 14% of revenues. The
Company's robotic tape libraries typically provide relatively higher levels of
profit margin contribution to the Company's results of operations. Any
shortfall in the sale of these products would have a relatively higher negative
effect on the Company's margins than the Company's other products. All data
capacities and transfer rates indicated for the products listed below assume a
compression ratio of two to one. Actual compression will vary depending on the
nature of the data and the drive and media quality.
Current Robotic Tape Library Systems
- ------------------------------------
Exabyte 440/480
The Exabyte 440 and 480 libraries target large enterprise application servers
and networks and support applications such as unattended network backup/
restore. These libraries represent Exabyte's largest capacity library
offerings. The Exabyte 440 incorporates up to four 8mm tape drives and up to
40 media cartridges, while the Exabyte 480 incorporates up to four 8mm tape
drives and up to 80 media cartridges (the Exabyte 440 can be upgraded to an
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Exabyte 480 library.) At full capacity (four Mammoth tape drives and 80 media
cartridges) the Exabyte 480 offers a data capacity of 3.2TB and a transfer rate
of 24MB per second. The libraries feature a standard bar code scanner and come
in both rack and tower configurations.
Exabyte 210/220
The Exabyte 210 and 220 libraries target small and large department networks,
respectively, as well as mid-range file and application servers. Their
applications include unattended network backup/restore. The Exabyte 210
library incorporates up to two 8mm tape drives and up to 10 media cartridges,
while the Exabyte 220 library incorporates up to two 8mm tape drives and up
to 20 media cartridges (the Exabyte 210 can be upgraded to an Exabyte 220
library). At full capacity (two Mammoth tape drives and 20 media cartridges),
the Exabyte 220 offers a data capacity of 800GB and a transfer rate of 12MB per
second. The libraries feature a bar code scanner (standard on the Exabyte
220) and come in both rack and tower configurations.
Exabyte 10h
The Exabyte 10h library targets small department networks and supports
applications such as network backup/restore. The Exabyte 10h incorporates one
Eliant(TM) 820 tape drive and up to 10 media cartridges. At full capacity, the
Exabyte 10h library offers a data capacity of 144GB and a transfer rate of 2MB
per second.
Exabyte 218
The Exabyte 218 library, Exabyte's 4mm tape library, targets small to mid-sized
department networks and supports applications such as network backup/restore.
The Exabyte 218 incorporates up to two DDS-2 4mm tape drives and up to 18 media
cartridges, and comes in both rack and tower configurations. At full capacity,
the Exabyte 218 offers a data capacity of 144GB and a transfer rate of 2MB per
second.
Exabyte 18D
The Exabyte 18D is Exabyte's first DLT(TM) library. The Exabyte 18D targets
small department networks and mid-range file and application servers. The
Exabyte 18D supports such applications as unattended network backup/restore.
The Exabyte 18D library incorporates a single DLT(TM) 4000 or DLT(TM) 7000 tape
drive from Quantum Corporation ("Quantum") and up to eight media cartridges.
At full capacity (with a DLT(TM) 7000 drive), the Exabyte 18D offers a data
capacity of up to 560GB and a transfer rate of up to 10MB per second. The
Exabyte 18D also comes in both rack and tower configurations.
Announced Robotic Tape Library Systems
- ----------------------------------------
Exabyte 230D
The Exabyte 230D is Exabyte's most recent DLT(TM) library offering. The
Exabyte 230D targets large client-server and department networks and supports
applications such as unattended network backup/restore. The Exabyte 230D
incorporates up to two Quantum DLT(TM) 4000 or DLT(TM) 7000 tape drives and
up to 30 media cartridges. At full capacity (with two DLT(TM) 7000 tape
drives), the Exabyte 230D offers a data capacity of 1.2TB and a transfer rate
of 20MB per second. The Exabyte 230D features a standard bar code scanner,
comes in both rack and tower configurations and is field upgradable to future
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DLT(TM) library offerings. Worldwide shipping of the Exabyte 230D to customers
is scheduled to begin in the first half of 1998.
There can be no assurance that this or any announced or unannounced product
will be successfully developed, made commercially available on a timely basis
or achieve market acceptance. Please refer to the "RISK FACTORS--Product
Development" section below.
Service
=======
Exabyte's Worldwide Service division provides a full range of in-warranty and
out-of-warranty support services for Exabyte's library, tape drive, and media
products. These services, which are delivered through a worldwide network of
service centers and authorized service providers, support Exabyte OEM, reseller
and end-user customers in the deployment, operation and maintenance of Exabyte
products.
The service programs offered by the Worldwide Service division for Exabyte's
products and media include those listed below:
Products Service Programs
-------- ----------------
Robotic Tape Libraries.......................Hardware conversions
Parts support
Depot repair
On-site service
8mm Tape Drive Products......................Extended warranties
Hardware upgrades
Depot repair
Next-day advance exchange
Media........................................Warranty exchange
Data recovery
Media conversions
In 1997, revenue from service and support programs accounted for 7% of total
revenue, while in both 1996 and 1995 these programs accounted for 6% of
revenues.
Minicartridge Tape Drive Products
=================================
During 1997, Exabyte's Eagle(RTM) division was responsible for the Eagle(RTM)
line of minicartridge tape drive products and related media. These products
targeted the desktop PC and PC server markets. The Eagle(RTM) division's
primary sales channels were resellers and retailers, although the division
began marketing its products to OEMs in 1997.
The Company announced the closure of its Eagle(RTM) division in December 1997
and took certain restructuring charges related to the closure. See
RESTRUCTURING CHARGES in the Management's Discussion and Analysis section
below.
In 1997, sales of minicartridge tape drive products represented 6% of total
revenue, while in 1996 and 1995, sales accounted for 5% and 2% of revenue,
respectively.
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MARKETING AND CUSTOMERS
- -----------------------
Exabyte markets its products worldwide to OEMs and resellers. Initial sales of
new products are often made to resellers who are usually quicker to evaluate,
integrate, and adopt new technology. OEM sales generally increase as the new
product successfully completes the necessary qualification process. For a
description of the risks associated with Exabyte's customers and customer
dependence, please refer to the "RISK FACTORS--Customer Dependence," "RISK
FACTORS--Market Demand" and "RISK FACTORS--Year 2000" sections below.
OEMs
- ----
OEM customers incorporate Exabyte drives as part of their own systems. Exabyte
works with its OEM customers during early product development stages to help
ensure its products will readily integrate into these customers' systems.
The sales cycle for an OEM typically covers many months. During this time,
the OEM evaluates the technology, qualifies the product specifications and
verifies Exabyte's compliance with product specifications. The OEM then
integrates the product into its system and publicly announces the integration
toward the end of the sales cycle before volume shipments of Exabyte's products
are made to the OEM. Product sales to OEMs represented 49% of total sales in
1997. In 1996 and 1995, these sales were 51% and 55%, respectively, of total
sales.
Resellers
- ---------
The Company's reseller customers purchase products for resale and may provide
all or some of the following services: distribution, system upgrades, value-add
or other services. Resellers may use the Company's tape drive products to
upgrade various types of installed computer systems, including those
manufactured by IBM, Sun Microsystems and Digital Equipment Corporation.
Some resellers package the Company's tape drives into a stand-alone enclosure
containing a power supply and software for attachment to the end-user's system.
Resellers may also combine the Company's products with other storage devices,
such as single or multiple disk drives, to deliver a value-added storage
solution. Resellers also distribute Exabyte's products to OEMs and end-users.
The Company often supports some of its reseller customers by providing
marketing and technical support directly to their customers, thereby
incurring certain additional costs for such sales. Other costs and risks
associated with the reseller business include inventory price protections,
stock rotation obligations and customer rebates. The reseller business is
also characterized by relatively short order lead times which limit the
Company's ability to forecast sales to these customers. Please refer to the
"RISK FACTORS--Market Demand" section below. Sales to resellers represented
approximately 46%, 45% and 42% of sales in 1997, 1996 and 1995, respectively.
International
- -------------
Exabyte also markets its products overseas directly to OEMs, as well as through
resellers to OEMs and end-users. Each of the Company's international markets
is served by resellers with rights to sell the Company's products in a country
or group of countries. Direct international sales accounted for approximately
32%, 30%, and 31% of sales in 1997, 1996, and 1995, respectively. (See Note 9
of Notes to Consolidated Financial Statements.) In addition, many of Exabyte's
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domestic customers ship a significant portion of Exabyte's products to their
overseas customers. Currently, a very small percentage of the Company's
international sales are denominated in foreign currencies and are affected by
foreign exchange rate fluctuations. In addition, changes in the foreign
exchange rates may adversely affect the volume of sales denominated in U.S.
dollars to overseas customers. Exabyte's sales are also subject to risks
common to export activities, including government regulation or seizure of
property, tariffs, and import restrictions. For a description of these and
other risks associated with international sales, please refer to the "RISK
FACTORS--Foreign Sales" section below.
Principal Customers
- -------------------
A partial list of Exabyte's customers includes Anthem, Bull S.A., Consan,
Digital Equipment Corporation, IBM, Ingram Micro, Merisel, NCR, Siemens
Nixdorf, Sun Microsystems and Tech Data.
IBM and Sun Microsystems were the only two customers accounting for 10% or more
of Exabyte's sales during the previous three fiscal years. IBM accounted for
17% of sales in 1997 and 15% of sales in both 1996 and 1995. Sun Microsystems
accounted for 13% of sales in 1997 and 11% of sales in both 1996 and 1995.
