<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended September 30, 1996
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 Number 0-11778
SEEQ TECHNOLOGY INCORPORATED
(Exact name of registrant as specified in its charter)
DELAWARE 94-2711298
(State of incorporation) (I.R.S. Employer
Identification No.)
47200 Bayside Pkwy., Fremont, California 94538
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (510) 226-7400
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01
par value
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 90 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 the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing price of the Common Stock on December 6,1996
as reported by NASDAQ, was approximately $90,865,000.
The number of outstanding shares of the registrant's Common Stock on December 6,
1996 was 30,288,379.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Proxy Statement for the 1997 Annual Meeting of Stockholders as filed with
the Commission (the "Proxy Statement") - Part III, Items 10, 11, 12 and 13.
<PAGE> 2
PART I
This Form 10-K contains forward-looking statements that involve risks and
uncertainties. The statements contained in this Form 10-K that are not purely
historical are forward-looking statements within the meaning of Section27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934, including without limitation statements regarding the Company's
expectations, beliefs, intentions or strategies regarding the future. All
forward-looking statements included in this document are based on information
available to the Company on the date hereof, and the Company assumes no
obligation to update any such forward-looking statements. The Company's actual
results could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including those set forth under the
caption "Risk Factors" and elsewhere in this Form 10-K.
ITEM 1. BUSINESS.
SEEQ Technology Incorporated (herein "SEEQ" or the "Company") is a leading
supplier of Ethernet data communication products for networking applications.
Ethernet is the dominant local area network ("LAN") technology today and was
originally developed by Xerox and Digital Equipment Corporation in the late
1970s. As an Ethernet pioneer, SEEQ introduced the industry's first Ethernet
chip set in 1982. SEEQ combines its strengths in digital circuit and analog
design with its communication systems expertise to produce mixed-signal data
communication solutions that provide increased functionality and greater
reliability that result in lower total system cost. In 1983, the Company
successfully developed the industry's first integrated Ethernet data
communication controller. In 1994, the Company introduced the industry's first
Fast Ethernet (100 megabits per second "Mbps") four-port controller.
SEEQ's product development and marketing strategy is to sell its products to
systems manufacturers who are performance and volume leaders in the information
networking, telecommunications, personal computer, workstation and printer
markets. The Company's more than 150 customers worldwide include such industry
leaders as Apple Computer, Bay Networks, Cabletron, Cisco Systems, Compaq,
Hewlett Packard, Intel, and 3COM. SEEQ's Ethernet data communication products
are sold in numerous market applications of Ethernet adapter cards,
workstations, media attachment units, print servers, file servers, repeaters,
switches, bridges and routers.
SEEQ's complete product line includes Ethernet data communication
controllers, AutoDUPLEXTM Ethernet chip sets for automatic full duplex switched
Ethernet applications, encoders/decoders, coaxial cable CMOS transceivers and
unshielded twisted pair cable CMOS transceivers, and networking modules. In
order to meet customers' needs for higher-speed LAN solutions, the Company
offers products which support Fast Ethernet, which is a 100Mbps version of
traditional 10Base-T Ethernet (10Mbps). The Company also sells media signaling
integrated circuits for another high speed LAN market, Asynchronous Transfer
Mode ("ATM").
The Company was founded in 1981 to develop, manufacture and market products
incorporating metal-oxide-silicon ("MOS") reprogrammable, nonvolatile memory
integrated circuit technology. In February 1994, the Company sold its
nonvolatile memory technology and related assets to focus on the data
communications market.
INDUSTRY BACKGROUND
Corporate computing networks during the late 1960s and 1970s were
characterized by expensive main frame computers which were concentrated in a
central location and accessed by remote display terminals. As the declining cost
of computing power made distributed data processing possible, LANs developed in
the early 1980s which provided departmental level processing in the form of
powerful small personal computers ("PCs") and microprocessor-based workstations.
LANs are used at the departmental level for information exchange among the local
computers and sharing of peripherals.
Although the computer industry initially favored proprietary LAN solutions, a
cooperative effort between computer and communications vendors under the
sponsorship of the Institute of Electrical and Electronic Engineers ("IEEE")
resulted in several LAN protocol standards including Ethernet and Token Ring.
These standard-based LANs provide a local shared communications facility which
can be accessed by products from multiple vendors, even though the higher
2
<PAGE> 3
level of protocols for these products may be incompatible. Under these
standards, the installation of LANs has expanded significantly, with most of the
worldwide PCs used in a business environment now connected to some form of LAN.
The PC LAN network consists of the following three major hardware elements
allowing data communication through a network operating system: network
interface cards ("NICs"), physical media transfer communication hardware and
file servers. The NIC is the hardware which allows a PC or workstation to link
via the physical media of transmission to the other network users and
peripherals. The physical media transfer communication hardware are the
connectors used to connect the NICs to the network and the type of wire the
transmission media used through the LAN. The choices of wiring include thick and
thin Ethernet cable, shielded and unshielded twisted pair (telephone cable), and
fiber optic cabling. The use of the growing installed base of twisted-pair
copper telephone lines is expected to remain the primary means for local
connectivity to the information superhighway. Currently, unshielded twisted-pair
copper wire is the most cost-effective means of transmitting information at the
data rates typically required for local connectivity.
Demand for LAN products has grown rapidly in recent years, as a result of the
growth in corporate networks, the introduction of client/server computing, the
expansion of personal computer and workstations markets, and the development of
new applications, including video conferencing, image processing and multimedia.
As networks grow in size and these new applications require faster data rates,
business networks will require more throughput capacity than is provided by
current implementations such as 10 Mbps Ethernet or 16 Mbps Token Ring. Fast
Ethernet (100 Mbps), Gigabit Ethernet (1,000 Mbps) and ATM technologies are
expected to satisfy the requirement for greater bandwidth capacity on most local
area networks.
BUSINESS STRATEGY
SEEQ's objective is to be a leading provider of digital and mixed-signal
silicon products for data communication applications. Key elements of the
Company's business strategy include the following:
DELIVER A BROAD RANGE OF PRODUCT OFFERINGS TO ETHERNET AND ATM BASED SYSTEMS
MANUFACTURERS
The primary focus of SEEQ's business strategy is to provide "connectivity
solutions" to leading systems manufacturers in rapidly growing Ethernet and ATM
based data communications markets. The Company strives to maintain close contact
with its customers and prospective customers to identify opportunities to design
products to meet customer specific functional requirements and to bring added
value to the end product. The Company also strives to continuously expand its
data communication product offerings in order to increase the capability and
operational and cost efficiencies for most LAN applications.
EXPAND "FAST" ETHERNET PRODUCT OFFERINGS AND CUSTOMER BASE
The Company is committed to the introduction of new data communication
products into existing and new high-speed LAN market segments (such as Fast
Ethernet and ATM), which enable system OEM's to improve performance, address new
applications and further integrate higher levels of system functionality. The
Company's existing line of Fast Ethernet products enable SEEQ to provide a full
range of LAN data communication solutions to its customers. SEEQ has been
successful in expanding its customer base by developing business relationships
with both established and emerging systems manufacturers. As the data
communications market, and specifically LAN equipment suppliers, adopt new, more
complex protocol standards, such as Fast Ethernet and ATM, and demand a higher
level of functional integration, SEEQ has designed its' new product offerings to
satisfy most LAN connectivity requirements.
CAPITALIZE ON MIXED-SIGNAL AND COMMUNICATIONS SYSTEMS EXPERTISE
The Company has assembled a talented group of engineers possessing both
mixed-signal integrated circuit and communications systems design skills. SEEQ
believes that its design staff is one of the leading mixed-signal teams in the
industry and represents one of the Company's core competitive strengths. The
Company's strategy is to utilize its
3
<PAGE> 4
process development and LAN technology expertise, together with its
manufacturing knowledge, to supply highly integrated connectivity solutions at
lower system cost than competitors' products.
MAINTAIN COST-EFFECTIVE SILICON FOUNDRY RELATIONSHIPS
SEEQ obtains the necessary supply of finished wafers to meet its
manufacturing needs through selective foundry arrangements with major
semiconductor manufacturers. These relationships are intended to provide SEEQ
with the required wafer fabrication capacity, and to provide the Company with
access to next generation silicon process technology. Due to the changing demand
for world-wide foundry capacity, it is the Company's objective to maintain two
suppliers for each of its "high-volume" products. Presently, SEEQ has foundry
arrangements with six semiconductor manufacturers; AMI Semiconductor, Hualon
Microelectronics Corporation ("HMC"), Ricoh, Rohm, Samsung Semiconductor and
TSMC.
EXTEND STRATEGIC RELATIONSHIPS WITH INDUSTRY LEADERS
SEEQ continues to work closely with systems manufacturers that are market and
technology leaders, which in selected cases has led to strategic sole-source
supplier arrangements. The Company believes that in order to build a long-term
business relationship with a customer, its product design and applications teams
must focus on understanding and meeting the customer's specific system
requirements. This close working relationship also enables SEEQ to identify
requirements for future systems being developed by the customer. In addition,
the Company plays an active role in industry-wide alliances aimed at developing
standards for new LAN technologies. SEEQ is a contributing member of the Fast
Ethernet Alliance and the recently formed Gigabit Ethernet Alliance.
TARGET EMERGING MARKETS FOR HIGH SPEED ETHERNET APPLICATIONS
Fast Ethernet has emerged over the last several years as a "user friendly"
solution to expanding network throughput capacity. In Fiscal 1996, Fast Ethernet
related product sales accounted for approximately 31% of SEEQ's total revenues.
It is expected that in fiscal 1997, the Fast Ethernet market could comprise
about 50% of the total available market for the Company's data communication
products. Even as the market for Fast Ethernet solutions begins to reach its
stride, network providers are developing products supporting even higher data
rates. SEEQ is working closely with these early market entrants and the Gigabit
Ethernet Alliance to develop a standard Gigabit Ethernet Media Access Controller
for high-performance networking systems such as switches, routers and servers.
PRODUCTS
Electronic data communications is one of the largest and fastest growing
segments of the integrated electronics market. LANs, representing networks
connecting two or more computers and peripherals within a localized geographical
area (e.g., office floor, building, or campus), address the need to share
information among individuals in close proximity. The most popular data
communication LAN technology in the market is Ethernet. The speed of standard
Ethernet is 10Mbps. Signal detection on Ethernet is based upon the concept of
carrier sense multiple access with collision detection ("CSMA/CD"). Today the
vast majority of Ethernet products are based on IEEE 802.3 standards. The most
popular Ethernet standard is 10Base-T, the operation of Ethernet over unshielded
twisted pair ("UTP") wiring.
The Company's Ethernet data link controllers are used in local area network
systems that can interconnect a wide variety of computers and peripheral
devices. They are generally used in Ethernet-compatible systems, and replace a
substantial number of discrete components previously contained on a printed
circuit board. The Company also produces a set of Ethernet encoder/decoder
circuits, media interface adapters ("MIAs"), and Ethernet transceiver circuits.
The Company's data communications products serve to reduce the cost of Ethernet
connections for local area network manufacturers.
The Company is also a leader in the application of automatic full duplex
technology to Ethernet LANs. SEEQ's AutoDuplex feature uses specially coded link
pulses to determine if the channel has duplex capabilities. The SEEQ patented
technique allows any node in a 10Base-T network to determine if it has a full
duplex channel for its use and to
4
<PAGE> 5
automatically modify its behavior when establishing independent transmit and
receive communication channels. This technique effectively doubles the
communications channel bandwidth available to the node. In a 10Base-T network
with full duplex nodes connected to a switching hub or multiport bridge, the
effective network bandwidth is doubled to 20 Mbits/sec. SEEQ has extended this
technique to Fast Ethernet to effectively increase the network bandwidth to 200
Mbits/sec.
In order to meet customers' needs for higher-speed LAN solutions, the Company
has developed a line of products for a high speed LAN technology called Fast
Ethernet. During 1994, the Company introduced its first Fast Ethernet product,
the 100Mbps four port Fast Ethernet controller. In 1996, SEEQ introduced a
100Mbps physical layer device.
MARKETING AND SALES
The Company sells its products to OEMs and distributors representing a wide
range of markets, including computer systems, facsimile equipment, engineering
workstations, modems, process controllers, and commercial data processing
systems. The Company's ten largest customers accounted for approximately 54%,
68% and 79% of net revenues for fiscal years 1994, 1995 and 1996, respectively.
Two customers, Apple Computer and Cisco Systems, accounted for approximately 16%
and 11% of revenues in fiscal 1994, respectively. Apple Computer and Serial
Systems (an agent for Hewlett Packard and Compaq) accounted for approximately
17% and 16% of revenues in fiscal 1995, respectively. Bay Networks and Serial
Systems accounted for approximately 42% and 10% of revenues in fiscal 1996,
respectively.
The Company coordinates all domestic sales through its' Burlington,
Massachusetts and Westlake, California regional sales offices in addition to its
Fremont, California headquarters. The Company's four OEM sales managers work
closely with manufacturers' representatives and distributors to secure
design-ins and production orders.
The Company markets its products through a network of independent
manufacturers' representatives and independent distributors. The Company has
contracted with five national distributors to stock and sell the Company's
products from five stocking locations. In addition, the Company has contracted
with approximately 15 independent manufacturers' representatives throughout the
United States, representing over 150 individual salespeople. The representatives
obtain orders for SEEQ, which the Company fills by shipping directly to the
purchaser and for which the Company pays the representatives commissions based
on the sales.
International sales were approximately $7.1 million, $8.6 million and $8.0
million, representing approximately 33%, 38% and 25% of product sales, for
fiscal years 1994, 1995 and 1996, respectively. Internationally, the Company
sells its' products through a network of approximately 22 manufacturer's
representatives (7 stock inventories of the Company's product), together with
international sales management in Fremont, California. Sales to foreign
customers are shipped from the Company's headquarters F.O.B. and are billed and
paid in United States dollars. Although sales may be made subject to tariffs in
certain countries or with regard to certain products, at present the Company's
average selling prices for foreign sales are not significantly different from
those for domestic sales. Foreign sales are subject to certain control
restrictions imposed by the United States and foreign governments, but the
Company has not encountered any such limitations that have materially affected
its foreign sales.
SEEQ's volume purchase orders do not necessarily result in sales as they are
generally terminable by the customer without significant penalty. Consequently,
backlog at any point in time is not necessarily indicative of future sales.
RESEARCH AND DEVELOPMENT
Expertise in a variety of related disciplines and functions is necessary to
design, develop and manufacture mixed signal semiconductor integrated circuits
which combine both digital and analog circuits. These disciplines include
systems and application engineering, computer aided design, device physics,
semiconductor process engineering, circuit design, reliability physics and test
engineering. The Company has committed and will continue to commit substantial
resources over an extended period to develop new products and technologies
utilizing all of these disciplines.
5
<PAGE> 6
The Company is concentrating on the application of its proprietary
technologies for the development of mixed signal integrated circuits for the
data communications market. Present research and development efforts are focused
on the development of Ethernet controllers and media signaling integrated
circuits for the 100Mbps Fast Ethernet market and the Gigabit Ethernet market,
and more highly integrated signaling devices for the 10Mbps Ethernet market.
The Company's research and development expenditures were approximately
$3,278,000, $3,069,000 and $3,303,000 for the fiscal years 1994, 1995 and 1996,
respectively. As of September 30, 1996, 16 employees were engaged in research
and development activities.
MANUFACTURING
The manufacturing process for semiconductors is comprised of three basic
operations: silicon wafer fabrication, assembly and testing. SEEQ has chosen to
use independent silicon foundries and assembly subcontractors to fabricate and
assemble its integrated circuits. This strategy enables the Company to focus its
resources on the design and test areas, where the Company believes it has
greater competitive advantages, and to eliminate the high cost of owning and
operating semiconductor silicon fabrication and assembly facilities.
Presently, SEEQ has a business relationship with six foundries. As SEEQ does
not have its own wafer fabrication capability, it must compete for foundry
capacity with other, larger semiconductor suppliers. SEEQ works closely with its
foundry partners to obtain a steady and predictable supply of integrated
circuits. While the Company believes it can obtain fabrication capacity with its
current foundry resources to meet current and future expected demand, the
Company could experience a shortfall in product availability if any of its
foundry partners are unable to meet planned capacity requirements or production
schedules. Further, the Company has no agreements with any of its foundries
which would ensure future wafer supply. Additionally, no one foundry partner is
capable of supplying sufficient capacity to meet total current or future
expected demand.
A substantial number of the Company's products are manufactured and assembled
by independent foundries and suppliers located in foreign countries. While the
costs associated with these services are billed and paid in U.S. dollars,
changes in foreign currencies against the U.S.
dollar could impact future product costs.
Test operations are performed during each phase of the manufacturing process.
SEEQ uses sophisticated testing equipment to test the die on each silicon wafer
prior to shipment for assembly. After assembly, each unit (i.e. packaged die)
undergoes final electrical testing at the Company. SEEQ's Ethernet controller
products are manufactured, including final testing, by two of its foundries.
