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SyQuest files for Chapter 11

The former pioneer in removable storage devices files for bankruptcy protection and reaches a tentative agreement to sell "substantial assets."

SyQuest, which had previously warned it was considering filing for bankruptcy, today let the other shoe drop.

The portable storage company filed for Chapter 11 under the U.S. bankruptcy laws, and said it was selling the bulk of its business to a strategic buyer. The company did not immediately disclose the identity of the buyer.

Under a letter of intent, SyQuest will sell its patents and other intellectual property, manufacturing and development equipment, finished goods and products still in the manufacturing process, along with raw materials, to the unnamed company.

SyQuest said it will use some of the proceeds from selling its assets to provide warranty service to customers who have already purchased its products. Going forward, the buyer will provide customer support and warranties to future SyQuest products sold.

The company, which at one time held the No. 1 position in the portable storage market before falling far behind Iomega, had $36.9 million in assets at the time of its bankruptcy filing, but was $85 million in debt.

SyQuest's largest unsecured creditors are Akashic Memories and StorMedia, which are owed a combined $1 million, said Tobias Keller, a SyQuest spokesman.

The two companies are expected to reach a definitive agreement by November 25. SyQuest plans to operate with a skeleton crew for the next several months until the deal is completed, Keller said.

SyQuest, which owns a manufacturing plant in Malaysia through one of its wholly owned subsidiaries, will work with that country's laws in divesting its property.

The company fell under an extreme credit crunch last month when one of its bankers reduced its credit line from $30 million to $10.45 million, as the company had fallen out of compliance with its lending requirements.

That created a problem with its investors, whom the company had hoped to secure $13 million in financing.

Those events followed SyQuest's third quarter report in August, in which the company posted a net loss of $42.5 million, compared with a loss of $10.7 million a year ago. Revenue for the quarter, however, rose 41 percent over the year-ago period, to $44.7 million.