In addition, Exabyte's three largest customers accounted for 39% of sales in
1997. There are many risks associated with Exabyte's dependence on its key
customers, including the loss of a key customer and substantial cancellations
or rescheduling of customer orders. For a description of these and other risks
associated with Exabyte's customers and customer dependence, please refer to
the "RISK FACTORS--Customer Dependence" and "RISK FACTORS--Market Demand"
sections below.
COMPETITION
- -----------
The data storage market is extremely competitive and subject to rapid
technological change. The Company believes that competition in the data
storage market will continue to increase. Manufacturers of all types of
storage technologies compete for a limited number of customers. The Company
believes that the main competitive factors considered by these customers are:
- storage capacity
- data transfer rate
- form factor
- price/performance
- innovation
- product quality and reliability
- timing of new product introductions
- volume availability
- customer support
- the Company's financial strength
Numerous companies are engaged in the research, development and
commercialization of data storage products, including computer manufacturers
such as IBM and Hewlett-Packard, that incorporate their own storage products
into their systems. Some of the Company's current and potential competitors
have significantly greater financial, technical, and marketing resources than
Exabyte. There can be no assurance that they will not devote those resources
to the aggressive marketing of helical scan, minicartridge, half-inch
cartridge, optical or other storage product technologies.
10
Future developments of tape and optical technologies, as well as new forms of
storage technologies, could create additional, significant competition to
Exabyte. Other risks include loss of market share, price erosion and pricing
pressure. For a description of these and other risks associated with Exabyte's
competition, please refer to the "RISK FACTORS--Competition" section below.
Exabyte's 8mm tape drive products face competition from companies offering
8mm, half-inch, 4mm and minicartridge tape drive products. Exabyte's largest
8mm competitor is currently Sony with its new AIT tape drive. There can be
no assurance that other companies will not enter the 8mm market in the future.
Sony also offers a competitive 4mm tape drive. 4mm tape drives are typically
lower in price and smaller in size, making them more attractive to the low end
of the market and those systems with a smaller form factor.
Among Exabyte's competitors which offer half-inch tape drive products are
Quantum, Fujitsu, IBM, Overland Data and StorageTek. The half-inch products
currently being offered generally have higher capacities and transfer rates
than Exabyte's products. Specifically, Quantum's DLT(TM) 7000 drive competes
in the same market segment as Exabyte's Mammoth drive, but offers storage
capacities and transfer rates greater than Mammoth or any of Exabyte's other
current tape drive products.
Additionally, certain of the Company's low-end 8mm tape drive products compete
with minicartridge tape drives. Minicartridge products offer some advantages
over the Company's low-end 8mm tape drive products, including compatibility of
new products with the larger installed base of earlier generation minicartridge
tape drives, and are generally lower in price and better suited for this market
segment. If higher capacity minicartridge tape drive products are successfully
introduced, such products could represent a more significant competitive
challenge to Exabyte's 8mm tape drive products. Exabyte's primary
minicartridge competitors are Seagate, Hewlett-Packard, Tandberg, Iomega and
Tecmar.
The Company's library product offerings face direct competition from other
companies manufacturing their own library offerings. Some of Exabyte's major
8mm library competitors are IBM, Qualstar, ADIC and Spectralogic. Among
Exabyte's DLT(TM) library competitors are ADIC, ATL, Hewlett-Packard, Quantum,
Breece Hill, and StorageTek. Major 4mm library competitors are IBM, Qualstar,
ADIC, Hewlett-Packard, StorageTek, Spectralogic and Seagate. Because
Exabyte's library products represent higher-margin business to the Company,
any shortfall in the sale of these products, due to competition or otherwise,
would have a proportionately greater impact on the Company's results of
operations.
Additionally, Exabyte's service programs are under competition from third party
service providers, including Tech Support Services International, RC
Electronics and ElectroService Labs.
MANUFACTURING
- -------------
Exabyte currently manufactures parts or complete units of its 8mm tape drive
and library products at its Boulder, Colorado facility. Exabyte's Scotland
facility customizes generic tape drives to meet customer-specific requirements
for Exabyte's European customers. The Company currently employs just-in-time
manufacturing techniques emphasizing flexibility and continuous product flow.
These techniques depend on uninterrupted access to high-quality, competitively
priced components in required volumes. The Company has a large number of sole-
source dependencies. Exabyte has executed master purchase agreements with some
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of its sole-source suppliers, and conducts business with the rest of its
suppliers on a purchase order basis. Please refer to the "RISK FACTORS--
Supplier Dependence" section below. Further, many such components are sourced
from suppliers located outside the U.S. Please refer to the "RISK FACTORS--
Foreign Exchange and Import Restrictions" section below.
Exabyte obtains much of the materials and components necessary for
manufacturing its products from its German subsidiary, Exabyte Magnetics GmbH
("EMG"), as well as from a number of suppliers. Many of the key components
are made to the Company's specifications and are acquired from sole sources.
Please refer to the "RISK FACTORS--Supplier Dependence" and "RISK FACTORS--
Mammoth" sections below.
The Company manufactures a mechanical deck mechanism for the Company's Mammoth
product. Production of this deck assembly requires a more complex
manufacturing process than the Company had previously undertaken. Difficulties
in manufacturing this deck assembly have caused production constraints for
Mammoth in the past. There can be no assurance that such problems will not
occur again in the future. For a description of the risks associated with the
Company's Mammoth product, please refer to the "RISK FACTORS--Mammoth" and
"RISK FACTORS--Media Constraints" sections below.
Among the many key components for Exabyte's products, and the supplier(s)
supplying the components are:
Sole-Source
Component Supplier(s)
--------- ---------
8mm tape decks.....................Sony
Hitachi
Circuit boards.....................Solectron
EFTC
Recording heads....................ReadRite
EMG
AME Media..........................Sony
Two of Exabyte's biggest sole-source suppliers are Sony Corporation ("Sony")
and Hitachi Corporation ("Hitachi"), both supplying customized 8mm tape decks
to the Company.
The relationship with Sony as a supplier of 8mm tape decks began in 1987. Sony
currently supplies customized tape decks for Exabyte's 8205XL and 8505XL 8mm
tape drives. In April 1997, the Company initiated end-of-life programs with
respect to these two products. The controlling supply agreement, entered into
by Exabyte, Nihon Exabyte Corporation (Exabyte's wholly owned Japanese
subsidiary) and Sony, terminates in March 1998. Exabyte does not intend to
renew this agreement. The parties are currently negotiating an amendment to
the contract to terminate the contract and end the supply of 8mm tape decks as
of August 1998. The Company expects that the amendment, if executed, would
provide for the supply of spare parts related to the tape decks supplied by
Sony. Such spare parts are of importance to Exabyte's Worldwide Service
division. Exabyte does not currently have a second source for these spare
parts, and any constraint in the supply could affect the Worldwide Services
division's ability to successfully service and maintain Exabyte's 8205XL and
8505XL tape drives, both in- and out-of-warranty, and could have a material
adverse effect on the Company's results of operations.
12
Hitachi currently supplies the tape deck components for Exabyte's 8700 and
Eliant(TM)820 8mm tape drives. The components incorporated into these products
are customized to the Company's specifications. The purchase agreement for the
Exabyte 8700 tape deck component was entered into among Exabyte, Nihon Exabyte
Corporation, and Hitachi on February 22, 1995 and was automatically renewed in
February 1998 for an additional 12 months, per the terms of the agreement. The
parties entered into a separate agreement on December 11, 1996, for the supply
of the Eliant(TM)820 tape deck component. Both agreements have a term of three
years, subject to two automatic 12-month extensions.
While both Hitachi purchase agreements contain certain restrictions regarding
the sale of Hitachi's tape decks or customized parts to third parties, such
limitations do not prevent Hitachi from individually developing similar
components and selling such components to third parties or incorporating such
components into its own competitive products.
There can be no assurance that the supply of these decks or spare parts from
Sony or Hitachi will continue or that prices will remain at their current
levels. The Company's inability to obtain decks or spare parts at a
commercially reasonable cost would cause a significant delay or even
termination of the production of these 8mm tape drives, and would have a
material adverse effect on the Company's competitive position and its results
of operations.
For a description of these and other risks associated with Exabyte's suppliers,
please refer to the "RISK FACTORS--Year 2000","RISK FACTORS--Supplier
Dependence" and "RISK FACTORS--Foreign Sourcing" sections below.
Exabyte also contracts with third parties to manufacture product components.
For a description of the risks associated with manufacturing, please refer to
the "RISK FACTORS--Third Party Contract Manufacturing" and "RISK FACTORS--
Patent Infringement and Proprietary Rights" sections below.
RESEARCH AND DEVELOPMENT
- ------------------------
Exabyte participates in an industry that is subject to rapid technological
changes and believes its future success depends on its ability to extend its
technology and further the development of highly reliable tape drive products
with competitive price performance characteristics. The Company focuses its
research and development efforts primarily on developing new products with
improved price performance and enhancing its current products. There are
numerous risks associated with Exabyte's research and development efforts. For
a description of these risks, please refer to the "RISK FACTORS--Product
Development" section below.
The Company's research and development expenses were approximately $40.9
million, $38.4 million and $37.0 million in 1997, 1996 and 1995, respectively.
Except for certain software development costs, the Company's research and
development costs are expensed as incurred.