Although the manufacturing process is highly controlled, equipment
malfunctions, process complexities, minute impurities, or defects in the masks
may cause a substantial percentage of the silicon wafers to be rejected or
individual chips to be non-functional. There can be no assurance that the
Company or any of its foundry suppliers will not experience yield problems in
the future.
COMPETITION
The semiconductor industry is intensely competitive and is characterized by
price erosion, rapid technological change, short product life cycles, cyclical
market patterns and heightened domestic and international competition in many
markets. The Company competes with major domestic and international
semiconductor companies, most of which have substantially greater financial,
technical, manufacturing and marketing resources than the Company, as well as
other substantial resources with which to more effectively pursue engineering,
manufacturing, marketing and distribution of their products. In addition, many
of the Company's competitors maintain their own wafer fabrication and
manufacturing facilities, which the Company considers to be a competitive
advantage. Accordingly, the Company believes that it is at a substantial
competitive disadvantage in comparison to larger companies with wafer
fabrication and manufacturing facilities, broader product lines, greater
technical, financial and other resources and a higher level of customer service
and support. New entrants may also increase their participation in the
semiconductor market. The ability of the Company to compete successfully in the
rapidly evolving area of high performance integrated circuit technology depends
on factors both within and outside of its control, including success in
designing and subcontracting
6
<PAGE> 7
the manufacture of new products that implement new technologies, adequate
sources of raw materials, protection of Company products by effective
utilization of intellectual property laws, product quality, reliability, price,
efficiency of production, the pace at which customers incorporate the Company's
integrated circuits into their products, success of competitors' products and
general economic conditions. Because the Company does not currently manufacture
its own semiconductor wafers, the Company is vulnerable to process technology
advances utilized by competitors to manufacture higher performance or lower cost
products. There is no assurance that the Company will be able to compete
successfully in the future.
PATENTS, TRADEMARKS AND LICENSES
Although the Company believes its success depends primarily upon the
experience and creative skills of its employees rather than the ownership of
patents, the Company does pursue a policy of obtaining patents for appropriate
inventions. The Company has obtained nonexclusive licenses from certain other
organizations, such as Texas Instruments, Incorporated, Xerox Corporation, and
AT&T, for use of product designs or specifications in the development of the
Company's products. Such license arrangements on a non-exclusive basis are
customary in the industry.
The Company invented the AutoDUPLEX technique for automatic full duplex
operation in switched Ethernet applications running over twisted pair cabling.
With respect to this invention, two United States patents have been issued to
the Company which expire in 2011 and 2013. However, there can be no assurance
that these patents will provide SEEQ with any meaningful protection. The Company
also has certain federally registered trademarks. The Company is pursuing a
systematic strategy of submitting patent applications whenever justified by a
combination of business and technical considerations. Presently, the Company has
on file with the U.S. Patent Office, seven applications, most of which relate to
Fast Ethernet design technologies. In addition, the Company avails itself of
mask work protection for its designs.
As is the case with many companies in the semiconductor industry, it may
become necessary or desirable in the future for SEEQ to obtain licenses relating
to its products from others. SEEQ has in the past received notification of
possible infringement of patents from certain other semiconductor manufacturers
and these matters are under consideration. Although patent holders in the
industry typically offer licenses, and SEEQ in the past has entered into license
agreements, there can be no assurance that licenses can be obtained on
acceptable terms.
The Company, from time to time, enters into technology and second source
agreements. The Company has not granted any rights relative to its process or
design technology which are or will be exclusive.
The Company has entered into a development agreement with a third party
relating to its Gigabit Media Access Controller. Under this agreement, the third
party will provide guidance and consulting in the area of product definition,
technical specifications, and functional and operational requirements in
exchange for most favored nation price for future purchases of this product from
SEEQ.
EMPLOYEES
As of September 30, 1996, the Company had 74 employees, including 10 in
marketing and sales, 16 in research, development and engineering related
functions, 40 in manufacturing and 8 in management, administration and finance.
The Company's success depends on a number of key employees, the loss of one or
more of whom could adversely affect the Company. The Company believes that its
future success will depend in large part upon its ability to attract, retain and
motivate highly skilled employees. The Company has never had a work stoppage,
slow-down or strike. None of the Company's employees are represented by a labor
union. The Company considers its employee relations to be good.
7
<PAGE> 8
ITEM 2. PROPERTIES.
The Company's executive offices and manufacturing and principal research and
design facilities currently occupy a 54,000 square foot building located in
Fremont, California. The building is leased by the Company under a lease
scheduled to expire in 2005 with one five-year renewal option. The Company also
leases additional offices for its regional sales managers in Westlake,
California and Burlington, Massachusetts.
ITEM 3. LEGAL PROCEEDINGS.
Pursuant to the Asset Purchase Agreement dated February 7, 1994, (the "Asset
Purchase Agreement") by and between SEEQ and Atmel Corporation ("Atmel"), Atmel
purchased the assets of SEEQ related to its electrically erasable programmable
read only memory ("EEPROM") products (the "EEPROM Asset Sale"). A substantial
portion of the consideration received by the Company in connection with the
EEPROM Asset Sale was placed in escrow subject to certain claims of indemnity by
Atmel under the Asset Purchase Agreement. As of September 30, 1996, $3,531,000
was on deposit in escrow (including interest of $502,000 earned thereon to such
date). Such amount is subject to any future claims that may be made by Atmel
with respect to the EEPROM technology sold to Atmel in the EEPROM Asset Sale
under the terms of the Asset Purchase Agreement. Atmel has notified SEEQ that,
based on certain claims asserted by Hualon Microelectronics Corporation ("HMC"),
one of SEEQ's foundries and joint development partners, that SEEQ previously
granted HMC certain license rights to the EEPROM technology pursuant to an
alleged license agreement, Atmel believes it may be entitled to assert a claim
against this escrow account, although Atmel has not done so to date. The funds
in this escrow account will remain in escrow until a determination is made that
SEEQ is entitled to such funds under any release condition in the escrow
agreement, or, if Atmel makes a claim prior to such date under such escrow, then
until such claim is resolved. The Company will be entitled to receive such funds
if it is determined that the alleged license agreement is invalid, or, if no
such determination is made, to the extent that any claims made by Atmel that
Atmel has suffered damages as a result of the alleged license agreement are
unsuccessful, or if Atmel does not make a claim to such funds by February 1999,
or as otherwise agreed by the Company and Atmel. On March 30, 1994, the Company
filed a lawsuit against HMC in which, among other things, the Company sought a
declaration by the court that the alleged license agreement is invalid. On
August 16, 1995, the Company and HMC entered into a Settlement Agreement,
Release and Tolling Agreement. Under the terms of such Agreement, the Company
agreed, among other things, that the claims asserted against HMC in respect of
the alleged license agreement would be tolled for such time and on such terms as
provided therein. As a result, the Company is not currently pursuing such
claims. The Company is entitled to pursue such claims in the future, however,
subject to the terms of the Settlement Agreement, Release and Tolling Agreement.
In the event that the Company does not cause the alleged license agreement to be
invalidated, Atmel may assert a claim against the Company under the Asset
Purchase Agreement, including a claim for damages, if suffered by Atmel as a
result of HMC's use of any of such technology, and, in the event any such claim
by Atmel is determined to be valid, Atmel may recover any such damages from the
escrow described above. The Company believes that, in the event of any claim by
Atmel, the amount of damages that may be payable by the Company upon a
resolution thereof will not have a material adverse effect on the Company's cash
flow, financial position or results of operations. However, there can be no
assurance as to such matters. Under the terms of the settlement, the Company
agreed to pay HMC an aggregate of $500,000 due in three consecutive monthly
installments beginning in August 1995. The Company further agreed to issue to
HMC 100,000 shares of SEEQ's common stock and reactivate and modify the 1990
Foundry and Co-Development Agreement.
On November 28, 1995, Level One Communications Incorporated ("Level One")
filed a complaint against the Company, in the United States District Court of
Northern California, alleging patent infringement. In the complaint, Level One
claims that the Company has used and sold products in violation of two of Level
One's patents. Level One seeks immediate and permanent injunctive relief
preventing the Company from making, using, or selling any devices that infringe
such patents and unspecified damages. The Company intends to vigorously contest
all of Level One's claims. Based on the Company's review to date, management
believes that the claims asserted by Level One are without merit and that the
outcome of these legal proceedings will not have a material adverse effect on
the Company's financial position or results of operations, although there can be
no assurance as to such matters. Patent litigation is often highly complex, can
extend for a protracted period of time, can involve substantial cost to the
Company and may divert the attention of the Company's management and technical
personnel, which can substantially increase the cost of
8
<PAGE> 9
such litigation. There can be no assurance that such costs and diversion of
resources would not have a material adverse effect on the Company's business,
financial condition and results of operations.
On June 25, 1996, Praxair, Inc. ("Praxair") filed a complaint against the
Company, entitled Praxair, Inc., a Delaware Corporation v. SEEQ, Inc., a
California Corporation and SEEQ Technology, Inc., a Delaware Corporation
(Superior Court of the State of California, County of Santa Clara, Case No.
CV758882). The suit arises out of a nitrogen supply contract between the Company
and the plaintiff. The Complaint purports to state causes of action for breach
of contract and promissory estoppel. The Complaint alleges that as a result of
purported breaches of the nitrogen supply contract, the Company is obligated to
pay plaintiff approximately $1,300,000 plus cost of suit, not including
attorney's fees. The Company intends to contest all of Praxair's claims
vigorously. Based on the Company's limited review to date, management believes
that the claims asserted by Praxair are without merit. However, there can be no
assurance that Praxair will not obtain a favorable result in the lawsuit which
could have a material adverse effect on the Company's business, financial
condition and results of operations.
In addition, SEEQ is involved in certain other routine litigation in the
ordinary course of its business. SEEQ believes that the outcome of these legal
proceedings will not have a material adverse effect on the Company's financial
position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the quarter
ended September 30, 1996.
9
<PAGE> 10
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's stock is listed on the NASDAQ National Market under the symbol
"SEEQ". The tables below present the high and low closing market prices for
fiscal years 1996 and 1995. The Company has never paid dividends on common
shares and has no present plans to do so. The financial covenants of the
Company's bank line of credit also restrict the amount the Company could pay in
dividends. The bank line of credit requires the Company to maintain a tangible
net worth of $11,488,000 as of June 30, 1996, plus one hundred percent (100%) of
the proceeds received from the sale of equity securities during each quarter,
plus seventy five percent (75%) from all profits from such quarter.
<TABLE>
<CAPTION>
Fiscal 1996 Fiscal 1995
----------- -----------
Quarter High Low High Low
------- ---- --- ---- ---
<S> <C> <C> <C> <C>
First $5 $3-5/8 $1-3/16 $ 3/4
Second $4-1/2 $2-3/4 $2-1/2 $ 13/16
Third $4-7/32 $3 $4 $2
Fourth $3-15/16 $2-11/16 $5-1/4 $2-15/16
</TABLE>
The approximate number of stockholders of record at September 30, 1996 was
15,000.
On April 21, 1995, the Company declared a dividend distribution of one
Preferred Share Purchase Right on each outstanding share of its common stock.
The Rights are designed to assure that all stockholders receive fair and equal
treatment in the event of any proposed takeover of the Company, to guard against
partial tender offers, squeeze-outs, open market accumulations and other tactics
that might be employed to gain control of the Company without paying all
stockholders a control premium. The Rights will be exercisable if a person or
group acquires 15% or more of the Company's common stock or announces a tender
offer the consummation of which would result in ownership by a person or group
of 15% or more of the Company's common stock.
Each Right will entitle stockholders to buy one one-hundredth of a share of a
new series of junior participating preferred stock at an exercise price of
$15.00 upon certain events. If, after the Rights become exercisable, the Company
is acquired in a merger or other business combination transaction, or sells 50%
or more of its assets or earnings power, each Right will entitle its holder to
purchase, at the Right's then-current price, a number of the acquiring company's
common shares having a market value at the time of twice the Right's exercise
price. In addition, if a person or group acquires 15% or more of the Company's
outstanding common stock, each Right will entitle its holder (other than such
person or members of such group) to purchase, at the Right's then-current
exercise price, a number of the Company's common shares (or cash, other
securities or property) having a market value of twice the Right's exercise
price. At any time within ten days after a person or group has acquired
beneficial ownership of 15% or more of the Company's common stock, the Rights
are redeemable for one cent per Right at the option of the Board of Directors.
The Rights are intended to enable all stockholders to realize the long-term
value of their investment in the Company. The Rights will not prevent a
takeover, but should encourage anyone seeking to acquire the Company to
negotiate with the Board of Directors prior to attempting a takeover. The
dividend distribution was made on May 2, 1995 payable to stockholders of record
on that date. The Rights will expire on May 2, 2005.
ITEM 6. SELECTED FINANCIAL DATA.
The consolidated selected financial data presented below as of September 30,
1992, 1993, 1994, 1995 and 1996, and for each of the five-year periods ended
September 30, 1996, are derived from the consolidated financial statements of
the Company. The consolidated financial statements as of September 30, 1995 and
1996, and for each of the years in the three-year period ended September 30,
1996, have been audited by Price Waterhouse LLP, independent accountants.
10
<PAGE> 11
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30, (1)
-----------------------------------------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
(in thousands, except per share data)
-------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues $ 37,080 $ 32,980 $ 21,480 $ 22,512 $ 31,338
-------- -------- -------- -------- --------
Costs and expenses:
Cost of revenues 24,765 21,796 15,632 14,758 20,680
Research and development 4,722 3,289 3,278 3,069 3,303
Marketing, general and administrative 10,173 7,827 6,939 3,827 4,579
Restructuring and other, net 7,431(2) 3,236(3) 4,932(4) (399)(5) --
-------- -------- -------- -------- --------
Total costs and expenses 47,091 36,148 30,781 21,255 28,562
-------- -------- -------- -------- --------
Income (loss) from operations (10,011) (3,168) (9,301) 1,257 2,776
Interest (expense) (1,444) (1,056) (456) (431) (240)
Interest and other income, net 154 100 187 518 403
Gain on sale of stock -- -- 1,693(6) -- --
-------- -------- -------- -------- --------
Income (loss) before income taxes (11,301) (4,124) (7,877) 1,344 2,939
Provision for income taxes -- -- -- (14) (88)
-------- -------- -------- -------- --------
Net income (loss) $(11,301) $ (4,124) $ (7,877) $ 1,330 $ 2,851
======== ======== ======== ======== ========
Net income (loss) per share: $ (0.74) $ (0.25) $ (0.32) $ 0.04 $ 0.09
Shares used in per share calculation: 15,243 16,741 24,273 30,894 32,148
-------- -------- -------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
(in thousands)
--------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital $ (607) $ 5,088 $ 908 $ 6,382 $ 9,153
Total assets 23,728 17,871 17,307 18,934 26,435
Long-term obligations 1,602 1,926 2,564 1,524 3,466
Stockholders' equity 4,472 6,544 4,056 10,768 14,193
</TABLE>
(1) The Selected Financial Data for fiscal years ended September 30, 1992
through September 30, 1993 does not give effect to the sale of assets in the
EEPROM Asset Sale on February 7, 1994, which constituted a significant
portion of the Company's operations during these fiscal years. See the
discussions under Notes 3 and 4 of Notes to Consolidated Financial
Statements.
(2) The Company recorded $7,431,000 in charges against operations in fiscal 1992
associated with closing its wafer fabrication facility.
(3) The Company recorded $3,236,000 in charges against operations in fiscal 1993
reflecting an adjustment to its prior estimates in connection with closing
its wafer fabrication facility and costs associated with the resignation the
Company's previous president and chief executive officer.
(4) The Company recorded $4,932,000 in charges against operations in fiscal 1994
representing a loss and other restructuring costs associated with the EEPROM
Asset Sale and the discontinuation of the Company's end-user Ethernet
adapter board products. See Notes 3 and 4 of Notes to Consolidated Financial
Statements.
(5) The Company recorded $399,000 as a benefit against operations in fiscal 1995
representing a change in the estimates of its restructuring reserves. See
Note 4 of Notes to Consolidated Financial Statements.
(6) The Company recorded a gain on the sale of stock in the amount of
$1,693,000. See Note 3 of Notes to Consolidated Financial Statements.