PATENTS AND PROPRIETARY INFORMATION
- -----------------------------------
Exabyte relies on a combination of patents, copyright and trade secret
protections, non-disclosure agreements, and licensing arrangements to establish
and protect its proprietary rights. As of February 23, 1998, Exabyte owned 46
United States patents and had 36 United States patent applications pending
(five of which have been allowed but have not yet issued), all relating to
13
technologies and other aspects of Exabyte tape drive and robotic tape library
products. However, the Company believes that, because of the rapid pace of
technological change in the tape storage industry, factors such as knowledge,
ability and experience of Exabyte's employees, new product introductions and
frequent product enhancements are often more significant than patent and trade
secret protection.
Exabyte licenses its technology to third party manufacturers to allow them to
manufacture Exabyte's products. Additionally, Exabyte has granted
manufacturing licenses to certain customers which allow them to manufacture and
sell the Company's products should specific events occur, such as the Company's
inability to perform its supply obligations. Exabyte also enters into joint
development agreements with third parties for the development of product
components. Under these agreements, the third parties generally have joint
ownership of certain technologies related to the component being developed.
The dissolution of these agreements could result in significant costs and other
risks to the Company. Please refer to the "RISK FACTORS--Patent Infringement
and Proprietary Rights" section below.
There are a number of risks associated with Exabyte's proprietary rights. For
a description of these risks, please refer to the "RISK FACTORS--Patent
Infringement and Proprietary Rights" and "RISK FACTORS--Third Party Contract
Manufacturing" sections below.
BACKLOG
- -------
Backlog consists of purchase orders for which a delivery schedule within six
months has been specified by the customer. The Company's backlog as of
January 3, 1998 and December 28, 1996 totaled approximately $22.0 million and
$28.9 million, respectively. The Company's customers typically are not
obligated to purchase minimum quantities of the Company's products. Lead times
for the release of purchase orders depend upon the scheduling practices of each
customer. The Company believes that the rate of new orders will vary
significantly from month to month. Customers may cancel or reschedule orders
without significant penalty. In addition, the Company's actual shipments
depend upon its production capacity and component availability. For these
reasons, the Company's backlog as of any particular date may not be indicative
of the Company's actual sales for any succeeding fiscal period. For a
description of these and other risks associated with Exabyte's backlog
management, please refer to the "RISK FACTORS--Inventory Write-downs and
Special Charges" and "RISK FACTORS--Customer Dependence" sections below.
FOREIGN EXCHANGE AND IMPORT RESTRICTIONS
- ----------------------------------------
Many of the Company's key components and products are currently or may be
manufactured overseas in countries such as Japan, Germany, The Netherlands,
China and Singapore. Additionally, a substantial portion of Exabyte's products
incorporate subassemblies and components purchased from Japanese or other
overseas suppliers in yen or another foreign currency. The Company's results
of operations, therefore, may be materially affected by fluctuations in
currency exchange rates. The Company enters into foreign currency forward
contracts to hedge the purchase of certain inventory components from Japanese
suppliers. (See Note 1 of Notes to the Consolidated Financial Statements.)
Exabyte's international involvement is also subject to other risks common to
foreign operations, including government regulations, foreign exchange or
import restrictions or tariffs imposed by the U.S. Government on products or
14
components shipped from another country. Additionally, the sale of Exabyte's
products to domestic federal or state agencies may be limited by the Buy
America Act or the Trade Agreement Act to the extent the Company incorporates
into its products components produced overseas.
The Company's subsidiaries located in The Netherlands, Germany, Japan, Canada
and Singapore operate under their respective local currencies. (See Note 1
of Notes to the Company's Consolidated Financial Statements.) As a result, any
amounts payable to a subsidiary or owed by a subsidiary are subject to the
foreign exchange rate between the U.S. dollar and the respective local currency
and could have a material effect on the Company's results of operations. In
addition, the Company's foreign operations are subject to the risks generally
applicable to the conduct of business in such countries.
For a description of these and other risks associated with Exabyte's foreign
involvement, please see the "RISK FACTORS--Foreign Operations," "RISK FACTORS--
Foreign Sourcing" and "RISK FACTORS--Foreign Sales" sections below.
EMPLOYEES
- ---------
As of February 28, 1998, the Company had 1,229 full-time and part-time
employees and 94 temporary or contract employees for a total of 1,323
employees. Of the Company's total employees, 110 were employed in the
Automation Solutions division, 360 in the Enterprise division, 374 in the
Worldwide Service division, 26 in the Eagle(RTM) division, 114 in sales, 90
in customer/technical support, 40 in marketing, 136 in quality and business
systems and 73 in general and administration. None of the Company's employees
is represented by a labor union although EMG is subject to an organized Works
Council.
The Company reduced its workforce in October 1997 and again in January 1998,
primarily as a result of its decision to close the Eagle(RTM) division. These
reductions have resulted in the involuntary termination of approximately 163
employees, to date.
The Company faces extreme competition for key employees. Success depends to a
significant extent upon the ability to attract, retain and motivate key
engineering, marketing, sales, manufacturing, support and executive personnel.
For a description of the risks associated with retaining key employees, please
refer to the "RISK FACTORS--Key Employees" section below.
RISK FACTORS
- ------------
Media Constraints
- -----------------
The Company is currently experiencing a shortage of the AME media used in its
Mammoth tape drive. Exabyte's ability to sustain growth in the Mammoth line
depends on the availability of this media, which is produced to the Company's
specifications. Currently, the AME media is sourced exclusively from Sony, a
direct competitor of Exabyte. In the event such media is not available in
sufficient volume, at an acceptable quality level and at a competitive price,
the Company could be forced to delay or cancel shipments of current Mammoth
tape drive products, including associated libraries, or the introduction of
future Mammoth tape drive products, which could have a material adverse effect
on the Company's competitive position and its results of operations.
15
The Company's ability to obtain an adequate supply of this media has been, is
currently and may be further affected by any constraint in Sony's production
of the media, the divergence of Sony's limited media supply to other third
parties, any change in Sony's media specification which would no longer meet
the Company's requirements, or otherwise as a result of Sony's competitive
position. The Company is currently attempting to obtain a second source for
the production of advance tape media. However, there can be no assurance that
its production of the media will be in the volume or of the quality required by
the Company.
Supplier Dependence
- -----------------
The Company relies on sole-source suppliers for certain critical components. A
reliance on sole-source suppliers involves several risks, including possible
shortage of certain key components and reduced control over delivery schedules,
manufacturing yields, quality and costs. The Company has experienced problems
with the quality of and interruptions in the supply of sole-source components
in the past. Any future yield, quality, delivery or supply problems with any
of these suppliers could force Exabyte to delay or cancel shipments of its
products, which could have a material adverse effect on the Company's
competitive position and its results of operations.
Specifically, because the Company depends on Sony and Hitachi as principal
sources for their 8mm mechanical tape decks in Exabyte's 8mm tape drive
products (excluding Mammoth), the Company may encounter delays in or
termination of the production of these 8mm tape drive products should Sony
and/or Hitachi encounter any of the problems previously listed regarding sole-
source suppliers. While Exabyte has supply contracts with both Sony and
Hitachi, there can be no assurance that the supply of tape decks or spare
parts will continue at required levels, or that prices will remain at the
current levels.
Additionally, while there are other suppliers of 8mm decks, the Company has no
assurances these parties would enter into supply agreements for the tape decks.
Customizing tape decks for the Company's tape drive products would require many
months of effort. There can be no certainty that such efforts would be
successful, or, even if successful, that they would not result in a significant
delay in the shipment or even termination of the production of one or more of
the Company's tape drive products.
The Company relies solely on Quantum, a competitor of the Company, to supply
the DLT(TM) tape drives for Exabyte's DLT(TM) libraries. The Company may
encounter delays in shipping or termination of the production of its DLT(TM)
libraries should Quantum encounter any of the problems described above
regarding sole-source suppliers. Exabyte does not have a purchase agreement
with Quantum for the supply of its DLT(TM) tape drives, and as such, there can
be no assurance that the supply or price of the DLT(TM) tape drives will
continue at their current levels.
The Company has also engaged other third parties, including competitors and
potential competitors, in the joint development of products or components, and
may do so again in the future. These relationships subject Exabyte to supply
or technology dependencies (see "RISK FACTORS--Patent Infringement and
Proprietary Rights").
16
Mammoth
- -------
Mammoth incorporates a deck assembly mechanism manufactured the Company. Prior
to the introduction of Mammoth, the Company's manufacturing experience was
largely limited to assembling and testing components purchased from third
parties. Production of the Mammoth deck assembly requires a complex
manufacturing process that the Company had never undertaken before.
EMG develops, manufactures and supplies scanners and recording heads, a key
component of Exabyte's Mammoth product. This component requires a high degree
of manufacturing and technical expertise. The Company has previously
experienced a delay in the introduction of Mammoth caused in part by the
inability of EMG to supply a sufficient number of high-quality parts. There
can be no assurance that the Company will not again experience such production
constraints, which could have a material adverse effect on the Company's
results of operations.
Customer Dependence
- -------------------
IBM and Sun Microsystems accounted for 17% and 13%, respectively, of Exabyte's
sales in 1997. In addition, Exabyte's three largest customers accounted for an
aggregate of 39% of sales in 1997. These customers are not required to
purchase a minimum quantity of the Company's products and may cancel or
reschedule orders without significant penalty. The loss of one or more of
these customers or substantial cancellations by these customers would have a
material adverse effect on the Company's results of operations. The Company
has experienced delays in receipt of purchase orders and, on occasion,
anticipated purchase orders have been rescheduled or have not materialized due
to changes in customer requirements. In addition, significant rescheduling or
deferrals of orders by any of these customers could cause substantial
fluctuations in the Company's quarterly results. Additionally, Exabyte's
library products represent higher-margin business to the Company. Any
shortfall in the sale of these products would have a greater adverse impact on
the Company's results of operations.