11
<PAGE> 12
The following table sets forth consolidated statements of operations data for
each of the eight quarters beginning October 1, 1994 and ending September 30,
1996. This information has been derived from unaudited consolidated quarterly
financial statements of the Company, which include all adjustments, consisting
only of normal recurring adjustments, except for adjustments relating to certain
restructuring and other expenses and gains on sales of stock, that the Company
considers necessary for a fair presentation of the information when read in
conjunction with the Consolidated Financial Statements and Notes thereto. The
results of operations for any quarter are not necessarily indicative of the
results to be expected for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------------------------------
Dec 31, Mar. 31 Jun. 30 Sep. 30 Dec 31, Mar. 31 Jun.30 Sep.30
1994 1995 1995 1995 1995 1996 1996 1996
-------- -------- -------- -------- -------- -------- -------- --------
(in thousands, except per share data)
-------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 6,180 $ 6,189 $ 5,353 $ 4,790 $ 4,801 $ 7,387 $ 8,644 $ 10,506
-------- -------- -------- -------- -------- -------- -------- --------
Costs and expenses:
Cost of revenues 4,330 3,933 3,331 3,164 3,487 4,874 5,893 6,426
Research and development 836 808 740 685 786 918 890 709
Marketing, general and 855 1,017 1,028 927 921 1,121 1,210 1,327
administrative
Restructuring and other, net (285) (41) (73) -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Total costs and expenses 5,736 5,717 5,026 4,776 5,194 6,913 7,993 8,462
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) from operations 444 472 327 14 (393) 474 651 2,044
Interest (expense) (87) (108) (118) (118) (83) (36) (49) (72)
Interest and other income, net 142 113 113 150 183 58 67 95
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before income 499 477 322 46 (293) 496 669 2,067
taxes
Provision for income taxes (5) (7) (1) (1) -- (6) (19) (63)
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss) $ 494 $ 470 $ 321 $ 45 $ (293) $ 490 $ 650 $ 2,004
======== ======== ======== ======== ======== ======== ======== ========
Net income (loss) per share: $ 0.02 $ 0.02 $ 0.01 $ 0.00 $ (0.01) $ 0.02 $ 0.02 $ 0.06
Shares used in per share calculation: 25,820 26,737 30,287 31,993 29,873 31,929 32,082 32,241
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Form 10-K contains forward-looking statements that involve risks and
uncertainties. The statements contained in this Form 10-K that are not purely
historical are forward-looking statements within the meaning of Section27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934, including without limitation statements regarding the Company's
expectations, beliefs, intentions or strategies regarding the future. All
forward-looking statements included in this document are based on information
available to the Company on the date hereof, and the Company assumes no
obligation to update any such forward-looking statements. The Company's actual
results could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including those set forth under the
caption "Risk Factors" and elsewhere in this Form 10-K.
12
<PAGE> 13
BACKGROUND
The Company was founded in 1981 to focus on the development and
manufacture of electrically erasable programmable read only ("EEPROM") products
and in 1982 began developing Ethernet data communication products. The Company
recorded its first profitable year in fiscal 1987 and the growth continued in
fiscal 1988 as both revenues and net income increased. In addition, the
Company's financial condition was strengthened when a public common stock
offering was completed in May 1988. Fiscal 1989 results were adversely affected
by weakening market conditions and production problems. In fiscal 1989, the
Company adopted a strategy to have its products manufactured by outside
foundries.
During the second quarter of fiscal 1994, the Company sold its assets
related to its EEPROM products (the "EEPROM Asset Sale") to Atmel Corporation
("Atmel"). Under the terms of the Asset Purchase Agreement dated February 7,
1994 between SEEQ and Atmel, Atmel acquired all rights in SEEQ's assets related
to EEPROM products, including intellectual property, equipment, inventory and a
portion of the accounts receivable. The purchase price for such assets consisted
of 135,593 shares of Atmel's Common Stock and $481,632 in cash. In addition,
Atmel assumed certain liabilities under equipment leases for equipment used in
producing EEPROM products. Since this sale, the Company has focused its'
business on data communication products.
During the third quarter of fiscal 1994, SEEQ sold the 135,593 shares of
Atmel Common Stock it received in the EEPROM Asset Sale for total proceeds of
$6,693,000, reflecting a gain on the sale of $1,693,000. A significant portion
of the proceeds from the stock sale was deposited in two escrow accounts subject
to claims of indemnity by Atmel under the Asset Purchase Agreement. One escrow
account, which contained $600,000, was subject to claims by Atmel with respect
to the equipment, inventory and accounts receivable sold to Atmel in the EEPROM
Asset Sale. Atmel asserted a claim for the full amount deposited in this escrow
account. On January 30, 1995, the Company entered into an agreement with Atmel
to settle Atmel's claim. Under the terms of the agreement, $250,000 was
distributed to Atmel and the remaining $350,000 was distributed to the Company.
The second escrow account, which initially contained $4,329,000 (recorded as
other assets), is subject to any future claims that may be made by Atmel with
respect to the EEPROM technology sold to Atmel in the EEPROM Asset Sale. During
the first quarter of fiscal 1995 and the fourth quarter of fiscal 1996, $300,000
and $1,000,000, respectively, was distributed to SEEQ from the escrow account,
leaving $3,029,000 on deposit therein as of September 30, 1996 (excluding
interest earned to date of $502,000). Atmel has notified SEEQ that, based on
certain claims asserted by HMC, one of SEEQ's foundries and joint development
partners, that SEEQ previously granted HMC certain license rights to the EEPROM
technology, Atmel believes it may be entitled to assert a claim against this
escrow account, although, Atmel has not done so to date. The funds in this
escrow account will remain in escrow until February 1999, or until a
determination is made that SEEQ is entitled to such funds under any release
condition in the escrow agreement, or if Atmel makes a claim prior to February
1999 under such escrow, then until such claim is resolved by a court.
In connection with the EEPROM Asset Sale, Atmel acquired 3,614,701 shares of
SEEQ's Common Stock pursuant to the Stock Purchase Agreement dated February 7,
1994, representing approximately 14% of SEEQ's outstanding shares of Common
Stock as of such date. Such shares were purchased at a price of $1.25 per share,
for a total purchase price of $4,518,376. The Company filed a registration
statement for these shares that became effective with the Securities and
Exchange Commission on March 24, 1995.
In connection with the EEPROM Asset Sale and the Company's decision in fiscal
1994 to discontinue its end-user Ethernet adapter board product line, the
Company adopted a restructuring plan pursuant to which, among other things,
certain business operations were discontinued, certain facilities were
eliminated and certain employees were terminated.
13
<PAGE> 14
The following table summarizes the activity under this restructuring plan for
the years ended September 30, 1996 (in thousands):
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Reserve at Restructure Utilization Reserve at Utilization Reserve at
September Benefit (Benefit) September (Benefit) September
30, 1994 (Charge) Charge 30, 1995 Charge 30, 1996
Recorded in During During
Fiscal 1995 Fiscal 1995 Fiscal
1996
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Facility lease, inventory and other
equipment costs $ (616) $ 11 $ 605 $ -- $ -- $ --
------- ------- ------- ----- ----- -----
EEPROM Asset Sale Restructuring
Costs of assets transferred (55) (195) 250 -- -- --
Excess facilities (2,534) 818 915 (801) 119 (682)
Discontinued inventories (150) 51 99 -- -- --
Other costs (292) (338) 435 (195) 195 --
------- ------- ------- ----- ----- -----
(3,031) 336 1,699 (996) 314 (682)
------- ------- ------- ----- ----- -----
End-user Ethernet adapter board
products write-off
Other costs -- 52 (52) -- -- --
------- ------- ------- ----- ----- -----
-- 52 (52) -- -- --
------- ------- ------- ----- ----- -----
Totals $(3,647) $ 399 $ 2,252 $(996) $ 314 $(682)
------- ------- ------- ----- ----- -----
</TABLE>
FACILITY LEASE, INVENTORY AND OTHER EQUIPMENT COSTS
During the second quarter of fiscal 1995, the Company entered into a final
settlement of a lawsuit previously filed against the Company for rent and
damages under a lease of certain premises previously occupied by the Company
which the Company vacated in July 1992. In connection with the action and the
proposed settlement thereof, the Company had previously recorded certain
reserves covering, among other things, the proposed issuance of shares of its
common stock. The market price of the Company's common stock increased during
the second quarter of fiscal 1995, and, as a result, the Company recorded
additional reserves of $122,000 to reflect the higher market price of the common
stock at the time of the final settlement of the lawsuit. During fiscal 1995,
the Company also sold equipment that had been fully reserved and settled certain
associated lease obligations, resulting in a $133,000 reduction in the
restructuring reserves. Upon settlement of this lawsuit, the balance of the
restructuring reserves were utilized.
EEPROM ASSET SALE RESTRUCTURING
In connection with the EEPROM Asset Sale, the Company incurred certain
restructuring costs or realized certain benefits during fiscal 1995 and 1996 as
follows:
EEPROM Asset Sale. On January 30, 1995 the Company and Atmel entered into a
settlement agreement to settle Atmel's claims made against the $600,000 escrow
account previously established. Under the settlement agreement, $250,000 was
distributed to Atmel and the remaining $350,000 was distributed to the Company.
As a result, the Company recorded a $195,000 charge.
Excess facilities. During fiscal 1994, the Company decided to sublease its
headquarters' office and manufacturing facilities for the approximately eight
years remaining on the term of the lease. The Company recorded reserves
representing the Company's estimate of the difference between the rent payable
by the Company under the lease and the anticipated rent payable to the Company
under a sublease. During the first quarter of fiscal 1995, the Company sublet
the entire facility in which its headquarters and operations were located at a
higher rental rate than previously estimated, and as a result in 1995, recorded
an $818,000 reduction to its restructuring reserves. The Company also recorded
$915,000 of facility lease payments, broker fees and relocation costs in
connection with the sublease. During fiscal 1996, the Company recorded $119,000
of facility lease payments in excess of the sublease amount.
14
<PAGE> 15
Discontinued Inventories. As a result of the EEPROM Asset Sale, the Company
discontinued certain inventories; in fiscal 1995 the Company paid $99,000 to
foundries for inventories.
Other costs. In fiscal 1994, the Company recorded other costs, including
property tax obligations, obsolete computer systems and legal fees. For the
fiscal year ended September 30, 1995, the Company recorded other costs of
approximately $338,000, primarily reflecting legal fees and settlement costs in
connection with the agreement with Hualon Microelectronics Company (see Note 11
Litigation). The Company paid $435,000 for settlement costs, outside foundries
for memory product process development and lease payments for certain equipment
related to EEPROM products. During fiscal 1996, payments of $195,000 for
settlement costs were made.
END-USER ETHERNET ADAPTER BOARD PRODUCTS WRITE-OFF
During the quarter ended March 31, 1994, the Company discontinued its end-user
Ethernet adapter boards product line, and recorded restructuring costs as
follows:
Other costs. During fiscal 1995, the Company recorded as other costs a reserve
of $39,000 reflecting the settlement of certain litigation relating to end-user
Ethernet adapter board products. Offsetting this charge, the Company recorded a
benefit of $91,000 from the collection of previously written-off accounts
receivable and the reversal of excess warranty reserves.
15
<PAGE> 16
ANNUAL RESULTS OF OPERATIONS
FISCAL 1996 COMPARED TO FISCAL 1995
The Company's revenues in fiscal 1996 were $31,338,000, an increase of 39%
from $22,512,000 in fiscal 1995. Products supporting the Fast Ethernet (100Mbps)
market accounted for approximately 31% of total revenues in fiscal 1996 compared
to less than 1% in fiscal 1995. Most of the Company's revenue growth in fiscal
1996 was attributable to substantially increased sales to one customer, Bay
Networks, which accounted for 42% of total revenues in fiscal 1996. Unit sales
volumes increased 36% and average selling prices increased 2.7% in fiscal 1996
as compared to fiscal 1995. LAN integrated circuit product average selling
prices increased 23% in fiscal 1996 compared to fiscal 1995.
During the first quarter of fiscal 1996, production from the Company's
foundries was not sufficient to meet demand. Consequently, product availability
and revenues were impacted. This situation steadily improved throughout fiscal
1996 as the Company completed the transition of its products to new foundries
while worldwide wafer availability and fab capacity improved significantly over
fiscal 1995. As a result, the Company's revenues increased in each subsequent
quarter due to higher demand and shipments against the past due backlog.
Gross margins were 34% compared to 34.4% in fiscal 1995. While the Company
realized higher margins on its Fast Ethernet products, overall margins were
impacted by price erosion on several of its older, standard Ethernet products.
During the first quarter of fiscal 1996, gross margin percentages were impacted
on certain products for which the Company experienced shortfalls in wafer
production and higher costs relating to start-up production for several new
product offerings. Gross margins in future periods will be affected primarily by
sales levels and product mix, average selling prices, wafer yields, and the
introduction of new products and improvements in manufacturing costs.
Research and development expenditures increased from $3,069,000 in fiscal
1995 to $3,303,000 in fiscal 1996. As a percentage of sales, research and
development expenditures decreased from 13.6% in fiscal 1995 to 10.5% in fiscal
1996 primarily as a result of increased revenues. The Company expects that the
level of research and development spending will increase in absolute dollars in
future periods as a result of increased development efforts on new LAN products
and manufacturing cost reduction programs on existing programs, but may vary as
a percentage of revenues.
Marketing, general and administrative expenses increased from $3,827,000 in
fiscal 1995 to $4,579,000 in fiscal 1996, and decreased as a percentage of sales
from 17.0% to 14.6% for the same periods, respectively. The dollar increase was
attributable primarily to higher sales commissions related to growth in annual
revenues. The Company anticipates that the level of marketing, general and
administrative expenses will vary in future periods based on expected sales
growth.
Interest expense has resulted primarily from borrowings under the Company's
equipment leases. Interest expense decreased from $431,000 in fiscal 1995 to
$240,000 in fiscal 1996 due to a reduction in bank borrowings which were
required under the Company's previous credit facility (see Note 7 of Notes to
Consolidated Financial Statements).
Interest income decreased from $518,000 in fiscal 1995 to $403,000 in fiscal
1996 due to a reduction in cash borrowed under the Company's previous credit
facility partially offset by increases in cash balances due to the exercise of
warrants and stock options, higher revenues and the release of $1,000,000 from
the EEPROM Asset Sale escrow account.
The income tax provision is due primarily to alternative minimum state and
federal income taxes. The provision for income taxes increased from $14,000 in
fiscal 1995 to $88,000 in fiscal 1996.
FISCAL 1995 COMPARED TO FISCAL 1994
The Company's revenues in fiscal 1995 were $22,512,000, an increase of 5%
from $21,480,000 in fiscal 1994. Since the EEPROM Asset Sale on February 7,
1994, the Company has derived its sales exclusively from the sale of data
16
<PAGE> 17
communication products. Consequently, there were no EEPROM sales for fiscal 1995
compared to EEPROM sales of $3,036,000 in fiscal 1994. LAN integrated circuit
product sales increased $4,315,000, or 30%, to $18,573,000 in fiscal 1995 from
fiscal 1994 due to a 65.1% increase in unit sales volumes, partially offset by a
21.4% decrease in average selling prices as a result of normal price erosion for
certain mature products and a change in product mix. In fiscal 1995, the Company
was notified by Apple Computer ("Apple") that the Company would receive no
additional orders for the media attachment units ("MAU"s) that the Company had
been manufacturing for Apple, following the second quarter of fiscal 1995. As a
result, subsystem product sales decreased by $247,000, or 5.9% in fiscal 1995 as
compared to fiscal 1994. The Company is actively marketing its LAN integrated
circuits to Apple Computer for MAUs and other data communication products.
During the fourth quarter of fiscal 1995, the Company began phasing-out one of
its primary foundry suppliers. As a result, the Company experienced shortfalls
in wafer deliveries and yields, which impacted fourth quarter revenues.
Gross margins increased to 34.4% compared to 27.2% in fiscal 1994. The
increase in gross margin in fiscal 1995 was largely the result of the
discontinuance of EEPROM product sales in fiscal 1994, and the Company's
emphasis on marketing its higher margin LAN integrated circuit products. During
the fourth quarter of fiscal 1995, gross margins were impacted on certain
products for which the Company experienced shortfalls in wafer production from
one of its foundries. Gross margins in future periods will be affected primarily
by sales levels and product mix, average selling prices, wafer yields, the
introduction of new products and improvements in manufacturing costs.
Research and development expenditures decreased from $3,278,000 in fiscal
1994 to $3,069,000 in fiscal 1995. As a percentage of sales, research and
development expenditures decreased from 15.3% in fiscal 1994 to 13.6% in fiscal
1995 primarily as a result of increased revenues, termination of personnel, the
elimination of engineering subcontracting and equipment expenses associated with
EEPROM products from the EEPROM Asset Sale.
Marketing, general and administrative expenses decreased from $6,939,000 in
fiscal 1994 to $3,827,000 in fiscal 1995, and decreased as a percentage of sales
from 32.3% to 17.0% for the same periods, respectively. These decreases were
attributable primarily to a decrease in payroll and selling and administrative
expenses after the Company substantially reduced its workforce and terminated
operations of sales offices no longer needed after the EEPROM Asset Sale.
Interest expense has resulted primarily from borrowings under the Company's
credit facility and from equipment leases. Interest expense decreased slightly
from $456,000 in fiscal 1994 to $431,000 in fiscal 1995 due to a decrease in
equipment lease line financing as a result of terminated leases associated with
EEPROM equipment sold after the EEPROM Asset Sale.