Market Demand
- -------------
The Company believes that the demand for its products is substantially
dependent upon the demand for workstations, mid-range computer systems and
networks. These markets tend to be volatile and subject to market shifts,
which may or may not be discernible in advance by Exabyte. A slowdown in the
demand for such products could have a material adverse effect on the demand
for the Company's products in any given period. Any demand weakness,
particularly in the reseller channel, which generally represents higher-
margin sales, could have a greater impact on profitability and a material
adverse effect on the Company's results of operations. Additionally,
inaccuracies in market demand forecasts can quickly result in either
insufficient or excessive inventories and disproportionate overhead expenses.
Patent Infringement and Propriety Rights
- ----------------------------------------
The Company relies on a combination of patents, copyright and trade secret
protection, non-disclosure agreements and licensing arrangements to establish
and protect its proprietary rights. However, the Company believes that because
of the rapid pace of technological change in the tape storage industry, factors
17
such as knowledge, ability and experience of Exabyte's employees, new product
introductions and frequent product enhancements are often more significant than
patent and trade secret protection.
Although Exabyte continues to file patent applications for its products, there
can be no assurance that patents will issue from any pending applications or,
if patents do issue, that any claims allowed will be broad enough to protect
the Company's technology. In addition, there can be no assurance that any
patents issued to the Company will not be challenged, invalidated, or
circumvented, or that any rights granted thereunder would provide proprietary
protection to the Company.
The Company has received in the past, and may receive in the future,
communications from third parties asserting that the Company's products
infringe their proprietary rights. The Company has also received letters from
third parties seeking indemnification from infringement against other third
parties. There can be no assurance that any of these claims will not result in
prolonged and costly litigation. While it may be necessary or desirable in the
future to obtain licenses relating to one or more of Exabyte's products or
current or future technologies, there can be no assurance that the Company will
be able to do so on commercially reasonable terms. The inability to obtain any
required license or to obtain such license on commercially reasonable terms
could have a material adverse effect on the Company's results of operations.
Although the Company continues to implement protective measures and intends to
defend its proprietary rights, policing unauthorized use of the Company's
technology or products is difficult and there can be no assurance that these
measures will be successful. In addition, the laws of certain foreign
countries may not protect the Company's proprietary rights to the same extent
as do the laws of the United States.
Additionally, the mechanized deck assembly incorporated in Mammoth is produced
by the Company rather than supplied from a third party. As such, the Company
does not benefit from supplier indemnification regarding patent or other
intellectual property infringement. There can be no assurance that the
manufacture and/or sale of Mammoth will not infringe the proprietary rights of
third parties.
The Company has entered into agreements with third parties providing for the
joint development of certain products or components. The termination or
dissolution of such agreements could result in disputes over the respective
ownership of the underlying technology. The Company entered into a joint
development agreement with Philips Electronics for the development of certain
key components. The Company is currently in discussions with Philips
Electronics regarding the terms and conditions of the dissolution of this
agreement.
Competition
- -----------
The tape storage market is highly competitive and subject to rapid technology
change, and the Company expects competition to increase. Competition has
resulted in price erosion of Exabyte's products in the past and is expected to
occur in the future. The Company may also face more significant competitive
challenges in the future in the form of loss of market share, pricing pressure
and otherwise, particularly in the library market. Numerous companies are
engaged in researching, developing, and commercializing data storage products.
Additionally, some of the Company's current and prospective competitors have
significantly greater financial, technical, manufacturing and marketing
18
resources than Exabyte. There can be no assurance that these competitors will
not devote their resources to the aggressive marketing of storage product
technologies, to which there can be no assurance that these technologies will
not be equivalent or superior to the Company's technology or which render the
Company's products obsolete or non-competitive. The Company's ability to
successfully compete in the tape storage market depends, in part, on accessing
and adapting to any such technological changes. In addition, the industry has
experienced a number of consolidations which have increased and may continue to
increase the competitive pressures on Exabyte.
The Company faces competition directly from 8mm tape drives produced by other
companies, particularly Sony (who also produces tape decks and AME media for
Exabyte) and indirectly from half-inch, 4mm and minicartridge tape drives
produced by others. Some of these products offer greater data capacities and
transfer rates than do Exabyte's products, particularly Quantum's DLT(TM)7000
half-inch tape drive. Significant competition is also developing from
companies offering erasable and non-erasable optical disks. In addition, other
companies may introduce in the future competitive storage tape drives based on
new technologies that may render the Company's products obsolete or
non-competitive.
Product and Quality Performance
- -------------------------------
Any failure of the Company's products, including media, to perform in
accordance with specifications could result in the loss of critical user data.
Such a loss may result in claims against the Company for damages arising from
such data loss. In addition, the Company may incur costs associated with a
product recall or other corrective action to address product defects, including
latent or epidemic defects. The Company's results of operations could be
materially adversely affected by the costs related to such corrective action or
the defense of claims and the payment of any judgment or settlement in excess
of any insurance coverage. While the Company has in the past incurred certain
costs related to product defects, no such costs to date have resulted in a
material adverse effect to the Company's results of operations.
Year 2000
- ---------
The phenomenon, known generally as the Year 2000 problem, involving the
potential inability of information or other data-dependent systems to properly
distinguish year references as of the turn of the century, represents a
material risk to the Company in a number of ways.
First, the Company itself is heavily dependent upon the proper functioning of
its own computer or data-dependent systems, including, but not limited to, its
orders entry, payroll, engineering changes and manufacturing systems. Any
failure or malfunctioning on the part of these or other systems could adversely
affect the Company in ways that are not currently known, discernable,
quantifiable or otherwise anticipated by the Company. In mid-1997, Exabyte
formed a task force to evaluate those areas of the Company that may be affected
by the Year 2000 problem and devised a plan for the Company to become Year 2000
compliant in a timely manner. The task force established a plan designed to
upgrade all of the Company's major information systems and supporting software
programs for Year 2000 compliance by the end of 1998. There can be no
assurance that any such plan will be successful, that the Company will be able
to upgrade any or all of its major systems in accordance with the plan or, once
upgraded, that the systems will be Year 2000 compliant. Should the Company fail
19
to upgrade its information systems in a timely manner, the Company could face
potential problems with the manufacture of its products, which could cause a
material adverse effect on the Company's results of operations.
Second, the Company's suppliers, particularly sole-source and long lead-time
suppliers, may be adversely affected by their respective failure to address the
Year 2000 problem. Should any of the Company's suppliers encounter Year 2000
problems that cause the company to delay manufacturing or shipments of key
components to Exabyte, the Company may be forced to delay or cancel shipments
of its products, which would have a material adverse effect on the Company's
results of operations. The Company has to date undertaken no assessment of any
of its suppliers' efforts to become Year 2000 compliant.
Third, the Company's customers may be adversely affected by their respective
failure to address the Year 2000 problem. Any inability of Exabyte's key
customers to become Year 2000 compliant which would cause them to delay or
cancel substantial purchase orders or delivery of Exabyte's products would have
a material adverse effect on the Company's results of operations. The Company
has to date undertaken no assessment of any of its key customers' efforts to
become Year 2000 compliant.
Fourth, the Company's products are typically integrated into information
systems which may be date sensitive. Exabyte's products rely on such systems
in order to function properly. Should these systems or supporting software not
function properly due to the Year 2000 problem, there can be no assurance that
the Company's products would function properly. Any failure of the Company's
products to perform in accordance with specifications could result in the loss
of critical user data. Such a loss may result in claims against the Company
for damages arising from such data loss. See "RISK FACTORS--Product and
Quality Performance".
The Company believes that many companies in the high technology industry will
face significant litigation in the future regarding problems caused by
Year 2000 noncompliance. Because the Company operates in the high technology
industry, it is the Company's belief that it may be the subject of such
litigation. Any such litigation could have a material adverse effect on the
Company's results of operations.
Management of Business and Product Transitions
- ----------------------------------------------
The Company is currently experiencing a period of rapid business and product
transition associated in part with its decision to restructure the Company into
divisions, close the Eagle(RTM) division and exit the low-end server and
desktop markets as it addresses the complexities of developing, manufacturing
and servicing multiple products which incorporate several different
technologies and which are sold through multiple marketing channels. This
transition has placed a significant strain on the Company's management,
operational and financial resources, and may continue to do so in the future.
Effective management of this business transition will require Exabyte to
continually implement and improve its operational, financial and information
systems and to expand, train and manage its employee base.
20
Inventory Write-downs and Special Charges
- -----------------------------------------
The Company may be unable to manage inventory levels to meet changing patterns
of product demand, product transitions and new product introductions. Such
inability may result in the Company incurring a special charge or inventory
write-down, or establishing a reserve which would have a material adverse
effect on its results of operations. In the third quarter of 1995 and the
third and fourth quarters of 1997, the Company incurred special charges or
inventory write-downs which have had a material adverse effect on the Company's
results of operations. There can be no assurance that additional reserves,
write-downs or write-offs will not be taken in the future and that such actions
will not have a material adverse effect on the Company's results of operations.
Product Development
- -------------------
Exabyte participates in an industry that is subject to rapid technological
change. The Company believes that its future success will depend on its
ability to apply and extend its technology and further develop reliable tape
subsystems and robotic tape libraries with competitive price performance and
quality characteristics. Accordingly, Exabyte's ability to compete
successfully depends on continued enhancements to its existing products and the
timely development of new products that meet the changing needs of users. The
Company has experienced delays from time to time meeting internal product
development schedules. In the future, the Company may encounter difficulties
that could delay or prevent future product development.
Exabyte continually assesses its product cycles in terms of product
introduction and withdrawal. Any failure by the Company to accurately estimate
the timing of new product introductions may result in the premature or delayed
withdrawal of its existing product lines. The premature withdrawal of an
existing product line could result in the loss of revenue and earnings
contribution from that product line. The delayed withdrawal of an existing
product line could result in the Company's assumption of excess product
inventory. Additionally, the premature or delayed introduction of a product
could adversely affect the sales or withdrawal timing of an existing product.
Failure to accurately time product introductions and withdrawals could have a
material adverse effect on the Company's results of operations.
The Company is currently developing a follow-on product to Mammoth. Any
inability or delay of the Company to develop and manufacture this product would
have a significant impact on the sale of the Mammoth tape drive and would have
a material adverse effect on the Company's results of operations.
Additionally, the Company's inability to maintain cost-effective volume
production of high-quality products and to introduce announced products would
have a material adverse effect on the Company's results of operations.
Key Employees
- -------------
The development, introduction and success of Exabyte's products depend largely
on the continued employment of certain key employees. The loss of key
employees could delay internal product development schedules, interrupt team
continuity and subject Exabyte to the risk of losing proprietary information to
competitors or other third parties.
21
Exabyte has in the past lost key employees to competitors and to other
companies and may likely lose key employees in the future. Although Exabyte
has incentive programs in place which are designed to encourage the continuous
employment of certain key employees, there can be no assurance that such
programs will be successful. Any such loss of key employees could have a
material adverse effect on the Company's results of operations.
Fluctuations In Quarterly Results
- ---------------------------------
The Company's results can fluctuate substantially from quarter to quarter for
various reasons. For example, the markets served by Exabyte are volatile and
subject to market shifts, which may or may not be discernible in advance by the
Company. The Company's operations have in the past and will in the future
reflect substantial fluctuations from period to period as a consequence of
industry shifts, price erosion, general economic conditions affecting the
timing of orders from customers, as well as other factors discussed herein.
Third Party Contract Manufacturing
- ----------------------------------
The Company has contracts with third parties to manufacture certain products.
Third party manufacturing of the Company's products may impair the Company's
ability to establish, maintain or achieve adequate product manufacturing design
standards or product quality levels. Risks associated with the transfer of
product manufacturing to third parties are particularly pronounced in the early
stages of the manufacturing of the product. A number of the Company's third
party manufacturing programs involve such early-stage manufacturing.
Third party manufacturing of the Company's products is based in part on
technology that the Company believes to be proprietary. Exabyte may license
this technology to contract manufacturers to enable them to manufacture
products for the Company. There can be no assurance that such manufacturers
will abide by any use limitations or confidentiality restrictions in such
licenses. In addition, these manufacturers may develop processes related to
manufacturing the Company's products which they would then own independently or
jointly with the Company. Any such action would increase Exabyte's reliance on
such manufacturers or would require the Company to obtain a license from such
manufacturers in order to manufacture its products. There can be no assurance
that any necessary licenses would be available on terms acceptable to the
Company, if available at all.
Foreign Sourcing
- ----------------
Because many of Exabyte's key components and products are currently or may be
manufactured in Japan, Germany, The Netherlands, China or Singapore, the
Company's results of operations may be materially affected by fluctuations in
currency exchange rates. A substantial portion of the Company's products
incorporate subassemblies and components purchased from Japanese or other
overseas suppliers in yen or other foreign currencies. The Company enters into
foreign currency forward contracts to hedge the purchase of certain inventory
components from Japanese suppliers. (See Note 1 of Notes to the Consolidated
Financial Statements.) Additional contractual arrangements may be made
subjecting Exabyte to additional foreign exchange rate risks.
22
The Company's international involvement is also subject to certain other risks
common to foreign operations, including government regulation and import
restrictions. In particular, an adverse foreign exchange movement of the U.S.
dollar versus Japanese yen or other currency, or the imposition of import
restrictions or tariffs by the United States government on products or
components shipped from Japan or another country could have a material adverse
effect on the Company's results of operations. Additionally, because Exabyte's
products incorporate components produced overseas, the sale of the Company's
products to domestic federal or state agencies may be restricted by limitations
imposed by the Buy American Act or the Trade Agreement Act.
Foreign Sales
- -------------
Direct international sales accounted for approximately 32% of sales in 1997 and
Exabyte currently expects that direct international sales will continue to
represent a significant portion of the Company's revenue. In addition, many of
the Company's domestic customers ship a significant portion of Exabyte's
products to their customers overseas. Currently, a very small percentage of
sales are denominated in foreign currencies and may be directly affected by
foreign exchange rate fluctuations. Changes in the foreign exchange rates may
also affect the volume of sales denominated in U.S. dollars to overseas
customers. The Company's sales are also subject to risks common to export
activities, including government regulation, tariffs, and import and
environmental restrictions. Exabyte's international sales may also be subject
to export licensing requirements.
Foreign Operations
- ------------------
The Company's subsidiaries in The Netherlands, Germany, Japan, Canada and
Singapore operate under their respective local currencies. See Note 1 to the
Company's Consolidated Financial Statements. As a result, any amounts payable
to a subsidiary or owed by a subsidiary are subject to the foreign exchange
rate between the U.S. dollar and the respective local currency, and could have
a material impact on the Company's results of operations. In addition, the
Company's foreign operations are subject to the risks generally applicable to
the conduct of business in such countries.
Volatility Of Stock Price
- -------------------------
The market price of the Company's common stock has historically been, and is
expected to continue to be, extremely volatile. The Company's operating
results have been below the expectations of investors and market analysts in
the past, and are likely to be below expectations again in some future period.
A shortfall in analyst or investor expectations of Exabyte's operating results
has had and could again have an immediate and significant impact on the market
price of the Company's common stock. Other factors could also have an
immediate and significant impact on the market price of the Company's common
stock, including without limitation, the Company's disclosure of its assessment
of its business prospects, new product announcements by the Company's
competitors and general conditions in the computer market.
23
Anti-Takeover Provisions
- ------------------------
The Company has taken a number of actions which could have the effect of
deterring a hostile takeover or delaying or preventing a change in control that
could result in a premium payment to the Company's stockholders for their
shares or that might otherwise be beneficial to the stockholders. The Company
has adopted a stockholder rights plan which could cause substantial dilution of
stock to a person who attempts to acquire the Company on terms not approved by
the Board of Directors. In addition, the Company's Restated Certificate of
Incorporation and By-laws contain provisions which may delay or prevent a
change in control. These provisions include:(i) the classification of the
Board; (ii) the authority of the Board to issue preferred stock without further
action by the stockholders, with such voting rights and other provisions as
the Board may determine; (iii) the requirement that actions by stockholders be
taken at a meeting of stockholders and not by written consent; (iv) the
requirement for advance notice of stockholder proposals and director
nomination;(v) the provision that only the Board may increase the authorized
number of directors; and (vi) the requirement that special meetings of
stockholders may be called only by the Chairman of the Board, President or
majority of directors.
Effective January 26, 1996, the Compensation Committee approved, and the Board
adopted, a severance compensation program ("Severance Program") under which
officers and other key employees of the Company would receive certain severance
payments if they are dismissed from Exabyte within one year after certain
changes in control of the Company occurred. The Severance Program provides for
a severance payment in varying amounts, not to exceed twelve months of
compensation, depending upon: (i) the time of any such change in control; and
(ii) the position level of the terminated officer or employee. The Severance
Program further allows, in certain circumstances, accelerating the vesting of
outstanding and unexercised stock options held by the affected officer or
employee.
Securities Suits
- ----------------
A large number of companies, directors and officers in the high technology
industry have been subjected to class action and derivative action suits filed
in federal and state courts. These suits generally allege that the defendants
failed to adequately disclose certain risks. The Company's results of
operations could be materially affected by the legal costs of defending such
actions, the divergence of management's attention from the Company's business,
and the payment of any judgment or settlement arising out of any such actions
against the Company in the future. In 1993, the Company successfully defended
a series of such class actions at an immaterial cost to the Company and it is
the Company's belief there are no current or pending actions against the
Company at this time.
24
Item 2.
PROPERTIES.
The Company's corporate offices, research and development, and manufacturing
facilities are located in Boulder, Colorado, in leased buildings aggregating
approximately 469,996 square feet. The lease terms on these facilities expire
on various dates ranging from March 1998 to September 2004. The Company
believes that additional space will be available if needed for further
expansion. The following chart identifies the location and type of each
Exabyte property.
LOCATION
-------------------------------------
OFFICE TYPE DOMESTIC INTERNATIONAL
----------- -------- -------------
R&D & MFG. Boulder, CO Nuremberg, Germany
PROCUREMENT Tokyo, Japan
SERVICE Boulder, CO Falkirk, Scotland
Mississauga, Ontario, Canada
Artarmon, Australia
Singapore
SALES & SUPPORT Boulder, CO Utrecht, The Netherlands
Campbell, CA Mississauga, Ontario, Canada
Mission Viejo, CA Paris, France
Oakbrook, IL Gwynedd, United Kingdom
Annapolis, MD Frankfurt, Germany
Walpole, MA Shanghai, China
Huntersville, NC Beijing, China
Beaverton, OR Hong Kong, China
Dallas, TX Singapore
Houston, TX
Item 3.