Interest income increased from $187,000 in fiscal 1994 to $518,000 in fiscal
1995 due to an increase in interest earned on higher cash balances, due
primarily to stock and warrant exercises and restricted cash and cash held in
escrow invested in short-term investment instruments.
During the third quarter of fiscal 1994, the Company sold 135,593 shares of
common stock in Atmel Corporation it received in the EEPROM Asset Sale for total
proceeds of $6,693,000, reflecting a gain on the sale of $1,693,000.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations and met its capital requirements
primarily through cash raised from operations, private and public placements of
equity and debt securities, capital leases and bank lines of credit.
Management believes that existing sources of liquidity, anticipated cash flow
from operations and borrowings under the Company's credit facility, will be
adequate to satisfy its projected working capital expenditures through the end
of fiscal 1997. However, there can be no assurance that the Company will have
adequate resources to satisfy such requirements. It may become necessary for the
Company to raise additional funds from debt and/or equity financing. There can
be no assurance that such funds will be available on terms acceptable to the
Company, if at all.
17
<PAGE> 18
The Company's cash and cash equivalents balance increased from $3,682,000 as
of September 30, 1995 to $3,974,000 as of September 30, 1996, primarily due to
the release of $1,000,000 in funds by Atmel from the escrow account previously
established in connection with the EEPROM Asset Sale. Funds from restricted cash
of $3,000,000 were used to pay off the short term borrowings $3,000,000 in
November 1995.
Operating Activities
Cash flows used for operating activities were $267,000 and $2,154,000 for
fiscal 1996 and 1995, respectively. The decrease in cash used for operating
activities in fiscal 1996 compared to fiscal 1995 was due primarily to the net
profit in fiscal 1996 of $2,851,000, depreciation of $1,173,000, partially
offset by an increase in working capital. The increase in working capital was
due primarily to increases in accounts receivable, inventories and capitalized
non-recurring engineering costs which was partially offset by an increase in
accounts payable.
Investing Activities
Cash flows provided by investing activities in fiscal 1996 were $3,676,000,
which includes $3,000,000 from the maturity of short term investments of
restricted cash, the proceeds of which were used to pay off the Company's short
term borrowings. The release of funds held in escrow was $1,000,000 and $300,000
in fiscal 1996 and 1995, respectively. Capital acquisitions, primarily for test
equipment, in fiscal 1996 were $3,701,000 of which $3,367,000 was leased and
$334,000 was paid in cash. The Company anticipates capital expenditures in
fiscal 1997 primarily for test equipment, engineering tools and software of
approximately $1,500,000 of which it is expected that approximately $750,000
will be financed through equipment leases.
Financing Activities
Cash flows used for financing activities in fiscal 1996 were $3,117,000.
During fiscal 1996, the Company paid off its short term borrowings of
$3,000,000. In fiscal 1996, the Company received $574,000 in proceeds from the
issuance of its common stock, primarily from warrant and stock option exercises,
partially offset by payments on capital lease obligations of $691,000.
In November 1993, the Company entered into a two-year line of credit
agreement, subject to renewal, with the CIT Group ("CIT"). Although the Company
was not required to make use of the bank line of credit, during the second
quarter of fiscal 1994 it used cash resources to reduce its effective short-term
credit borrowings interest rate by borrowing the minimum required borrowings of
$3,000,000 under a secured bank line of credit with CIT, and investing the
proceeds in a short-term certificate of deposit (restricted cash). Effective
November 22, 1995, the Company renewed the credit facility with CIT for a two
year term. Under the renewed credit agreement, the minimum borrowing requirement
was reduced to $1,500,000 and was only applicable in the event the Company had a
loan balance outstanding with CIT. Thus the Company liquidated its restricted
cash and repaid the note payable to bank in November 1995. The credit agreement
with CIT was terminated by the Company in August 1996.
In August 1996, the Company entered into a one-year revolving line of credit
agreement with a bank. Under the terms of the bank revolving line of credit, the
Company could borrow the lesser of $7,000,000 or an amount determined by a
formula applied to eligible accounts receivable, at a variable interest rate
equal to the prime rate plus 0.75%. The revolving line of credit is secured by a
security interest in the Company's assets, including intellectual property and
expires August 18, 1997. The loan agreement requires the Company to maintain a
profit each fiscal year and to maintain certain financial ratios. The loan
agreement also requires the Company to maintain a level of tangible net worth
which, in effect, limits the ability of the Company to make payments of cash
dividends (see Item 5). There were no borrowings outstanding under this
revolving line of credit as of September 30, 1996.
Historically, the Company has financed a significant amount of its capital
expenditures through capital leases. For fiscal years 1996, 1995 and 1994,
capital lease obligations incurred were $3,367,000, $94,000 and $29,000,
respectively. Payments of principal and interest , for capital leases in place
at the end of fiscal 1996, will be $1,156,000, $908,000 and $766,000 for fiscal
years 1997, 1998 and 1999, respectively.
18
<PAGE> 19
IMPACT OF CURRENCY AND INFLATION
The Company purchases its materials and services in U.S. dollars, and its
foreign sales are primarily billed in U.S. dollars. Accordingly, the Company has
not been subject to substantial currency exchange fluctuations. However, there
can be no guarantee that this trend will continue. The effect of inflation on
SEEQ's financial results have not been significant to date.
RISK FACTORS
HISTORY OF OPERATING LOSSES; UNCERTAINTY OF FUTURE FINANCIAL RESULTS
The Company incurred substantial operating losses during each of the five
fiscal years ended September 30, 1994. During the fiscal years ended September
30, 1990, 1991, 1992, 1993 and 1994, the Company incurred operating losses of
$26.1 million, $3.2 million, $11.3 million, $4.1 million and $7.9 million,
respectively. The Company achieved a profit of approximately $1.3 million for
the fiscal year ended September 30, 1995 and approximately $2.9 million for the
fiscal year ended September 30, 1996. The Company had an accumulated deficit of
approximately $109.5 million at September 30, 1996. There can be no assurance
that the Company will be able to sustain profitability or revenue growth in the
future. The Company's ability to maintain profitability in the future will
depend, among other things, on its ability to successfully manufacture and sell
its products, to develop new products and to control its costs and expenses.
Failure by the Company to maintain revenue growth or profitability would impair
the Company's ability to sustain its operations.
LIQUIDITY; FUTURE CAPITAL REQUIREMENTS
The Company presently believes that anticipated cash provided by operations,
existing cash, and available lines of credit will be adequate to meet its cash
needs for at least the next 12 months. However, the Company requires substantial
working capital to fund its business, particularly to finance inventories and
accounts receivable and/or capital expenditures. The Company's future capital
requirements will depend on many factors, including the timing and extent of
spending to support product development efforts and expansion of sales and
marketing, the timing of introductions of new products and enhancements to
existing products, and market acceptance of the Company's products. Accordingly,
the Company expects that it may need to raise additional equity or debt
financing in the future. There can be no assurance that additional debt and/or
equity financing, if required, will be available on acceptable terms or at all.
FACTORS AFFECTING OPERATING RESULTS
The Company believes that its future annual and quarterly operating results
will be subject to quarterly variations based upon a wide variety of factors
that could have a material adverse effect on the Company's revenues and
profitability, many of which are outside the control of the Company. These
factors include fluctuations in manufacturing yields, the timing of introduction
of new products by the Company and its competitors, changes in the markets
addressed by the Company's products, market acceptance of the Company's and its
customers' products, the volume and timing of orders received, changes in the
Company's product mix and customer base, the timing and extent of research and
development expenditures, the availability and cost of semiconductor wafers from
outside foundries, product obsolescence, price erosion, competitive factors,
cyclical semiconductor industry conditions and general economic conditions. The
Company's net revenue and cost of sales vary depending upon the mix of products
sold. Any unfavorable changes in manufacturing yields or product mix, delays in
new product introductions, underutilization of manufacturing capacity, increased
price competition or other factors could have a material adverse effect on the
Company's operating results and financial condition. Historically, average
selling prices in the semiconductor industry have decreased over the life of any
particular product. There can be no assurance that the average selling prices of
the Company's current or future products will not be subject to significant
pricing pressures in the future. In addition, the Company's business is
characterized by short-term orders and shipment schedules, and customer orders
typically can be canceled or rescheduled without significant penalty to the
customer. Due to the absence of substantial noncancellable backlog, the Company
typically plans its production and inventory levels based on internal forecasts
of customer demand, which are highly unpredictable and can fluctuate
substantially. In addition, the Company is limited in its
19
<PAGE> 20
ability to reduce costs quickly in response to any revenue shortfalls, which
could have a material adverse effect on the Company's business, operating
results and financial condition.
Due to the foregoing factors, as well as other unanticipated factors, it is
likely that in some future quarter the Company's operating results will be below
the expectations of public market analysts or investors. In such event, the
price of the Company's Common Stock would be materially adversely affected.
DEPENDENCE ON NEW PRODUCT DEVELOPMENT AND TECHNOLOGICAL CHANGE
The average selling prices of the Company's products historically have
decreased over the products' lives and are expected to continue to do so. To
offset average selling price decreases typically experienced over the life of
any particular product, the Company relies primarily on obtaining cost
reductions in the manufacture of those products and on introducing new, higher
priced products which incorporate advanced features or address new or emerging
markets. To the extent that such cost reductions and new product introductions
do not occur in a timely manner, the Company's operating results will be
adversely affected. As a result, the Company's operating results will depend to
a substantial extent on its ability to continue to successfully introduce new
products on a timely basis that compete effectively on the basis of price and
performance and that address customer requirements. The success of new product
introductions into the marketplace is dependent upon several factors, including
proper new product definition, timely completion and introduction of new product
designs, availability of production capacity, achievement of acceptable
manufacturing yields and market acceptance of such new products. The development
cycle for new products is generally one to two years, depending upon the
complexity of the product. Accordingly, new product development requires a
long-term forecast of market trends and customers' needs and may be adversely
affected by competing technologies serving markets addressed by the Company's
products. Although the Company has successfully developed new products in the
past, there can be no assurance that it will continue to be able to do so in the
future. In this regard, as a result of the Company's financial results in the
past several years and other factors, the Company has been unable to introduce
new products as fast as existing products become obsolete or as such product
sales decline, as reflected by the reductions in sales over such period. The
Company has recently experienced certain delays in the development of certain of
its new products, which the Company believes may have a material adverse effect
on the Company's results of operations in future periods. Although the Company
has increased its development efforts over the past year, there can be no
assurance that such delays will not continue to occur in future periods. The
markets for the original equipment manufacturers who purchase the Company's
products are characterized by rapidly changing technology, evolving industry
standards and improvements in products and services. If technologies or
standards supported by the Company's products become obsolete or fail to gain
widespread commercial acceptance, the Company's business may be materially
adversely affected. As a result, the Company believes that continued significant
expenditures for research and development will be required in the future. If the
Company were unable to design, develop and introduce competitive products on a
timely basis, its future operating results would be materially adversely
affected.
New products are generally incorporated into a customer's products or systems
at the design stage. However, design wins, which can often require significant
expenditures by the Company, may precede the generation of volume sales, if any,
by a year or more. Moreover, the value of any design win will depend in large
part on the ultimate success of the customer's product and on the extent to
which the system's design accommodates components manufactured by the Company's
competitors. No assurance can be given that the Company will achieve design wins
or that any design win will result in significant future revenue.
CUSTOMER CONCENTRATION
During certain periods, a relatively small number of the Company's customers
have accounted for a significant portion of the Company's revenues. Sales to
Apple Computer and Serial Systems accounted for approximately 17% and 16% of the
Company's revenues in fiscal 1995, respectively. Sales to Bay Networks and
Serial Systems accounted for approximately 42% and 10% of the Company's revenues
in fiscal 1996, respectively. The reduction, delay or cancellation of orders
from one or more of the Company's significant customers for any reason,
including a reduction in the demand for data communications products that
include the Company's products, could have a material adverse effect on the
Company's results of operations and financial condition. The Company's sales to
its customers are made under purchase orders and not pursuant to any long-term
agreements. In addition, the Company's products are often
20
<PAGE> 21
sole-sourced to its customers, and the Company's operating results and financial
condition could be materially and adversely affected if one or more of the
Company's major customers were to develop other sources of supply. Furthermore,
in view of the short product life cycles, in the market for data communications
products, the Company's operating results would be materially and adversely
affected if one or more of the Company's significant customers were to purchase
integrated circuits manufactured by one of the Company's competitors for
inclusion in new generations of products developed by its customers. The Company
is also dependent upon sales representatives and distributors for the sales of
its products to systems manufacturers. There can be no assurance that the
Company's current customers will continue to place orders with the Company, that
orders by existing customers will continue at the levels of previous periods, or
that the Company will be able to obtain orders from new customers. The loss of
one or more of the Company's current customers could have a material adverse
effect on the Company's business, operating results and financial condition. In
this regard, in the second quarter of fiscal 1995, the Company was notified by
Apple Computer that the Company would receive no additional orders for the media
attachment unit ("MAU") that the Company had been manufacturing for Apple. As a
result, the loss of such sales had a material adverse effect on the Company's
results of operations. In response, the Company has attempted to replace such
sales through sales of its LAN integrated circuits to Apple Computer and other
customers.
DEPENDENCE UPON INDEPENDENT MANUFACTURERS AND ASSEMBLY SUPPLIERS
All of the Company's products are currently manufactured to the Company's
specifications by independent subcontractors, and the Company maintains no wafer
manufacturing or assembly operations of its own. The Company currently utilizes
semiconductor wafer manufacturing subcontractors located in South Korea, Japan,
Taiwan and the United States. The Company also contracts with independent
assembly suppliers located in Asia for the assembly of all of its products, and
relies principally on one assembly contractor located in South Korea. As a
result, all of the Company's products are manufactured by independent foundries
and assembled by foreign assembly contractors. Consequently, the Company
currently relies exclusively on the manufacturing, assembly and other resources
of these independent manufacturers and assembly suppliers. Currently, certain of
these independent manufacturers serve as the sole source for several of the
Company's products. The Company's reliance on subcontractors to manufacture and
assemble its produce involves significant risks, including reduced control over
delivery schedules, the potential lack of adequate capacity, reduced control
over fluctuations in manufacturing yields, discontinuation or phase-out of such
subcontractors' production processes, and potential misappropriation of
proprietary intellectual property. There can be no assurance that the Company
will not experience problems in timeliness, yields and quality of wafer
deliveries from its wafer manufacturing subcontractors, each of which could have
a material adverse effect on the Company's operations and operating results. In
addition, although the Company has entered into manufacturing agreements with
each of these independent manufacturers, there can be no assurance that such
manufacturers will continue to manufacture products for the Company.
The Company generally does not have long-term, non-cancelable contracts with
its wafer suppliers. Therefore, the Company's wafer suppliers could choose to
prioritize capacity for other uses or reduce or eliminate deliveries to the
Company on short notice. Accordingly, there can be no assurance that the
Company's foundries will allocate sufficient wafer manufacturing capacity to the
Company to satisfy the Company's product requirements. In addition, the Company
has been, and expects to continue to be in the future, particularly dependent on
one or more foundries for its wafer manufacturing requirements. Any sudden
demand for an increased amount of wafers or sudden reduction or elimination of
any existing source or sources of wafers could result in a material delay in the
shipment of the Company's products. In this regard, in the fourth quarter of
fiscal 1995, the Company was notified by one of its foundry suppliers that it
would no longer supply wafers to the Company. Although the Company recently
added an additional independent wafer supplier, there can be no assurance that
such events will not have a material adverse effect on the Company's results of
operations and financial condition. There can be no assurance that material
disruptions in supply, which have occurred periodically in the past, will not
occur in the future. Any such disruption could have a material adverse effect on
the Company's operating results and financial condition. In the event the
Company were unable to qualify alternative manufacturing sources for existing or
new products in a timely manner or such sources were unable to produce wafers
with acceptable manufacturing yields, the Company's business, operating results
and financial condition would be materially and adversely affected.
21
<PAGE> 22
DEPENDENCE ON FOUNDRY MANUFACTURING
The manufacture of semiconductor wafers for the Company's products is a
highly complex process that requires a high degree of technical skill,
state-of-the-art equipment and effective cooperation between the wafer foundry
and the Company's engineering staff to produce acceptable yields. Worldwide
manufacturing capacity for these products is limited. Therefore, significant
interruptions in supply from any of the Company's independent foundries could
adversely affect the Company and its results of operations. Other unanticipated
changes in the Company's wafer supply or assembly arrangements could reduce
product availability, increase cost, impair quality and reliability or decrease
yield. Many of the factors that could result in such changes are beyond the
Company's control. To a considerable extent, the Company's ability to succeed in
the future will depend on its ability to maintain access to advanced wafer
fabrication technologies. Since the Company does not own or operate its own
wafer fabrication or process development facility, the Company depends upon
independent companies to provide access to such technologies. In light of this
dependency, and the intensely competitive nature of the semiconductor industry,
there is no assurance that either technology advantages or timely product
introduction can be maintained in the future. In connection with its
arrangements with foreign independent wafer suppliers, it is necessary for the
Company to provide such suppliers with proprietary information regarding its
process and product technologies. Although the Company has entered into
confidentiality and nondisclosure agreements with its foreign suppliers, there
can be no assurance that the Company will be able to protect its rights under
its patents, copyrights, maskwork rights or such confidentiality and
nondisclosure agreements in foreign countries.
MANUFACTURING; VARIATION IN PRODUCTION YIELDS
The manufacture of semiconductor products is highly complex, involving many
precise and critical steps, and is sensitive to a wide variety of factors,
including the level of contaminants in the manufacturing environment, impurities
in the materials used and the performance of sophisticated electronic equipment.
Technical problems which may arise in the manufacturing process at the
manufacturing facilities of any of the Company's independent foundries can
adversely affect manufacturing yields and the overall profitability of the
Company. Such technical problems may occur or new problems may arise as the
Company begins using new manufacturing processes in connection with the
introduction of new products. While the Company is attempting to minimize the
impact of such factors and potential problems by developing several sources of
wafer supply, certain of the foundries utilized by the Company have experienced
lower than anticipated yields. No assurance can be given that the Company or its
suppliers will not experience yield problems in the future, which could have a
material adverse effect on the Company's results of operations.
RISKS ASSOCIATED WITH FOREIGN SUPPLIERS
A substantial number of the Company's products are manufactured, and all of
the Company's products are assembled, by independent foundries and assembly
suppliers located in foreign countries, including Taiwan, Japan and South Korea.
The Company is, therefore, subject to certain risks generally associated with
contracting with foreign suppliers, including currency exchange fluctuations,
political instability, trade restrictions and changes in tariff and freight
rates.
THE SEMICONDUCTOR INDUSTRY
The semiconductor industry is subject to rapid technological change, price
erosion, occasional shortages of materials, variations in manufacturing
efficiencies, significant expenditures for capital equipment and product
development, and cyclical market patterns. In recent years, the industry has
experienced intermittent significant economic downturns characterized by
diminished product demand, accelerated erosion of selling prices and production
overcapacity. Similar fluctuations may occur in the future, and there can be no
assurance that the Company will not be materially and adversely affected is the
future by such fluctuations or by cyclical conditions in the semiconductor
industry or slower growth in any of the markets for the Company's products.
22
<PAGE> 23
DEPENDENCE ON DATA COMMUNICATION MARKET
The Company anticipates that substantially all of the Company's future
revenues will be attributable to sales of data communication products. The
market for data communications products is characterized by intense competition,
relatively short product life cycles and rapid technological change. In
addition, the market for data communications products has undergone a period of
extremely rapid growth and has experienced consolidation among the competitors
in the marketplace. The Company expects that substantially all of its revenues
for the foreseeable future will continue to consist of sales of data
communications products. The Company's results of operations and financial
condition would be materially adversely affected in the event of any future
slowdown or adverse events in the market for data communications products.
LITIGATION
On November 28, 1995, Level One Communications Incorporated ("Level One")
filed a complaint against the Company, in the United States District Court of
Northern California, alleging patent infringement. In the complaint, Level One
claims that the Company has used and sold products in violation of two of Level
One's patents. Level One seeks immediate and permanent injunctive relief
preventing the Company from making, using, or selling any devices that infringe
such patents and unspecified damages. The Company intends to vigorously contest
all of Level One's claims. Based on the Company's limited review to date,
management believes that the claims asserted by Level One are without merit and
that the outcome of these legal proceedings will not have a material adverse
effect on the Company's financial position or results of operations, although
there can be no assurance as to such matters. Patent litigation is often highly
complex, can extend for a protracted period of time, can involve substantial
cost to the Company and may divert the attention of the Company's management and
technical personnel, which can substantially increased the cost of such
litigation. There can be no assurance that such costs and diversion of resources
would not have a material adverse effect on the Company's business, financial
condition and results of operations.
On June 25, 1996, Praxair, Inc. ("Praxair") filed a complaint against the
Company, entitled Praxair, Inc., a Delaware Corporation v. SEEQ, Inc., a
California Corporation and SEEQ Technology, Inc., a Delaware Corporation
(Superior Court of the State of California, County of Santa Clara, Case No.
CV758882). The suit arises out of a nitrogen supply contract between the Company
and the plaintiff. The Complaint purports to state causes of action for breach
of contract and promissory estoppel. The Complaint alleges that as a result of
purported breaches of the nitrogen supply contract, the Company is obligated to
pay plaintiff approximately $1,300,000 plus cost of suit, not including
attorney's fees. The Company intends to contest all of Praxair's claims
vigorously. Based on the Company's limited review to date, management believes
that the claims asserted by Praxair are without merit. However, there can be no
assurance that Praxair will not obtain a favorable result in the lawsuit which
could have a material adverse effect on the Company's business, financial
condition and results of operations.
COMPETITION
The semiconductor industry is intensely competitive and is characterized by
price erosion, rapid technological change, short product life cycles, cyclical
market patterns and heightened domestic and international competition in many
markets. The Company competes with major domestic and international
semiconductor companies, most of which have substantially greater financial,
technical, manufacturing and marketing resources than the Company, as well as
other substantial resources with which to more effectively pursue engineering,
manufacturing, marketing and distribution of their products. In addition, many
of the Company's competitors maintain their own wafer fabrication and
manufacturing facilities, which the Company considers to be a competitive
advantage. Accordingly, the Company believes that it is at a substantial
competitive disadvantage in comparison to larger companies with wafer
fabrication and manufacturing facilities, broader product lines, greater
technical, financial and other resources and a higher level of customer service
and support. New entrants may also increase their participation in the
semiconductor market. The ability of the Company to compete successfully in the
rapidly evolving area of high performance integrated circuit technology depends
on factors both within and outside of its control, including success in
designing and subcontracting the manufacture of new products that implement new
technologies, adequate sources of raw materials, protection of Company products
by effective utilization of intellectual property laws, product quality,
reliability, price, efficiency of production, the pace at which customers
incorporate the Company's integrated circuits into their products, success of
23
<PAGE> 24
competitors' products and general economic conditions. Because the Company
does not currently manufacture its own semiconductor wafers, the Company is
vulnerable to process technology advances utilized by competitors to manufacture
higher performance or lower cost products. There is no assurance that the
Company will be able to compete successfully in the future.
PATENTS, LICENSES AND INTELLECTUAL PROPERTY CLAIMS
The Company's success depends in part on its ability to obtain patents,
licenses and other intellectual property rights covering its products and
manufacturing processes. To that end, the Company has in the past acquired
certain patents and patent licenses and intends to continue to seek patents on
its inventions and manufacturing processes in appropriate circumstances. The
process of seeking patent protection can be long and expensive and there can be
no assurance that patents will issue from currently pending or future
applications or that existing patents or any new patents that may be issued will
be of sufficient scope or strength to provide meaningful protection or any
commercial advantage to the Company. The Company may be subject to or may
initiate interference proceedings in the patent office, which can demand
significant financial and management resources. As is typical in the
semiconductor industry, the Company has from time to time received, and may in
the future receive, communications alleging possible infringement of patents or
other intellectual property rights of others. Based on industry practice, the
Company believes that any necessary licenses or other rights are often
obtainable on commercially reasonable terms, but no assurance can be given that
licenses would be available or that litigation would not ensue. Litigation,
which could result in substantial cost to and diversion of effort by the
Company, may be necessary to enforce patents or other intellectual property
rights of the Company or to defend the Company against claimed infringement of
the rights of others. The failure to obtain necessary licenses or other rights
or litigation could have a material adverse effect on the Company's operations.
See "Risk Factors -- Litigation."
ENVIRONMENTAL AND OTHER GOVERNMENTAL REGULATIONS
Certain of the Company's foundry and assembly subcontractors are subject to a
variety of government regulations related to the discharge or disposal of toxic,
volatile or otherwise hazardous chemicals used in their manufacturing process.
The failure by the Company's subcontractors to comply with present or future
environmental regulations could result in fines, suspension of production or
cessation of operations. Such regulations could also require the subcontractors
to acquire equipment or to incur substantial other expenses to comply with
environmental regulations. If substantial additional expenses were incurred by
the Company's subcontractors, product costs could significantly increase, thus
materially adversely affecting the Company's results of operations.
Additionally, the Company is subject to a variety of government regulations
relating to its operations, such as environmental, labor and export control
regulations. While the Company believes it has all permits necessary to conduct
its business, the failure to comply with present or future regulations could
result in fines being imposed on the Company or suspension or cessation of
operations. Any failure by the Company or its subcontractors to control the use
of, or adequately restrict the discharge of hazardous substances could subject
it to future liabilities, and could have a material adverse effect on the
Company.
ATTRACTION AND RETENTION OF KEY PERSONNEL
The Company's future success is dependent upon its ability to hire and retain
qualified technical and management personnel, particularly highly skilled design
engineers involved in new product development. The competition for such
personnel is intense and there can be no assurance that the Company will be able
to attract and retain skilled and experienced personnel in the future. Any
failure to attract or retain such personnel could adversely affect the Company's
future prospects and profitability.
24
<PAGE> 25
VOLATILITY OF STOCK PRICE
The Company's Common Stock has experienced substantial price volatility and
such volatility may occur in the future, particularly as a result of quarter to
quarter variations in the actual or anticipated financial results of, or
announcements by, the Company, its competitors and other companies in the
semiconductor industry. In addition, the stock market has experienced extreme
price and volume fluctuations which have affected the market price of many
technology companies in particular and which have often been unrelated to the
operating performance of these companies. Broad market fluctuations, as well as
general economic and political conditions, may adversely affect the market price
of the Common Stock.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
Index to Financial Statements
Financial Statements Page
<S> <C>
Report of Independent Accountants 26
Consolidated Balance Sheets at September 30, 1996 and 1995 27
Consolidated Statements of Operations for the Years Ended September 30, 1996, 1995 and 1994 28
Consolidated Statements of Stockholders' Equity for the Years Ended September 30, 1996, 1995
and 1994 29
Consolidated Statements of Cash Flows for the Years Ended September 30, 1996, 1995 and 1994 30
Notes to Consolidated Financial Statements 31-41
Financial Statement Schedule
II Valuation and Qualifying Accounts S-1
</TABLE>
Schedules not listed above have been omitted because they are not applicable
or are not required or the information required to be set forth therein is
included in the Financial Statements or notes thereto.
25
<PAGE> 26
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS
OF SEEQ TECHNOLOGY INCORPORATED
In our opinion, the financial statements listed in the accompanying index
present fairly, in all material respects, the financial position of SEEQ
Technology Incorporated and its subsidiary at September 30, 1996 and 1995, and
the results of their operations and their cash flows for each of the three
fiscal years in the period ended September 30, 1996, 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.
PRICE WATERHOUSE LLP
San Jose, California
October 23, 1996
26
<PAGE> 27
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
- ---------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, September 30,
(Thousands, except share amounts) 1996 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,974 $ 3,682
Restricted cash -- 3,000
Accounts receivable, less allowances for sales
returns and doubtful accounts of $240 and $338 8,235 3,900
Inventories 5,352 2,230
Other current assets 368 212
- ---------------------------------------------------------------------------------------------------------------
Total current assets 17,929 13,024
- ---------------------------------------------------------------------------------------------------------------
Property and equipment:
Machinery and equipment 8,923 5,596
Furniture and fixtures 2,680 2,446
Leasehold improvements 401 321
- ---------------------------------------------------------------------------------------------------------------
12,004 8,363
Accumulated depreciation and amortization (7,746) (6,863)
- ---------------------------------------------------------------------------------------------------------------
4,258 1,500
Other assets 4,248 4,410
- ---------------------------------------------------------------------------------------------------------------
$ 26,435 $ 18,934
- ---------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable to bank $ -- $ 3,000
Accounts payable 6,271 1,938
Accrued salaries, wages and employee benefits 586 467
Other accrued liabilities 754 896
Deferred income on sales to distributors 270 54
Current portion of capitalized lease obligations 895 287
- ---------------------------------------------------------------------------------------------------------------
Total current liabilities 8,776 6,642
- ---------------------------------------------------------------------------------------------------------------
Long-term liabilities 3,466 1,524
- ---------------------------------------------------------------------------------------------------------------
Commitments and contingencies (see Notes 3, 8, 11 and 12)
Stockholders' equity
Convertible preferred stock, $0.01 par value; 1,000,000
shares authorized, no shares outstanding -- --
Issuance of common stock, $0.01 par value; 40,000,000 shares
authorized, 30,245,113 and 29,769,766 shares outstanding 302 298
Additional paid-in capital 123,424 122,854
Accumulated deficit (109,533) (112,384)
- ---------------------------------------------------------------------------------------------------------------
Total stockholders' equity 14,193 10,768
- ---------------------------------------------------------------------------------------------------------------
$ 26,435 $ 18,934
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements
27
<PAGE> 28
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
(Thousands, except per share amounts) Year Ended September 30,
- ---------------------------------------------------------------------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Revenues $ 31,338 $ 22,512 $ 21,480
-------- -------- --------
Costs and expenses:
Cost of revenues 20,680 14,758 15,632
Research and development 3,303 3,069 3,278
Marketing, general and administrative 4,579 3,827 6,939
Restructuring and other, net -- (399) 4,932
-------- -------- --------
28,562 21,255 30,781
-------- -------- --------
Income (loss) from operations 2,776 1,257 (9,301)
Interest expense (240) (431) (456)
Interest and other income, net 403 518 187
Gain on sale of stock -- -- 1,693
-------- -------- --------
Income (loss) before provision for income 2,939 1,344 (7,877)
taxes
Provision for income taxes (88) (14) --
-------- -------- --------
Net income (loss) $ 2,851 $ 1,330 $ (7,877)
-------- -------- --------
Net income (loss) per share:
Primary $ 0.09 $ 0.05 $ (0.32)
Fully diluted $ 0.09 $ 0.04 $ (0.32)
Shares used in per share calculations:
Primary 32,032 29,205 24,273
Fully diluted 32,148 30,894 24,273
-------- -------- --------
</TABLE>
See accompanying notes to consolidated financial statements
28
<PAGE> 29
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
Years ended September 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Common Stock Additional
------------------- Paid-in Notes Accumulated
(In Thousands) Shares Amount Capital Receivable Deficit Total
- -------------- ------ ------ ---------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1993 21,688 $217 $112,636 $(472) $(105,837) $ 6,544
Issuance to employees under
employee stock plans 186 2 218 -- -- 220
Issuance of common 3,615 36 4,397 -- -- 4,433
Exercise of warrants 311 3 261 -- -- 264
Forgiveness of officer loans -- -- -- 472 -- 472
Net loss -- -- -- -- (7,877) (7,877)
------ ---- -------- ----- --------- --------
Balance at September 30, 1994 25,800 258 117,512 -- (113,714) 4,056
Issuance to employees under
employee stock plans 601 6 733 -- -- 739
Common stock issued in
settlement of litigation 475 5 891 -- -- 896
Exercise of warrants 2,894 29 3,718 -- -- 3,747
Net income -- -- -- -- 1,330 1,330
------ ---- -------- ----- --------- --------
Balance at September 30, 1995 29,770 298 122,854 -- (112,384) 10,768
Issuance to employees under
employee stock plans 339 3 475 -- -- 478
Exercise of warrants 136 1 95 -- -- 96
Net income -- -- -- -- 2,851 2,851
------ ---- -------- ----- --------- --------
Balance at September 30, 1996 30,245 $302 $123,424 $ 0 $(109,533) $ 14,193
------ ---- -------- ----- --------- --------
</TABLE>
See accompanying notes to consolidated financial statements
29
<PAGE> 30
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------------------
(Increase/(Decrease) in cash and cash equivalents, in thousands) 1996 1995 1994
- ---------------------------------------------------------------- ------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income/(loss) $ 2,851 $ 1,330 $(7,877)
Adjustments to reconcile net income to net cash
used for operating activities:
Depreciation and amortization 1,173 717 1,069
Gain on sales of stock held in escrow -- -- (1,195)
(Benefit) provision for restructuring and other -- (399) 4,932
(Gain) loss on equipment disposal (10) (19) 25
Forgiveness of officer loans -- -- 472
Changes in assets and liabilities:
Accounts receivable (4,335) (646) 2,326
Inventories (3,122) (92) 1,597
Other current assets (156) 738 316
Other assets (1,068) (297) 196
Accounts payable 4,333 (1,247) (830)
Accrued salaries, wages and employee benefits 119 (319) (407)
Other accrued liabilities 74 (1,421) (2,064)
Long term obligations (126) (499) (483)
------- ------- -------
Net cash provided by (used for) operating activities (267) (2,154) (1,923)
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (334) (851) (394)
Proceeds on disposal of equipment 10 46 98
Release of funds held in escrow 1,000 300 --
Short-term investments in restricted account 3,000 -- (3,000)
------- ------- -------
Net cash provided by (used for) investing activities 3,676 (505) (3,296)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payments on) short-term borrowings (3,000) -- 3,000
Payments of capital lease obligations (691) (398) (1,219)
Proceeds from issuance of stock 574 4,486 4,917
------- ------- -------
Net cash provided by (used for) investing activities (3,117) 4,088 6,698
------- ------- -------
Net increase in cash and cash equivalents 292 1,429 1,479
Cash and cash equivalents at beginning of period 3,682 2,253 774
------- ------- -------
Cash and cash equivalents at end of period $ 3,974 $ 3,682 $ 2,253
------- ------- -------
SUPPLEMENTAL DISCLOSURES:
Cash paid during the year for interest $ 264 $ 464 $ 433
Capitalized lease obligations incurred for the acquisition
of equipment $ 3,367 $ 94 $ 29
Issuance of stock for settlement of litigation $ -- $ 896 $ --
------- ------- -------
</TABLE>
See accompanying notes to consolidated financial statements
30
<PAGE> 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. THE COMPANY
SEEQ Technology Incorporated (the "Company"), incorporated in Delaware, was
formed on January 13, 1981 to engage in the development, production and sale of
state-of-the-art, high technology semiconductor devices.