LEGAL PROCEEDINGS.
The Company is not currently aware of any material legal
proceedings against the Company.
Item 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Inapplicable.
25
EXECUTIVE OFFICERS OF THE COMPANY
=================================
The executive officers of the Company and their ages as of March 2, 1998 are
as follows:
William L. Marriner 44 Chairman of the Board
President and Chief Executive Officer
Mark W. Canright 46 Senior Vice President,
Sales & Customer Support
Stephen F. Smith 48 Vice President, Chief Financial Officer,
Corporate Secretary and General Counsel
Mr. William L. Marriner joined the Company in March 1987 as Vice President,
Finance and Administration and Chief Financial Officer. He was subsequently
promoted to Senior Vice President in July 1991 and Executive Vice President in
December 1994 and continued to serve as Chief Financial Officer until January
1997. Mr. Marriner was elected acting President and Chief Executive Officer in
January 1997, President, Chief Executive Officer and director in July 1997 and
Chairman of the Board in January 1998. Prior to joining the Company,
Mr. Marriner held various positions at Storage Technology Corporation from 1978
to 1987, including Vice President of Pacific and Latin American Operations,
Manager of Business Planning and Administration for International Operations
and Assistant to the President.
Mr. Mark W. Canright joined Exabyte in 1987 as Western Region Sales Manager and
was promoted to Western Region Director in 1990, Vice President of North
American Sales in January 1992, Vice President of Worldwide Sales and Support
in July 1992, Vice President of Worldwide Sales and Marketing in January 1993
and Senior Vice President of Worldwide Sales and Marketing in January 1994.
Mr. Canright has held the position of Senior Vice President of Sales and
Customer Support since February 1996. Prior to joining the Company,
Mr. Canright held various sales management positions at the Burroughs
Corporation, Data General and Convergent Technologies.
Mr. Stephen F. Smith joined the Company in June 1989 as Exabyte's General
Counsel, and currently holds this position. Mr. Smith was appointed as Vice
President and Chief Financial Officer in December 1997. Mr. Smith has also
served as Secretary since February 1995. Prior to joining Exabyte, Mr. Smith
held various positions at StorageTek from 1977 to 1989, including General
Counsel, Senior Counsel and Director of International Financial Operations.
Executive officers serve at the discretion of the Board. There are no family
relationships among any of the directors and officers.
26
PART II
Item 5.
MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.
The Company's common stock is traded in the over-the-counter market and quoted
in the National Market System of the Nasdaq Stock Market("Nasdaq") under the
symbol EXBT. The following table shows, for the calendar quarters indicated,
the high and low trading prices of the Company's common stock as reported on
Nasdaq.
Calendar Year High Low
- ------------- ----- -----
1996
First Quarter................................ $17 $13
Second Quarter............................... 22-3/4 12-3/8
Third Quarter................................ 15-1/2 11-5/8
Fourth Quarter............................... 17-1/2 12-5/8
1997
First Quarter................................ $14-3/4 $ 9-1/2
Second Quarter............................... 16-1/2 11-3/4
Third Quarter................................ 14-1/8 10
Fourth Quarter............................... 11-15/16 5-5/8
1998
First Quarter (through March 2, 1998)........ $ 8-3/8 $ 6-7/16
At March 2, 1998, the Company had 719 holders of record of its common stock.
The Company has never paid cash dividends on its common stock. In addition,
the Company's bank line of credit prohibits the payment of dividends without
prior bank approval. **The Company presently intends to retain any earnings
for use in its business and does not anticipate paying any cash dividends on
its common stock in the foreseeable future.**
Item 6.
SELECTED FINANCIAL DATA
(In thousands, except per share amounts)
The selected financial data set forth below with respect to the Company's
consolidated statements of operations for the fiscal years ended January 3,
1998, December 28, 1996, December 30, 1995, December 31, 1994 and January 1,
1994, and with respect to the consolidated balance sheets as of January 3,
1998, December 28, 1996, December 30, 1995, December 31, 1994 and January 1,
1994 are derived from consolidated financial statements audited by Price
Waterhouse LLP, independent accountants. The consolidated financial statements
for the years ended January 3, 1998, December 28, 1996 and December 30, 1995
are included elsewhere in this report on Form 10-K and the selected financial
data shown below are qualified by reference to such financial statements.
27
(In thousands except per share amounts) Fiscal Years Ended
Jan. 3, Dec. 28, Dec. 30, Dec. 31, Jan. 1,
Consolidated Statement of Operations Data: 1998 1996 1995 1994 1994
- ------------------------------------------ ------- ------- ------- ------- -------
Net sales.................................... $335,684 $362,891 $374,147 $381,844 $310,295
Cost of goods sold........................... 288,053 265,002 311,891 257,365 219,053
-------- -------- -------- -------- --------
Gross profit................................. 47,631 97,889 62,256 124,479 91,242
Operating expenses:
Selling, general and administrative..... 59,211 47,929 49,896 42,560 37,169
Research and development................ 40,909 38,391 36,956 33,586 31,648
Purchased research and development(1)... -- -- -- 2,597 --
-------- -------- -------- -------- --------
Income (loss) from operations................ (52,489) 11,569 (24,596) 45,736 22,425
Other income (expense), net.................. (634) 1,114 1,568 2,069 1,507
-------- -------- -------- -------- --------
Income (loss) before income taxes(2)......... (53,123) 12,683 (23,028) 47,805 23,932
(Provision) benefit for income taxes......... 22,312 (4,058) 10,593 (15,400) (7,750)
-------- -------- -------- -------- --------
Net income (loss)............................ $(30,811) $ 8,625 $(12,435) $ 32,405 $ 16,182
======== ======== ======== ======== ========
Basic net income (loss) per share............ $(1.38) $0.39 $(0.57) $1.52 $0.77
======== ======== ======== ======== ========
Common shares used in the calculation of
basic net income (loss) per share(3).... 22,326 22,003 21,711 21,378 21,001
======== ======== ======== ======== ========
Diluted net income (loss) per share.......... $(1.38) $0.39 $(0.57) $1.48 $0.76
Common and potential common shares used ======== ======== ======== ======== ========
in the calculation of diluted net
income (loss) per share(3).............. 22,326 22,307 21,711 21,965 21,399
======== ======== ======== ======== ========
Consolidated Balance Sheet Data:
- --------------------------------
Working capital.............................. $128,282 $143,730 $137,143 $157,978 $129,693
Total assets................................. 221,346 256,126 250,336 242,765 197,307
Long-term obligations, excluding current
portion................................. 2,974 3,458 4,181 237 454
Stockholders' equity......................... 170,796 200,013 186,366 196,907 158,535
(1) Purchased research and development relates to the Grundig Data Scanner
GmbH acquisition during 1994.
(2) The Company recorded restructuring charges in 1997 totaling $34.9 million.
See Note 10 of Notes to Consolidated Financial Statements.
(3) See Note 1 of Notes to Consolidated Financial Statements for an
explanation of the determination of shares used in computing net income
(loss) per share.
Quarterly Results of Operations (Unaudited)
- -------------------------------------------
The following table sets forth unaudited operating results for each quarter of
fiscal 1997 and 1996. This information has been prepared on the same basis as
the audited financial statements and, in the opinion of management, contains
all adjustments, consisting only of normal recurring adjustments, necessary for
a fair statement thereof. The operating results for any quarter are not
necessarily indicative of results for any future period.
28
(In thousands, except per share amounts) Quarters Ended
Jan. 3, Sep. 27, Jun. 28, Mar. 29,
1998 1997 1997 1997
------- ------- ------- -------
Net sales.............................. $74,641 $78,474 $97,144 $85,425
Cost of goods sold..................... 74,771 79,643 71,452 62,187
------- ------- ------- -------
Gross profit (loss).................... (130) (1,169) 25,692 23,238
Selling, general and administrative.... 15,778 15,612 15,083 12,738
Research and development............... 12,207 10,463 8,894 9,345
------- ------- ------- -------
Income (loss) from operations(1)....... (28,115) (27,244) 1,715 1,155
Other income (expense), net............ (943) 38 (171) 442
------- ------- ------- -------
Income (loss) before income taxes...... (29,058) (27,206) 1,544 1,597
(Provision) benefit for income taxes... 11,466 11,914 (525) (543)
------- ------- ------- -------
Net income (loss)...................... $(17,592) $(15,292) $ 1,019 $ 1,054
======== ======== ======= =======
Basic net income (loss) per share...... $(0.79) $(0.68) $0.05 $0.05
======== ======== ======= =======
Diluted net income (loss) per share.... $(0.79) $(0.68) $0.05 $0.05
======== ======== ======= =======
As a Percentage of Net Sales
Net sales.............................. 100.0% 100.0% 100.0% 100.0%
Cost of goods sold..................... 100.2 101.5 73.6 72.8
----- ----- ----- -----
Gross margin........................... (0.2) (1.5) 26.4 27.2
Selling, general and administrative.... 21.1 19.9 15.5 14.9
Research and development............... 16.4 13.3 9.1 10.9
----- ----- ----- -----
Income (loss) from operations(1)....... (37.7) (34.7) 1.8 1.4
Other income (expense), net............ (1.3) 0.0 (0.2) 0.5
----- ----- ----- -----
Income (loss) before income taxes...... (39.0) (34.7) 1.6 1.9
(Provision) benefit for income taxes... 15.4 15.2 (0.6) (0.7)
----- ----- ----- -----
Net income (loss)...................... (23.6)% (19.5)% 1.0% 1.2%
===== ===== ===== =====
(1) In the quarters ended January 3, 1998 and September 27, 1997 the Company
recorded pre-tax restructuring charges of $15.5 million and $19.4 million,
respectively, related to its decision to exit the desktop and low-end server
market. See Note 10 of Notes to Consolidated Financial Statements.