For purposes of presentation, the Company has indicated its fiscal year as
ending on September 30; whereas, in fact, the Company operates on a 52/53-week
fiscal year ending on the last Sunday in September of each year. Fiscal 1994 and
1995 are 52-week years and fiscal 1996 is 53 weeks. Two customers accounted for
approximately 42% and 10% of revenues in fiscal 1996, two customers accounted
for approximately 17% and 16% of the Company's revenues in fiscal 1995 and two
customers accounted for approximately 16% and 11% of revenues in fiscal 1994.
Sales to foreign customers in fiscal years 1996, 1995 and 1994 represented 25%,
38% and 33%, respectively, of revenues during such years. During fiscal years
1996, 1995 and 1994, approximately $2.0 million, $2.3 million, $3.4 million
respectively, represented sales to customers in Europe, and $5.8 million, $6.2
million, $3.6 million respectively, represented sales to customers in the
Asian/Pacific Rim region. Sales to other geographical regions during such years
were not material.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION. The consolidated financial statements include the
accounts of SEEQ Technology incorporated and its wholly owned subsidiary. Upon
consolidation, all significant intercompany accounts and transactions are
eliminated.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS. The Company considers all highly
liquid investment instruments with a maturity of three months or less at the
time of the purchase to be cash equivalents. The Company classifies its debt and
equity securities which are comprised of investments in high grade commercial
paper included in cash and cash equivalents and the escrow account relating to
the EEPROM technology sold to Atmel in the EEPROM Asset Sale as
available-for-sale; any significant unrealized holding gains or losses will be
excluded from earnings and reported net of the income tax effect in a separate
component of stockholders' equity.
INVENTORIES. Inventories are stated at the lower of cost or market. Cost is
determined on a first-in, first-out basis.
Inventories consist of the following:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
September 30,
(Thousands) 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Raw materials $ 22 $ 16
Work in process 3,147 1,379
Finished goods 2,183 835
- --------------------------------------------------------------------------------
$5,352 $2,230
- --------------------------------------------------------------------------------
</TABLE>
PROPERTY AND EQUIPMENT. Property and equipment are stated at cost. Depreciation
is computed using the straight-line method over the estimated useful lives of
assets, generally five years. Depreciation of leasehold improvements is computed
using the shorter of the remaining term of the leases or the estimated useful
lives of the improvements. Depreciation for federal tax purposes is computed
using accelerated methods.
NON-RECURRING PRODUCTION TRANSFER COSTS. Non-recurring costs such as tooling and
engineering costs resulting from the transfer of current product to new
foundries are capitalized and amortized to cost of revenues over the shorter of:
the remaining life of the product, the term of the foundry agreement or two
years. Non-recurring costs which are associated with the development of new
products are expensed as research and development costs when incurred. During
fiscal 1996, the Company capitalized $835,000 of non-recurring product transfer
costs of which $231,000 was amortized in the same period. Non-recurring product
transfer costs in fiscal years 1995 and 1994 were not material.
31
<PAGE> 32
SALES TO DISTRIBUTORS. The Company sells to certain domestic distributors under
agreements allowing certain rights of return and price protection on unsold
merchandise. Such sales are not recognized for financial reporting purposes
until the merchandise is sold by the distributor, as reported by the distributor
for its fiscal month end closest to that of the Company. Upon shipment of
semiconductor devices by the Company, amounts billed to domestic distributors by
the Company are included as accounts receivable; inventory is relieved; and the
sale and estimated gross profit are deferred until all the conditions of sale
are met. Semiconductor revenue from sales to international distributors is
recognized at the time of shipment. The amount of inventory maintained at
international distributors that is subject to returns and allowances is not
material.
INCOME TAXES. Deferred tax assets and liabilities are recognized for the
expected tax consequences of temporary differences between the tax bases of
assets and liabilities and the amounts reported for financial reporting purposes
for all periods presented (See Note 9. Income Taxes).
ESTIMATES AND ASSUMPTIONS. The preparation of financial statements in conformity
with generally accepted accounting principals requires management to make
estimates and assumptions that effect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from these estimates.
CONCENTRATION OF CREDIT RISK. Financial instruments which potentially subject
the Company to concentration of credit risk consist of cash equivalents and
accounts receivable. The Company invests primarily in money market accounts and
high grade commercial paper.
The Company's accounts receivable are derived primarily from sales to customers
located primarily in the U.S., Europe and the Asia/Pacific Rim. The Company
performs ongoing credit evaluations of its customers and generally does not
require collateral.
At September 30, 1996, outstanding receivables from three customers accounted
for 45%, 11%, and 11% of the Company's accounts receivable. At September 30,
1995, outstanding receivables from two customers accounted for 17% and 14% of
the Company's accounts receivable.
NET INCOME (LOSS) PER SHARE. Primary and fully diluted net income per share for
fiscal years 1996 and 1995 was determined using the treasury stock method.
Primary income per common and common equivalent share is computed using the
weighted average number of shares outstanding during the period, including
dilutive stock options and warrants. Fully diluted income per common and common
equivalent share reflects additional dilution related to stock options and
warrants due to the use of the market price at the end of the period, when
higher than the average price for the period.
Net loss per share for fiscal 1994 was computed using the weighted average
number of common shares outstanding during the period. Common stock equivalents
are not included because the effect is antidilutive.
32
<PAGE> 33
NOTE 3. SALE OF EEPROM ASSETS AND SEEQ COMMON STOCK TO ATMEL.
Pursuant to the Asset Purchase Agreement dated February 7, 1994 (the "Asset
Purchase Agreement"), by and between SEEQ and Atmel Corporation ("Atmel"), Atmel
purchased the assets of SEEQ related to its electrically erasable programmable
read only memory ("EEPROM") products (the "EEPROM Asset Sale"). Under the terms
of the Asset Purchase Agreement, Atmel acquired all of SEEQ's rights in assets
related to SEEQ's EEPROM products, including intellectual property, equipment,
inventory and a portion of the accounts receivable. The purchase price for such
assets consisted of 135,593 shares of Atmel's common stock and $481,632 in cash.
In addition, Atmel assumed certain liabilities under equipment leases for
equipment used in producing EEPROM products.
During the third quarter of fiscal 1994, SEEQ sold the 135,593 shares of Atmel
Common Stock it received in the EEPROM Asset Sale for total proceeds of
$6,693,000, reflecting a gain on the sale of $1,693,000. A significant portion
of the proceeds from the stock sale was deposited in two escrow accounts subject
to claims of indemnity by Atmel under the Asset Purchase Agreement. One escrow
account, which contained $600,000, was subject to claims by Atmel with respect
to the equipment, inventory and accounts receivable sold to Atmel in the EEPROM
Asset Sale. Atmel asserted a claim for the full amount deposited in this escrow
account. On January 30, 1995, the Company entered into an agreement with Atmel
to settle Atmel's claim. Under the terms of the agreement, $250,000 was
distributed to Atmel and the remaining $350,000 was distributed to the Company.
The second escrow account, which initially contained $4,329,000 (recorded as
other assets), is subject to any future claims that may be made by Atmel with
respect to the EEPROM technology sold to Atmel in the EEPROM Asset Sale. During
the first quarter of fiscal 1995 and the fourth quarter of fiscal 1996, $300,000
and $1,000,000, respectively, was distributed to SEEQ from the escrow account,
leaving $3,029,000 on deposit therein as of September 30, 1996 (excluding
interest earned to date of $502,000). Atmel has notified SEEQ that, based on
certain claims asserted by HMC, one of SEEQ's foundries and joint development
partners, that SEEQ previously granted HMC certain license rights to the EEPROM
technology, Atmel believes it may be entitled to assert a claim against this
escrow account, although, Atmel has not done so to date. The funds in this
escrow account will remain in escrow until February 1999, or until a
determination is made that SEEQ is entitled to such funds under any release
condition in the escrow agreement, or if Atmel makes a claim prior to February
1999 under such escrow, then until such claim is resolved by a court.
In connection the EEPROM Asset Sale, Atmel acquired 3,614,701 shares of SEEQ's
Common Stock pursuant to the Stock Purchase Agreement dated February 7, 1994,
representing approximately 14% of SEEQ's outstanding shares of Common Stock as
of such date. Such shares were purchased at a price of $1.25 per share, for a
total purchase price of $4,518,376. The Company filed a registration statement
for these shares that became effective with the Securities and Exchange
Commission on March 24, 1995.
The following unaudited pro forma information reflects the results of operations
for the year ended September 30, 1994, as if the EEPROM Asset Sale had occurred
as of October 1, 1993 after giving effect to certain adjustments, including
reversal of the revenue and related costs of sales attributable to EEPROM
products, reduction in research and development and marketing expenses
associated with the development and marketing of EEPROM products and reduction
in interest expense associated with leased equipment used in manufacturing
EEPROM products. The pro forma information excludes the effect of the
restructuring charges which were recorded in fiscal 1994, as a consequence of
the sale of assets in the EEPROM Asset Sale, and the effect of the gain of sales
of stock which was recorded in fiscal 1994. The average number of shares
outstanding in fiscal 1994 has been adjusted to reflect the effect of issuing
shares of SEEQ's common stock to Atmel pursuant to the purchase agreement as if
they had been outstanding for the entire period. The pro forma results have been
prepared for comparative purposes only and do not purport to be indicative of
what operating results would have been had the acquisition taken place at
October 1, 1993 or of operating results which may occur in the future.
<TABLE>
<CAPTION>
--------------------------------------------------------
Year ended September 30,
1994
(in thousands, except per share data)
(unaudited)
--------------------------------------------------------
<S> <C>
Net Sales $ 18,444
Net Loss (4,113)
Net Loss per $ (0.16)
share:
--------------------------------------------------------
</TABLE>
33
<PAGE> 34
NOTE 4. RESTRUCTURINGS.
In connection with the EEPROM Asset Sale (SEE NOTE 3. SALE OF EEPROM ASSETS AND
SEEQ COMMON STOCK TO ATMEL) and the Company's decision in fiscal 1994 to
discontinue its end-user Ethernet adapter board product line, the Company
adopted a restructuring plan, pursuant to which , among other things, certain
business operations were discontinued, certain facilities were eliminated and
certain employees were terminated. The restructuring reserves are included as
part of other accrued liabilities and long term liabilities.
The following table summarizes the restructuring activity in fiscal 1994, 1995
and 1996 (in thousands):
<TABLE>
<CAPTION>
------------- ----------- ----------- -------------
Reserve at Restructure Utilization Reserve at
September 30, Benefit (Benefit) September 30,
1993 (Charge) Charge 1994
Recorded in During
Fiscal 1994 Fiscal 1994
------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Facility lease, inventory and
other equipment costs $(2,055) $ 1,026 $ 413 $ (616)
------- ------- ------- -------
EEPROM Asset Sale
Restructuring
Sale proceeds -- 5,482 (5,482) --
Costs of assets transferred -- (5,656) 5,601 (55)
Excess facilities -- (3,186) 652 (2,534)
Severance -- (421) 421 --
Discontinued inventories -- (404) 254 (150)
Excess property and
leasehold improvements -- (158) 158 --
Other costs -- (578) 286 (292)
------- ------- ------- -------
-- (4,921) 1,890 (3,031)
------- ------- ------- -------
End-user Ethernet adapter
board products write-off
Discontinued inventories -- (808) 808 --
Other costs -- (229) 229 --
------- ------- ------- -------
-- (1,037) 1,037 --
------- ------- ------- -------
Totals $(2,055) $(4,932) $ 3,340 $(3,647)
------- ------- ------- -------
</TABLE>
<TABLE>
<CAPTION>
---------- ----------- ----------- ---------- ----------- ----------
Reserve at Restructure Utilization Reserve at Utilization Reserve at
September Benefit (Benefit) September (Benefit) September
30, 1994 (Charge) Charge 30, 1995 Charge 30, 1996
Recorded in During During
Fiscal 1994 Fiscal Fiscal 1996
---------- ----------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Facility lease, inventory and other
equipment costs $ (616) $ 11 $ 605 $ -- $ -- $ --
------- ------- ------- ----- ----- -----
EEPROM Asset Sale
Restructuring
Costs of assets transferred (55) (195) 250 -- -- --
Excess facilities (2,534) 818 915 (801) 119 (682)
Discontinued inventories (150) 51 99 -- -- --
Other costs (292) (338) 435 (195) 195 --
------- ------- ------- ----- ----- -----
(3,031) 336 1,699 (996) 314 (682)
------- ------- ------- ----- ----- -----
End-user Ethernet adapter board
products write-off
Other costs -- 52 (52) -- -- --
------- ------- ------- ----- ----- -----
-- 52 (52) -- -- --
------- ------- ------- ----- ----- -----
Totals $(3,647) $ 399 $ 2,252 $(996) $ 314 $(682)
------- ------- ------- ----- ----- -----
</TABLE>
34
<PAGE> 35
FACILITY LEASE, INVENTORY AND OTHER EQUIPMENT COSTS
The reversal in fiscal 1994 reflects an adjustment to a reserve recorded in
prior fiscal years by the Company to cover estimated costs in connection with
the termination of the Company's prior lease facility. During the second quarter
of fiscal 1995, the Company entered into a final settlement of a lawsuit
previously filed against the Company for rent and damages under a lease of
certain premises previously occupied by the Company which the Company vacated in
July 1992. In connection with the action and the proposed settlement thereof,
the Company had previously recorded certain reserves covering, among other
things, the proposed issuance of shares of its common stock. The market price of
the Company's common stock increased during the second quarter of fiscal 1995,
and, as a result, the Company recorded additional reserves of $122,000 to
reflect the higher market price of the common stock at the time of the final
settlement of the lawsuit. During fiscal 1995, the Company also sold equipment
that had been fully reserved and settled certain associated lease obligations,
resulting in a $133,000 reduction in the restructuring reserves. Upon settlement
of this lawsuit, the balance of the restructuring reserves were utilized.
EEPROM ASSET SALE RESTRUCTURING
In connection with the EEPROM Asset Sale, the Company incurred certain
restructuring costs or realized certain benefits during fiscal 1994, 1995 and
1996 as follows:
EEPROM Asset Sale. On January 30, 1995 the Company and Atmel entered into a
settlement agreement to settle Atmel's claims made against the $600,000 escrow
account previously established. Under the settlement agreement, $250,000 was
distributed to Atmel and the remaining $350,000 was distributed to the Company.
As a result, the Company recorded a $195,000 charge in fiscal 1995 for that
portion of the settlement which was not previously reserved.
Excess facilities. During fiscal 1994, the Company decided to sublease its
headquarters' office and manufacturing facilities for the approximately eight
years remaining on the term of the lease. The Company recorded reserves
representing the Company's estimate of the difference between the rent payable
by the Company under the lease and the anticipated rent payable to the Company
under a sublease. During the first quarter of fiscal 1995, the Company sublet
the entire facility in which its headquarters and operations were located at a
higher rental rate than previously estimated, and as a result in 1995, recorded
an $818,000 reduction to its restructuring reserves. The Company also recorded
$915,000 of facility lease payments, broker fees and relocation costs in
connection with the sublease. During fiscal 1996, the Company recorded $119,000
of facility lease payments in excess of the sublease amount.
Severance. The Company substantially reduced its workforce as a result of the
termination of 78 employees in the quarter ended March 31, 1994.
Discontinued Inventories. As a result of the EEPROM Asset Sale, the Company
discontinued certain inventories; in fiscal 1995 the Company paid $99,000 to
foundries for inventories.