29
Quarters Ended
Dec. 28, Sep. 28, Jun. 29, Mar. 30,
1996 1996 1996 1996
------- ------- ------- -------
(In thousands, except per share amounts)
Net sales.............................. $85,868 $92,741 $90,464 $93,818
Cost of goods sold..................... 65,005 66,079 65,641 68,277
------ ------ ------ ------
Gross profit........................... 20,863 26,662 24,823 25,541
Selling, general and administrative.... 13,865 11,921 11,634 10,509
Research and development............... 10,972 9,248 8,142 10,029
------ ------ ------ ------
Income (loss) from operations......... (3,974) 5,493 5,047 5,003
Other income (expense), net............ (11) 293 688 144
------ ------ ------- ------
Income (loss) before income taxes...... (3,985) 5,786 5,735 5,147
(Provision) benefit for income taxes... 1,943 (2,083) (2,065) (1,853)
------ ------ ------ ------
Net income (loss)...................... $(2,042) $ 3,703 $ 3,670 $ 3,294
======= ======= ======= =======
Basic net income (loss) per share...... $(0.09) $0.17 $0.17 $0.15
======= ======= ======= =======
Diluted net income (loss) per share.... $(0.09) $0.17 $0.16 $0.15
======= ======= ======= =======
As a Percentage of Net Sales
Net sales.............................. 100.0% 100.0% 100.0% 100.0%
Cost of goods sold..................... 75.7 71.3 72.6 72.8
----- ----- ----- -----
Gross margin........................... 24.3 28.7 27.4 27.2
Selling, general and administrative.... 16.1 12.8 12.8 11.2
Research and development............... 12.8 10.0 9.0 10.7
----- ----- ----- -----
Income (loss) from operations.......... (4.6) 5.9 5.6 5.3
Other income (expense), net............ -- 0.3 0.8 0.2
----- ----- ----- -----
Income (loss) before income taxes...... (4.6) 6.2 6.4 5.5
(Provision) benefit for income taxes... 2.3 (2.2) (2.3) (2.0)
----- ----- ----- -----
Net income (loss)...................... (2.3)% 4.0% 4.1% 3.5%
===== ===== ===== =====
30
Item 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following tables set forth items in the Exabyte Corporation and
Subsidiaries (the "Company") Consolidated Statements of Operations for the
three years ended January 3, 1998, December 28, 1996 and December 30, 1995 as a
percentage of net sales.
CONSOLIDATED STATEMENTS OF OPERATIONS
Fiscal Years
1997 1996 1995
----- ----- -----
Net sales................................... 100.0% 100.0% 100.0%
Cost of goods sold.......................... 85.8 73.0 83.4
----- ----- -----
Gross margin................................ 14.2 27.0 16.6
Operating expenses:
Selling, general and administrative....... 17.6 13.2 13.3
Research and development.................. 12.2 10.6 9.8
----- ----- -----
Income (loss) from operations............... (15.6) 3.2 (6.5)
Other income (expense), net................. (0.2) 0.3 0.4
----- ----- -----
Income (loss) before income taxes........... (15.8) 3.5 (6.1)
(Provision) benefit for income taxes........ 6.6 (1.1) 2.8
----- ----- -----
Net income (loss)........................... (9.2)% 2.4% (3.3)%
===== ===== =====
PRODUCT MIX TABLE
Fiscal Years
1997 1996 1995
----- ----- -----
8mm drives:
EXB-8205, 8505, 8700, Eliant(TM)820,
and Mammoth............................... 59.1% 65.3% 59.7%
Libraries:
10h, 210, 220, 440, 480 and 18D........... 18.2 14.4 13.9
Media....................................... 14.6 11.9 9.5
Service, spares and other................... 6.6 5.8 5.6
Minicartridge products:
TR-3, TR-4i, TR-4s, Eagle(RTM)96, NS8(TM),
2501 and Nest(TM) products................ 5.8 4.8 1.9
Other end-of-life drives and libraries...... 0.8 1.5 12.0
Sales allowances............................ (5.1) (3.7) (2.6)
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
31
CUSTOMER MIX TABLE
Fiscal Years
1997 1996 1995
----- ----- -----
OEM......................................... 48.7% 50.6% 54.5%
Reseller.................................... 46.1 45.3 41.6
End-user and other.......................... 5.2 4.1 3.9
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
In addition to the historical information contained herein, the following
discussion contains forward-looking statements that include risks and
uncertainties. The Company has identified by **bold-face** various sentences
within this discussion which contain such forward-looking statements. The
Company's results of operations may differ materially from results contemplated
or otherwise anticipated by each and every such forward-looking statement.
Factors that could cause actual results to differ include, but are not limited
to, those identified herein as well as those discussed in the Company's filings
on Form 10-K and Forms 10-Q.
FISCAL YEAR 1997 COMPARED TO 1996
- ---------------------------------
In 1997, the Company's net sales of $335.7 million represented a 7.5% decrease
from 1996 sales of $362.9 million. In 1997, sales of 8mm products decreased to
$198.5 million from $236.9 million in 1996. This 16.2% change resulted from
decreased sales of 8mm half-high products, specifically the 8505 and 8205.
Sales of library products increased in both absolute dollars and as a
percentage of sales from 14.4% in 1996 to 18.2% in 1997. Media sales also
increased in absolute dollars and represented 14.6% of sales in 1997 compared
to 11.9% of sales in 1996. Other components of revenues did not vary
materially either in absolute dollars or as a percentage of sales.
The relative customer mix during 1997 shifted slightly to resellers, end-users
and others from original equipment manufacturers ("OEMs").
The Company's gross margin percentage for 1997 decreased to 14.2% compared to
27.0% for 1996. The 1997 margins were affected by 1997 restructuring charges
which impacted cost of sales by $29.0 million (see Note 10 of Notes to
Consolidated Financial Statements). Excluding such charges, the gross margin
for 1997 was 22.8%. Decreased gross margin percentages resulted from the
impact of (1) start-up manufacturing costs and inefficiencies on several new
products, (2) lower than expected manufacturing volumes, (3) increasing levels
of mini-cartridge sales, which were made at lower gross margins, and (4) higher
levels of program expenditures aimed at retailers through the Eagle(RTM)
division. These impacts were partially offset by lower warranty costs in 1997
versus 1996 and the impact of a stronger dollar versus the yen, which reduced
the cost of certain Japanese components. **The yen is expected to have a
continuing positive impact on margins in 1998. Due to the competitive nature
of the storage peripherals business, price erosion on most products is expected
to have a commensurate negative impact on gross margins unless manufacturing
costs can be reduced at the same time.**
32
Selling, general and administrative expenses increased to $59.2 million in
1997 from $47.9 million in 1996. These dollar amounts represent 17.6% and
13.2%, respectively, of revenue in each year. Excluding 1997 restructuring
charges (see Note 10 of Notes to Consolidated Financial Statements), these
expenses were $57.7 million and 17.2% of revenue. The increase is largely the
result of increased marketing expenditures on certain of the Company's newer
products, such as Mammoth and Eliant(TM)820, and a corporate branding awareness
program. These expenses were also modestly impacted by the opening of
subsidiaries in Singapore and Canada during the latter part of 1996 and early
part of 1997.
Research and development expenditures increased to $40.9 million in 1997
compared to $38.4 million in 1996. These dollar amounts represent 12.2% and
10.6%, respectively, of revenue for each year. Excluding 1997 restructuring
charges (see Note 10 of Notes to Consolidated Financial Statements), these
expenses were $37.4 million and 11.1% of revenue. Recurring research and
development expenditures were adversely impacted in 1996 by higher than normal
levels of spending in connection with completion of the Mammoth development
effort. **The Company expects 1998 research and development expenses to
decrease from 1997 levels due to the decision to close the Eagle(RTM) division
and cancel its Eagle(RTM) development projects.**
Other income (expense), net, consists of interest income and expense, state
franchise taxes, foreign currency translation gains and losses and other
miscellaneous items. Other income (expense), net, was impacted in 1997 by the
write-off of an investment, which was considered impaired, of $900,000.
The income tax benefit for 1997 was 42.0% compared to expense of 32.0% in the
prior year. The 1997 tax benefit also reflects the benefit of filing amended
tax returns for 1993-1995 to claim additional research and development tax
credits. See Note 6 of Notes to Consolidated Financial Statements for a
description of the factors which resulted in the effective tax rates being
different from the statutory tax rate of 35.0%. **The Company currently
expects the 1998 effective tax rate to approximate 34.0%.**
The change from net income of $8.6 million in 1996 to a net loss of $30.8
million in 1997 resulted from the impacts of lower sales and gross margins in
1997, combined with higher operating expenses and the impact of restructuring
charges related to the decision to close the Eagle(RTM) division and exit the
desktop and low-end server markets.