Excess property and leasehold improvements. In fiscal 1994 the Company wrote off
fixtures and other property and leasehold improvements related to the assets
sold that were no longer usable in the Company's continuing operations.
Other costs. In fiscal 1994, the Company recorded other costs, including
property tax obligations, obsolete computer systems and legal fees. For the
fiscal year ended September 30, 1995, the Company recorded other costs of
approximately $338,000, primarily reflecting legal fees and settlement costs in
connection with the agreement with Hualon Microelectronics Company (see Note 11
Litigation). The Company paid $435,000 for settlement costs, outside foundries
for memory product process development and lease payments for certain equipment
related to EEPROM products. During fiscal 1996, payments of $195,000 for
settlement costs were made.
END-USER ETHERNET ADAPTER BOARD PRODUCTS WRITE-OFF
During the quarter ended March 31, 1994, the Company discontinued its end-user
Ethernet adapter boards product line, and recorded restructuring costs as
follows:
35
<PAGE> 36
Discontinued inventories. The Company wrote off Ethernet adapter board product
inventories that the Company discontinued.
Other costs. In Fiscal 1994, the Company recorded other costs, including
severance costs, component supplier termination charges and excess property and
leasehold improvement write-offs. During fiscal 1995, the Company recorded as
other costs a reserve of $39,000 reflecting the settlement of certain litigation
relating to end-user Ethernet adapter board products. Offsetting this charge,
the Company recorded a benefit of $91,000 from the collection of previously
written-off accounts receivable and the reversal of excess warranty reserves.
NOTE 5. STOCKHOLDERS' EQUITY
WARRANTS. In fiscal 1991, as a partial consideration for a bank credit
agreement, the Company issued a warrant exercisable for five years to purchase
150,000 shares of the Company's common stock at $1.56 per share; this warrant
was exercised during fiscal 1995. In fiscal 1992, as consideration to extend the
credit agreement for an additional year, the Company issued a warrant
exercisable through August 1, 1995 to purchase 100,000 shares of the Company's
common stock at $3.13 per share; this warrant was not exercised and therefore
expired in fiscal 1995. In fiscal 1992, in conjunction with the private
placement of 700,000 shares of common stock, warrants to purchase a like number
of shares were issued, exercisable for three years, to purchase shares of the
Company's common stock at $2.75 per share. In addition, the placement agent was
granted the right to purchase 70,000 shares of common stock at $2.00 per share
together with a warrant to purchase an additional 70,000 shares of common stock
at $2.75 per share. The warrants issued in conjunction with the private
placement were repriced in fiscal 1993 to purchase the Company's common stock at
$0.85 per share. During fiscal 1993 and 1994, 232,500 and 310,500 of these
warrants were exercised, respectively. None of these warrants were exercised
during fiscal 1995 and the remaining 227,000 warrants expired. In fiscal 1993,
in conjunction with a foreign equity offering, warrants were issued to purchase
120,385 shares of common stock at $1.25 per share. During fiscal 1995 and 1996,
84,270 and 36,115 of these warrants were exercised, respectively. In the third
quarter of fiscal 1993, as part of a public offering of 4.6 million shares of
the Company's common stock, warrants to purchase an additional 2.3 million
shares at $1.40 per share were issued. In addition, the selling agent was
granted warrants to purchase 460,000 shares of common stock at $1.06 per share.
During fiscal 1995, all of the 2.3 million warrants at $1.40 per share were
exercised and 360,000 of the $1.06 per share warrants were exercised, the
remaining 100,000 of these warrants were exercised in fiscal 1996. The value of
these warrants was immaterial at the date of issuance for fiscal years 1993,
1992 and 1991.
CONVERTIBLE PREFERRED STOCK. At September 30, 1996, 1,000,000 shares of
preferred stock are authorized for issuance with no shares outstanding.
Attributes of the preferred stock such as dividend rates, voting rights, and
liquidation preferences, are subject to determination by the Company's Board of
Directors upon issuance.
COMMON SHARES. The Company's amended articles of incorporation authorize the
issuance of up to 40,000,000 common shares. The following table summarizes
shares of common stock reserved for issuance as of September 30, 1996:
<TABLE>
<CAPTION>
- ----------------------------------------------------
Issuable upon Number of Shares
- ----------------------------------------------------
<S> <C>
Exercise of stock options,
including shares available 5,624,106
for option
Periodic Purchase Plan 96,939
- ----------------------------------------------------
5,721,045
- ----------------------------------------------------
</TABLE>
STOCK PURCHASE RIGHTS. In April 1995, the Company implemented a plan to protect
stockholder's rights in the event of a proposed takeover of the Company. Under
the plan, each share of the Company's outstanding common stock carries one
Preferred Share Purchase Right (Right). Each Right entitles the holder, under
certain circumstances, to purchase one one-hundredth of a share of Preferred
Stock of the Company or its acquirer at a discounted price. The Rights are
redeemable by the Company and expire in 2005.
36
<PAGE> 37
NOTE 6. EMPLOYEE STOCK PLANS
PERIODIC PURCHASE PLAN. All employees who have met the minimum service period
are eligible to participate in the Company's Periodic Purchase Plan. Employees
may purchase shares subject to the Plan at a price not less than 85% of the
lesser of the fair market value at the beginning or end of the offering period.
The term of each offering period is six months. During fiscal 1996, 1995 and
1994, 30,000, 15,000 and 17,000 shares were issued at average purchase prices of
$2.36, $0.90 and $1.01 per share, respectively. At September 30, 1996, 96,939
shares are available for issuance under the plan.
STOCK OPTION PLANS. During fiscal 1982, the Company adopted two stock option
plans; an incentive plan for employees and a non-statutory plan for certain
employees, directors, sales representatives, distributors and consultants. The
plans were subsequently combined. Under the restated plan, as amended, a total
of 7,760,000 shares of common stock have been reserved for issuance under the
combined plan, including an increase of 1,400,000 shares of common stock,
approved by the stockholders at the Annual Meeting held March 21, 1996. Options
are granted for a period not in excess of ten years from the date of grant.
Terms for exercising options are determined by the Board of Directors. Options
outstanding at September 30, 1996 become exercisable in cumulative increments
proportionately over a four-year period from the date of grant, except that if
termination occurs within six months from commencement date, no options are
exercisable. Options are granted to purchase shares at prices not less than the
fair market value at the date of grant. The plan expires in 2002.
In fiscal 1990, the Company adopted a non-statutory stock option plan for
non-employee directors. A total of 200,000 shares of common stock were reserved
for issuance under the plan. Options are automatically granted to eligible board
members at the director's initial election or appointment and subsequent annual
meetings commencing with the second annual meeting following the date of initial
election or appointment. In March 1996, the stockholders approved an amendment
to the plan to provide for a special one-time option grant to two non-employee
members of the Company's Board of Directors. Options to purchase a combined
total of 40,000 shares were granted. Options are exercisable after an initial
six month waiting period following the date of grant at prices not less than the
fair market value on the date of the grant. Options are subject to repurchase
rights by the Company to the extent that they are not vested at the time of
termination of Board membership.
The following table summarizes stock option activity under the stock option
plans:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Shares Options Outstanding
(Thousands except per share Available -------------------------------------------------
amounts) For Grant Shares Price per share Amount
--------- ------ ------------------ -------
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1993 1,770 3,511 $1.000 -- $7.875 $ 5,586
Granted (1,518) 1,518 1.344 -- 1.375 1,986
Canceled 1,746 (1,746) 1.063 -- 5.500 (3,106)
Exercised (162) 1.500 -- 1.625 (192)
------ ------ ------------------ -------
Balance at September 30, 1994 1,998 3,121 1.000 -- 7.875 4,274
Granted (1,877) 1,877 1.000 -- 2.438 2,771
Canceled 1,043 (1,043) 1.000 -- 5.500 (1,611)
Exercised (586) 1.000 -- 2.500 (725)
------ ------ ------------------ -------
Balance at September 30, 1995 1,164 3,369 1.000 -- 7.875 4,709
Additional shares authorized 1,400
Granted (1,013) 1,013 2.750 -- 3.688 3,421
Canceled 109 (109) 1.000 -- 3.688 (222)
Exercised (309) 1.000 -- 1.500 (406)
------ ------ ------------------ -------
Balance at September 30, 1996 1,660 3,964 1.000 -- 7.875 7,502
------ ------ ------------------ -------
Options exercisable at September 30, 1996 1,688 $1.000 -- $7.875 $ 2,794
------ ------ ------------------ -------
</TABLE>
NOTE 7. SHORT-TERM NOTE PAYABLE
In November 1993, the Company entered into a two-year line of credit agreement,
subject to renewal, with the CIT Group ("CIT"). Although the Company was not
required to make use of the bank line of credit, during the second quarter of
fiscal
37
<PAGE> 38
1994 it used cash resources to reduce its effective short-term credit borrowings
interest rate by borrowing the minimum required borrowings of $3,000,000 under a
secured bank line of credit with CIT, and investing the proceeds in a short-term
certificate of deposit (restricted cash). Effective November 22, 1995, the
Company renewed the credit facility with CIT for a two year term. Under the
renewed credit agreement, the minimum borrowing requirement was reduced to
$1,500,000 and was only applicable in the event the Company had a loan balance
outstanding with CIT. Thus the Company liquidated its restricted cash and repaid
the note payable to bank in November 1995. The credit agreement with CIT was
terminated by the Company in August 1996.
In August 1996, the Company entered into a one-year revolving line of credit
agreement with a bank. Under the terms of the bank revolving line of credit, the
Company could borrow the lesser of $7,000,000 or an amount determined by a
formula applied to eligible accounts receivable, at a variable interest rate
equal to the prime rate plus 0.75%. The revolving line of credit is secured by a
first position security interest in the Company's assets, including intellectual
property, and expires August 18, 1997. The loan agreement requires the Company
to maintain a profit each fiscal year and to maintain certain financial ratios.
The loan agreement also requires the Company to maintain a level of tangible net
worth which, in effect, limits the ability of the Company to make payments of
cash dividends. As of September 30, 1996, the Company was in compliance with all
of the covenants of the credit agreement. There were no borrowings outstanding
under this revolving line of credit as of September 30, 1996.
NOTE 8. LONG-TERM OBLIGATIONS AND COMMITMENTS
Long-term obligations consisted of the following (in thousands):
<TABLE>
<CAPTION>
-----------------------
September 30,
1996 1995
------- -------
<S> <C> <C>
Capitalized lease obligations $ 3,280 $ 604
Facility lease obligations 1,081 1,207
------- -------
4,361 1,811
Less: current portion (895) (287)
------- -------
$ 3,466 $ 1,524
------- -------
</TABLE>
The Company leases its facilities and certain manufacturing and office equipment
under non-cancelable lease arrangements. The major facility lease expires in
2005 and provides for base rental rates which are increased at various times
during the term of the lease and for a renewal option to extend the lease for an
additional five-year period. The non-cancelable equipment leases are for terms
of three to five years and generally provide for the lessor to retain the
depreciation for income tax purposes. Most of the leases require the Company to
pay property taxes, insurance and normal maintenance and repairs.
Leases meeting certain specific criteria are accounted for as the acquisition of
an asset and the incurrence of a liability (i.e., a capital lease). Assets
recorded as property and equipment under capital leases were as follows:
<TABLE>
<CAPTION>
---------------------
September 30,
(Thousands) 1996 1995
- ----------- ------- -----
<S> <C> <C>
Machinery and equipment $ 3,195 $ --
Furniture and fixtures 266 155
------- -----
3,461 155
Accumulated amortization (309) (53)
------- -----
$ 3,152 $ 102
------- -----
</TABLE>
38
<PAGE> 39
Minimum future lease payments (in thousands) for non-cancelable leases as of
September 30, 1996 were as follows:
<TABLE>
<CAPTION>
- ------------- --------- ------
Years ended Operating Capital
September 30, Leases Leases
- ------------- --------- ------
<S> <C> <C>
1997 $ 645 $1,156
1998 652 908
1999 658 766
2000 687 565
2001 702 527
Thereafter 1,877 76
------- ------
Total minimum lease payments $ 5,221 3,998
-------
Less: amount representing interest (718)
------
Present value of minimum
lease payments 3,280
Less: current portion (895)
------
Long term lease obligations $2,385
------
</TABLE>
Rental expense under all operating leases was $634,000 for fiscal 1996, $597,000
for fiscal 1995 and $1,056,000 for fiscal 1994.
NOTE 9. INCOME TAXES
For fiscal 1996 and 1995, the Company recorded provisions of $88,000 and
$14,000, respectively, for income taxes. The Company's provisions were computed
by applying the estimated annual tax rate to income taxes, taking into account
net operating loss carryforwards and alternative minimum taxes. No provision for
federal or state income taxes was recorded in fiscal 1994 as the Company
incurred a net operating loss. At September 30, 1996, the Company had net
operating loss carryforwards of approximately $107,500,000 for federal income
tax purposes, which may be utilized to reduce future taxable income. These carry
forwards expire in varying amounts from 1997 through 2010. Under the Tax Reform
act of 1986, the amounts of and the benefit from net operating losses that can
be carried forward may be impaired or limited in certain circumstances. Events
which may cause changes in the amount of net losses that the Company may utilize
in any one year include, but are not limited to, a cumulative stock ownership
change of more than 50% over a three year period.
Deferred tax assets (liabilities) are comprised of the following (in thousands):
<TABLE>
<CAPTION>
September 30, 1996 September 30, 1995
------------------ ------------------
<S> <C> <C>
Net operating loss carryforwards $ 39,165 $ 39,817
Restructuring accruals 278 320
Inventory reserve and basis difference 168 269
Compensation accruals 52 64
Accounts receivable and sales return 215 135
reserves
Other 51 449
-------- --------
Gross deferred tax assets 39,929 41,054
-------- --------
Gross deferred tax liabilities -- --
-------- --------
Deferred tax asset valuation allowance (39,929) (41,054)
-------- --------
Total net deferred asset $ -- $ --
-------- --------
</TABLE>
Management believes sufficient uncertainty exists regarding the realizability of
the net deferred tax assets such that a full valuation allowance is required.
39
<PAGE> 40
NOTE 10. DEVELOPMENT AND LICENSE AGREEMENTS
In July 1990, the Company entered into an eight year renewable manufacturing and
technology agreement with Hualon Microelectronics Corporation ("HMC"). HMC
provided foundry services to the Company through the second quarter of fiscal
1994. In fiscal 1994, as a result of the EEPROM Asset Sale and disputes with
HMC, the Company discontinued its use of HMC's foundry services (see Note 11
Litigation.). In August 1995, the Company re-established its foundry and
development relationship with HMC. The Company and HMC agreed to reactivate and
modify their 1990 Foundry and Co-Development Agreement. Under the "amended"
Agreement, HMC will, solely at the Company's request, manufacture wafers for
certain of the Company's products through fiscal 1998. In connection with the
transfer of production from another foundry to HMC, the Company paid
Non-recurring Engineering ("NRE") charges of $240,000. The Company paid
approximately $40,000 of these NRE charges in fiscal 1995 and $200,000 in fiscal
1996. The Company has several other foundries which it operates on an individual
purchase order basis.
NOTE 11. LITIGATION
On March 30, 1994, the Company filed a lawsuit against HMC in which, among other
things, the Company sought a declaration by the court that an alleged license
agreement, pursuant to which HMC had allegedly been granted certain license
rights to the EEPROM technology sold to Atmel (see Note 3), is invalid. In
response to the Company's claims, HMC asserted affirmative defenses and
counterclaims. On August 16, 1995, the Company and HMC entered into a Settlement
Agreement, Release and Tolling Agreement. Under the terms of such Agreement, the
Company agreed, among other things, that the claims asserted against HMC in
respect of the alleged license agreement would be tolled for such time and on
such terms as provided therein. As a result, the Company is not currently
pursuing such claims. The Company is entitled to pursue such claims in the
future, however, subject to the terms of the Settlement Agreement, Release and
Tolling Agreement. In the event that the Company does not cause the alleged
license agreement to be invalidated, Atmel may assert a claim against the
Company under the Asset Purchase Agreement, including a claim for damages, if
suffered by Atmel as a result of HMC's use of any of such technology, and, in
the event any such claim by Atmel is determined to be valid, Atmel may recover
any such damages from the escrow described above. The Company believes that, in
the event of any claim by Atmel, the amount of damages that may be payable by
the Company upon a resolution thereof will not have a material adverse effect on
the Company's cash flow, financial position or results of operations. However,
there can be no assurance as to such matters. Under the terms of the settlement,
the Company agreed to pay HMC $500,000 due in three consecutive monthly
installments beginning in August 1995. The Company further agreed to issue to
HMC 100,000 shares of SEEQ's common stock and reactivate and modify the 1990
Foundry and Co-Development Agreement (see Note 10. Development and License
Agreements).
During 1995, the Company settled a lawsuit previously filed against the Company
by GOCO Realty Fund I / Brazos Partners LP (see note 4).