FISCAL YEAR 1996 COMPARED TO 1995
- ---------------------------------
The Company's net sales of $362.9 million for fiscal 1996 decreased 3% from net
sales of $374.1 million for 1995. The overall decrease in sales resulted from
increases in sales of the Company's 8mm half-high drives, minicartridge drives
and consumables, which were more than offset by decreased sales of 8mm full-
high and 4mm drives which the Company discontinued in 1995 and 1996,
respectively. Sales in 1996 were also impacted by limited supply of the
Company's newest 8mm drive, Mammoth.
Sales of 8mm half-high drives increased to 65.3% of sales in 1996 from 59.7% in
1995. This increase was the result of increased sales of the Company's newer
8mm half-high products, such as Mammoth, and the transition away from 8mm full-
high products. Also included in 8mm half-high sales are more mature products,
such as the 8205 and 8505. Sales of these products remained relatively stable
representing 57.8% of sales in 1996 compared to 58.8% in 1995. Sales of 8mm
half-high libraries remained stable at 14.4% of total sales in 1996 and 13.9%
33
in 1995. Sales of 8mm full-high drives and libraries represented 0.8% of sales
in 1996 compared to 6.2% in 1995. Sales of 4mm products decreased to 0.7% of
sales in 1996 compared to 5.8% in 1995.
The relative customer mix during 1996 shifted to resellers from OEMs. Reseller
sales increased to 45.3% of sales in 1996 from 41.6% in 1995. OEM sales
decreased to 50.6% of sales in 1996 from 54.5% in 1995. End-user and other
sales represented 4.1% of net sales in 1996 and 3.9% in 1995.
The Company's gross margin percentage for 1996 increased to 27.0% compared to
16.6% for 1995. The 1995 margins were affected by special non-recurring third
quarter charges in cost of sales of $34.2 million related to the write-down of
full-high inventories pursuant to an end-of-life announcement. Excluding such
charges, the gross margin for 1995 was 25.8%. Gross margin was affected by a
number of factors during the year. An increase in the value of the dollar
versus the yen resulted in reduced costs for certain Japanese components.
Additionally, improved warranty costs had a positive impact on margins.
Selling, general and administrative expenses decreased to $47.9 million in 1996
from $49.9 million in 1995. The decreases are primarily the result of special
non-recurring charges in 1995 totaling $2.6 million related to the write-off of
goodwill and end-of-life capitalized equipment.
Research and development expenditures increased to $38.4 million for 1996
compared to $37.0 million in 1995. The increases were attributed to continuous
engineering improvements on products released during the year, such as Mammoth,
as well as increased engineering efforts related to new 8mm, minicartridge and
library products which were introduced in 1997.
Other income, net, consists primarily of interest income and expense, state
franchise taxes, foreign currency gains and losses and other miscellaneous
items.
The provision for income tax for 1996 was 32.0% compared to a benefit of 46.0%
in the prior year. See Note 6 of Notes to Consolidated Financial Statements
for a description of the factors which resulted in the effective tax rates
being different from the statutory tax rate of 35.0%.
A net loss of $12.4 million in 1995 changed to net income of $8.6 million in
1996. This change reflects the impact of certain inventory and other
write-downs in 1995.
RESTRUCTURING CHARGES
- ---------------------
During 1997, the Company recorded pre-tax restructuring charges of $34.9
million related to formal decisions by the Company's Board of Directors to exit
the desktop and low-end server market through the closure of its Eagle(RTM)
division. These decisions were made in order to focus the Company on mid-range
application server markets and establish a more competitive cost structure in
those markets.
34
The following table summarizes the activity in the Company's restructuring
reserves during 1997:
Workforce Inventory Asset
(In thousands) Reduction Write-downs Write-downs Total
--------- ----------- ----------- -----
Restructuring charges........... $3,123 $24,684 $7,140 $34,947
Asset write-downs............... -- (16,890) (6,140) (23,030)
Cash payments................... (1,480) (134) -- (1,614)
Additional charges/
reclassifications........... (196) 128 -- (68)
------ ------ ------ -------
Balance, January 3, 1998........ $1,447 $7,788 $1,000 $10,235
====== ====== ====== =======
Cash payments in 1997 relate primarily to termination payments for the first of
two reductions in workforce. A second reduction in force resulted from a
formal action in December and took place in January 1998. Additional charges/
reclassifications resulted from the write-off of a note receivable, net
additional charges impacting earnings of $58,000 and reclassifications among
reserves. **The majority of remaining reserve balances are expected to result
in future cash outflows. The workforce reduction and related recurring expense
reductions are expected to yield annual savings of at least $20 million.**
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards Nos. 130 and 131, "Reporting Comprehensive
Income" ("SFAS 130") and "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS 131"), respectively (collectively, the
"Statements"). The Statements are effective for fiscal years beginning after
December 15, 1997. SFAS 130 establishes standards for reporting of
comprehensive income and its components in annual financial statements. SFAS
131 establishes standards for reporting financial and descriptive information
about an enterprise's operating segments in its annual financial statements and
selected segment information in interim financial reports. Reclassification or
restatement of comparative financial statements or financial information for
earlier periods is required upon adoption of SFAS 130 and SFAS 131,
respectively. **Application of the Statements' requirements is not expected to
have a material impact on the Company's consolidated financial position,
results of operations or earnings per share data as currently reported,
although its disclosures on business segments may change.**
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
During 1997, the Company expended $6.3 million of cash for operating
activities, received $1.3 million from the issuance of common stock to Company
employees, expended $11.8 million for capital equipment and paid $1.5 million
on long-term liabilities. Together, these activities resulted in a decrease in
the combined balance of cash and short-term investments of $18.3 million to a
year-ending balance of $48.5 million. The Company's working capital decreased
to $128.3 million on January 3, 1998 from $143.7 million on December 28, 1996.
35
The Company has a $7.5 million bank line of credit which expires May 15, 1998,
with borrowings under the line limited to 80% of eligible accounts receivable
plus 25% of eligible inventory (limited to $3,000,000). On January 3, 1998,
the amount available under the line was $7.5 million and no borrowings were
outstanding. Borrowings under the line of credit bear interest at the lower of
the bank's prime rate or LIBOR + 2%. The ability to borrow under this line of
credit is dependent upon the Company's adherence to a set of financial
covenants. The Company was in technical violation of certain of these
covenants at the end of the fourth quarter. This violation was subsequently
waived by the lender. **The Company anticipates that it will renew this line
at comparable terms upon its expiration.** Offsetting the amount available
under the line of credit is a letter of credit which secures certain leasehold
improvements made by the Company's subsidiary in Germany. This letter is for
DM 1,300,000 and decreases by DM 100,000 in August of each year until it is
fully depleted.
**The Company currently expects to make capital expenditures of approximately
$11.1 million during 1998. The Company believes its existing sources of
liquidity and funds expected to be generated from operations will provide
adequate cash to fund anticipated working capital and other cash requirements
through fiscal 1998.**
Item 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
Report of Independent Accountants................................... 36
Consolidated Balance Sheets -
January 3, 1998 and December 28, 1996............................... 37
Consolidated Statements of Operations - for the years ended
January 3, 1998, December 28, 1996 and December 30, 1995............ 38
Consolidated Statements of Changes in Stockholders' Equity -
for the years ended January 3, 1998, December 28, 1996 and
December 30, 1995................................................... 39
Consolidated Statements of Cash Flows -
for the years ended
January 3, 1998, December 28, 1996 and December 30, 1995............ 40-41
Notes to Consolidated Financial Statements.......................... 42-56
36
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Exabyte Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of changes in stockholders' equity and
of cash flows present fairly, in all material respects, the financial position
of Exabyte Corporation and its subsidiaries at January 3, 1998 and December 28,
1996, and the results of their operations and their cash flows for each of the
three years in the period ended January 3, 1998, in conformity with generally
accepted accounting principles. 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 of these statements in accordance with generally accepted auditing
standards which 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, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
- ------------------------
PRICE WATERHOUSE LLP
Boulder, Colorado
January 21, 1998
37
EXABYTE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (In thousands)
January 3, December 28,
1998 1996
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ASSETS
Current assets:
Cash and cash equivalents.......... $ 47,014 $ 46,223
Short-term investments............. 1,470 20,600
Accounts receivable, net........... 41,577 56,414
Inventories, net................... 44,551 55,765
Income tax receivable.............. 15,873 --
Deferred income taxes.............. 20,678 14,172
Other current assets............... 4,695 3,211
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Total current assets................. 175,858 196,385
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Property and equipment, net.......... 35,152 45,187
Deferred income taxes................ 8,900 10,055
Other assets......................... 1,436 4,499
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45,488 59,741
-------- --------
$221,346 $256,126
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................... $ 13,992 $ 18,916
Accrued liabilities................ 32,021 31,900
Accrued income taxes............... 1,044 1,007
Current portion of long-term
obligations ..................... 519 832
-------- --------
Total current liabilities............ 47,576 52,655
Long-term obligations ............... 2,974 3,458
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Commitments (Note 7).................
Stockholders' equity:
Preferred stock, $.001 par value;
14,000 shares authorized; no
shares issued and outstanding.... -- --
Common stock, $.001 par value;
50,000 shares authorized;
22,466 and 22,184 shares
issued........................... 22 22
Capital in excess of par value..... 65,718 64,124
Treasury stock, at cost, 15 shares. (9) (9)
Retained earnings.................. 105,065 135,876
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Total stockholders' equity........... 170,796 200,013
-------- --------
$221,346 $256,126
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
38
EXABYTE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)