On November 28, 1995, Level One Communications Incorporated ("Level One") filed
a complaint against the Company, in the United States District Court of Northern
California, alleging patent infringement. In the complaint, Level One claims
that the Company has used and sold products in violation of two of Level One's
patents. Level One seeks immediate and permanent injunctive relief preventing
the Company from making, using, or selling any devices that infringe such
patents and unspecified damages. The Company intends to vigorously contest all
of Level One's claims. Based on the Company's review to date, management
believes that the claims asserted by Level One are without merit and that the
outcome of these legal proceedings will not have a material adverse effect on
the Company's financial position or results of operations, although there can be
no assurance as to such matters. Patent litigation is often highly complex, can
extend for a protracted period of time, can involve substantial cost to the
Company and may divert the attention of the Company's management and technical
personnel, which can substantially increase the cost of such litigation. There
can be no assurance that such costs and diversion of resources would not have a
material adverse effect on the Company's business, financial condition and
results of operations.
On June 25, 1996, Praxair, Inc. ("Praxair") filed a complaint against the
Company, entitled Praxair, Inc., a Delaware Corporation v. SEEQ, Inc., a
California Corporation and SEEQ Technology, Inc., a Delaware Corporation
(Superior Court of the State of California, County of Santa Clara, Case No.
CV758882). The suit arises out of a nitrogen supply contract between
40
<PAGE> 41
the Company and the plaintiff. The Complaint purports to state causes of action
for breach of contract and promissory estoppel. The Complaint alleges that as a
result of purported breaches of the nitrogen supply contract, the Company is
obligated to pay plaintiff approximately $1,300,000 plus cost of suit, not
including attorney's fees. The Company intends to contest all of Praxair's
claims vigorously. Based on the Company's limited review to date, management
believes that the claims asserted by Praxair are without merit. However, there
can be no assurance that Praxair will not obtain a favorable result in the
lawsuit which could have a material adverse effect on the Company's business,
financial condition and results of operations.
In addition, the Company is involved in certain other routine litigation in the
ordinary course of its business. Based on the Company's limited review to date,
management believes that the outcome of these legal proceedings will not have a
material adverse effect on the Company's financial position or results of
operations.
41
<PAGE> 42
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this Item is incorporated by reference to the
information contained in the section entitled "Election of Directors" contained
in the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item is incorporated by reference to the
information contained in the section entitled "Executive Compensation" contained
in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item is incorporated by reference to the
information contained in the section entitled "Election of Directors - Share
Ownership" contained in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item is incorporated by reference to the
information contained in the section entitled "Election of Directors" contained
in the Proxy Statement.
42
<PAGE> 43
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
1. Exhibits
3.1 Certificate of Incorporation (incorporated herein by reference to
Registrant's Registration Statement on Form S-1 (Registration No.
33-47985)).
3.2 Bylaws (incorporated herein by reference to Registrant's
Registration Statement on Form S-1 (Registration No. 33-47985)).
4.1 Rights Agreement dated as of April 21, 1995 between the Company
and American Stock Transfer and Trust Company, including exhibits
thereto (incorporated herein by reference to Registrant's Form 8-A
on May 2, 1995).
10.0 Form of Indemnification Agreement with Directors and Officers
(incorporated herein by reference to Registrant's Form 8-B filed
on June 2, 1987).
10.2 Executive Compensation Plans and Arrangements.
10.2.1 Restated Periodic Purchase Plan, as amended (incorporated herein
by reference to Registrant's Annual Report on Form 10-K for the
fiscal year ended September 30, 1991).
10.2.2 Restated 1982 Stock Option Plan, as amended (incorporated herein
by reference to Registrant's Form S-8 Registration Statement
(33-6544) filed on July 2, 1993.
10.2.3 1989 Non-Employee Director Stock Option Plan (incorporated herein
by reference to Registrant's Form S-8 Registration Statement
(Registration No. 33-35838) filed on July 11, 1990).
10.3 Technology Transfer and Foundry Agreement dated as of July 16,
1990 between the Company and HMC Microelectronics Corporation
(subject to confidential treatment) (incorporated by reference to
Registrant's Quarterly Report on Form 10-Q for the period ended
June 30, 1990).
10.4.1 Settlement Agreement, Release and Tolling Agreement dated as of
August 16, 1995 by and between the Company and HMC
Microelectronics Corporation (subject to confidential treatment).
10.4.2 Amendment to Technology Transfer and Foundry Agreement dated
August 16, 1995 by and between the Company and HMC
Microelectronics Corporation (subject to confidential treatment).
10.5* Business Loan Agreement with Silicon Valley Bank dated as of
August 19, 1996.
10.6 Asset Purchase Agreement dated February 7, 1994 between the
Company and Atmel Corporation (incorporated by reference to the
Company's Form 8-K dated February 7, 1994).
10.7 Stock Purchase Agreement dated February 7, 1994 between the
Company and Atmel Corporation (incorporated by reference to the
Company's Form 8-K dated February 6, 1994).
43
<PAGE> 44
10.8 Escrow Agreement dated February 7, 1994 between the Company, Atmel
Corporation and Wilson, Sonsini, Goodrich & Rosati, P.C.
(incorporated by reference to the Company's Form 8-K dated
February 7, 1994).
10.9 Escrow Agreement dated April 14, 1994 between the Company, Atmel
and Bank of America NT&SA (incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended March 31, 1994).
11.0* Schedule of Computation of Earnings Per Share (See page 47 of
this Form 10-K).
13.1 Registrant's Proxy Statement for the 1997 Annual Meeting of
Stockholders, to be filed with the Securities and Exchange
Commission.
21.1 The Company's subsidiary, Talus Technology Incorporated, a
California Corporation, was dissolved effective September 30,
1995 (See page 48 of this Form 10-K).
23.1* Consent of Price Waterhouse LLP, Independent Accountants.
24.1 Power of Attorney (See page 46 of this Form 10-K, the Company
Signature page).
(a) Reports on Form 8-K. The Company filed no Current Reports on Form
8-K during the quarter ended September 30, 1996.
27.1* Financial Data Schedules
* Filed Herewith
Undertakings
For purposes of complying with the amendments to the rules governing Form S-8
(effective July 13, 1990) and Form S-3 under the Securities Act of 1933, the
undersigned registrant hereby undertakes as follows:
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers or controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the 1933 Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of the
expenses incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered on the Form S-8 and Form S-3 identified below, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the 1933 Act and will be governed by the final adjudication of such
issue.
The preceding undertaking shall be incorporated by reference into
registrant's Registration Statement on Form S-8 Registration No.6554), filed
July 2, 1993; registrant's Registration Statement on Form S-8 (Registration No.
33-35838), filed July 11, 1990; registrant's Registration Statement on Form S-8
(Registration No. 33-27419), filed March 7, 1989; and registrant's Registration
Statement on Form S-3 (Registration No. 33-84018), filed May 22, 1996.
44
<PAGE> 45
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereto duly authorized.
SEEQ TECHNOLOGY INCORPORATED
By /s/ Phillip J. Salsbury
-----------------------
Phillip J. Salsbury
Chief Executive Officer
Dated: December 18, 1996
45
<PAGE> 46
POWER OF ATTORNEY
Know All Persons By These Presents, that each person whose signature appears
below constitutes and appoints Phillip J. Salsbury and Robert O. Hersh, and each
of them, as his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place, and stead, in
any and all capacities, to sign any and all amendments to this report on Form
10K, and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in connection therewith, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof:
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Phillip J. Salsbury Chief Executive Officer December 18, 1996
- ----------------------------- and Director
(Phillip J. Salsbury) (Principal Executive
Officer)
/s/ Robert O. Hersh Vice President, Finance December 18, 1996
- ----------------------------- and Administration
(Robert O. Hersh) (Principal Financial
and Accounting Officer)
/s/ Alan V. Gregory Chairman of the Board December 18, 1996
- ----------------------------- and Director
(Alan V. Gregory)
/s/ Charles Harwood Director December 18, 1996
- -----------------------------
(Charles Harwood)
Director December 18, 1996
- -----------------------------
(Peter Cheng)
</TABLE>
46
<PAGE> 47
EXHIBIT 11.0
SEEQ TECHNOLOGY INCORPORATED
SCHEDULE OF COMPUTATION OF EARNINGS PER SHARE
(in thousands except per share amounts)
<TABLE>
<CAPTION>
Years Ended
-------------------------------------
September September September
30,1996 30,1995 30,1994
--------- --------- ---------
<S> <C> <C> <C>
PRIMARY
Earnings:
Net income (loss) $ 2,851 $ 1,330 $ (7,877)
------- ------- --------
Shares:
Average common shares outstanding 30,070 27,244 24,273
Add effect of dilutive options and warrants
(as determined by the treasury stock method) 1,962 1,961 --
------- ------- --------
As adjusted 32,032 29,205 24,273
------- ------- --------
Primary earnings per share $ 0.09 $ 0.05 $ (0.32)
------- ------- --------
FULLY DILUTED
Earnings:
Net income (loss) $ 2,851 $ 1,330
------- -------
Shares:
Average common shares outstanding 30,070 27,244
Add incremental effect of dilutive options and
warrants (as determined by the treasury
stock method) 2,078 3,650
------- -------
As adjusted 32,148 30,894
------- -------
Fully diluted earnings per share $ 0.09 $ 0.04
------- -------
</TABLE>
47
<PAGE> 48
EXHIBIT 23.1
SEEQ TECHNOLOGY INCORPORATED
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-3 (No. 33-84018) and in the Registration Statements on Form
S-8 (No. 33-27419, No. 33-6554, No. 33-35838) of SEEQ Technology Incorporated of
our report dated October 23, 1996, appearing on page 26 of this 1996 Annual
Report on Form 10-K.
/s/ PRICE WATERHOUSE LLP
San Jose, California
December 18, 1996
48
<PAGE> 49
SCHEDULE II
SEEQ TECHNOLOGY INCORPORATED
VALUATION AND QUALIFYING ACCOUNTS
Years Ended September 30
(in thousands)
<TABLE>
<CAPTION>
Additions
--------------------
Balance at Charged to Charged Balance at
Beginning Costs and Against Deductions End
of Year Expenses Revenues of Year
---------- ---------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
1994
Allowance for Doubtful Accounts
and Sales Returns $1,692 $138 $1,511 $2,677 (1) $664
------ ---- ------ ------ ----
1995
Allowance for Doubtful Accounts
and Sales Returns $ 664 $ 59 $ 530 $915 (1) $338
------ ---- ------ ------ ----
1996
Allowance for Doubtful Accounts
and Sales Returns $ 338 $ -- $ 898 $996 (1) $240
------ ---- ------ ------ ----
</TABLE>
(1) Doubtful account write-offs and customer returns and price adjustments
49
<PAGE> 1
Exhibit 10.5
- -------------------------------------------------------------------------------
SEEQ TECHNOLOGY, INCORPORATED
LOAN AND SECURITY AGREEMENT
- -------------------------------------------------------------------------------
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
1. DEFINITIONS AND CONSTRUCTION....................................... 1
1.1 Definitions............................................... 1
1.2 Accounting Terms.......................................... 6
2. LOAN AND TERMS OF PAYMENT.......................................... 6
2.1 Advances.................................................. 6
2.2 Overadvances.............................................. 8
2.3 Interest Rates, Payments, and Calculations................ 8
2.4 Crediting Payments........................................ 9
2.5 Fees...................................................... 9
2.6 Additional Costs.......................................... 9
2.7 Term...................................................... 10
3. CONDITIONS OF LOANS................................................ 10
3.1 Conditions Precedent to Initial Advance................... 10
3.2 Conditions Precedent to all Advances...................... 10
4. CREATION OF SECURITY INTEREST...................................... 10
4.1 Grant of Security Interest................................ 10
4.2 Delivery of Additional Documentation Required............. 11
4.3 Right to Inspect.......................................... 11
5. REPRESENTATIONS AND WARRANTIES..................................... 11
5.1 Due Organization and Qualification........................ 11
5.2 Due Authorization; No Conflict............................ 11
5.3 No Prior Encumbrances..................................... 11
5.4 Bona Fide Eligible Accounts............................... 11
5.5 Merchantable Inventory.................................... 11
5.6 Name; Location of Chief Executive Office.................. 11
5.7 Litigation................................................ 11
5.8 No Material Adverse Change in Financial Statements........ 12
5.9 Solvency.................................................. 12
5.10 Regulatory Compliance..................................... 12
5.11 Environmental Condition................................... 12
5.12 Taxes..................................................... 12
5.13 Subsidiaries.............................................. 12
5.14 Government Consents....................................... 12
5.15 Full Disclosure........................................... 12
6. AFFIRMATIVE COVENANTS.............................................. 13
6.1 Good Standing............................................. 13
6.2 Government Compliance..................................... 13
6.3 Financial Statements, Reports, Certificates............... 13
6.4 Inventory; Returns........................................ 13
6.5 Taxes..................................................... 13
6.6 Insurance................................................. 14
6.7 Principal Depository...................................... 14
6.8 Quick Ratio............................................... 14
6.9 Debt-Net Worth Ratio...................................... 14
6.10 Tangible Net Worth........................................ 14
6.11 Profitability............................................. 14
6.12 Further Assurances........................................ 14
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C> <C>
7. NEGATIVE COVENANTS.................................................. 15
7.1 Dispositions............................................... 15
7.2 Change in Business......................................... 15
7.3 Mergers or Acquisitions.................................... 15
7.4 Indebtedness............................................... 15
7.5 Encumbrances............................................... 15
7.6 Distributions.............................................. 15
7.7 Investments................................................ 15
7.8 Transactions with Affiliates............................... 15
7.9 Subordinated Debt.......................................... 15
7.10 Inventory.................................................. 15
7.11 Compliance................................................. 16
8. EVENTS OF DEFAULT................................................... 16
8.1 Payment Default............................................ 16
8.2 Covenant Default........................................... 16
8.3 Material Adverse Change.................................... 16
8.4 Attachment................................................. 16
8.5 Insolvency................................................. 17
8.6 Other Agreements........................................... 17
8.7 Subordinated Debt.......................................... 17
8.8 Judgments.................................................. 17
8.9 Misrepresentations......................................... 17
9. BANK'S RIGHTS AND REMEDIES.......................................... 17
9.1 Rights and Remedies........................................ 17
9.2 Power of Attorney.......................................... 18
9.3 Accounts Collection........................................ 18
9.4 Bank Expenses.............................................. 18
9.5 Bank's Liability for Collateral............................ 19
9.6 Remedies Cumulative........................................ 19
9.7 Demand; Protest............................................ 19
10. NOTICES............................................................. 19
11. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER.......................... 20
12. GENERAL PROVISIONS.................................................. 20
12.1 Successors and Assigns..................................... 20
12.2 Indemnification............................................ 20
12.3 Time of Essence............................................ 20
12.4 Severability of Provisions................................. 20
12.5 Amendments in Writing, Integration......................... 20
12.6 Counterparts............................................... 20
12.7 Survival................................................... 20
12.8 Confidentiality............................................ 21
</TABLE>
ii
<PAGE> 4
This LOAN AND SECURITY AGREEMENT is entered into as of August 19, 1996
by and between SILICON VALLEY BANK ("Bank") and SEEQ TECHNOLOGY, INCORPORATED
("Borrower").
RECITALS
Borrower wishes to obtain credit from time to time from Bank, and Bank
desires to extend credit to Borrower. This Agreement sets forth the terms on
which Bank will advance credit to Borrower, and Borrower will repay the amounts
owing to Bank.
AGREEMENT
The parties agree as follows:
1. DEFINITIONS AND CONSTRUCTION
1.1 Definitions. As used in this Agreement, the
following terms shall have the following definitions:
"Accounts" means all presently existing and hereafter
arising accounts, contract rights, and all other forms of obligations owing to
Borrower arising out of the sale or lease of goods (including, without
limitation, the licensing of software and other technology) or the rendering of
services by Borrower, whether or not earned by performance, and any and all
credit insurance, guaranties, and other security therefor, as well as all
merchandise returned to or reclaimed by Borrower and Borrower's Books relating
to any of the foregoing.
"Advance" or "Advances" means a cash advance under
the Revolving Facility.
"Affiliate" means, with respect to any Person, any
Person that owns or controls directly or indirectly such Person, any Person that
controls or is controlled by or is under common control with such Person, and
each of such Person's senior executive officers, directors, and partners.
"Bank Expenses" means all: reasonable costs or
expenses (including reasonable attorneys' fees and expenses) incurred in
connection with the preparation, negotiation, administration, and enforcement of
the Loan Documents; and Bank's reasonable attorneys' fees and expenses incurred
in amending, enforcing or defending the Loan Documents (including fees and
expenses of appeal), whether or not suit is brought.
"Borrower's Books" means all of Borrower's books and
records including: ledgers; records concerning Borrower's assets or liabilities,
the Collateral, business operations or financial condition; and all computer
programs, or tape files, and the equipment, containing such information.
"Borrowing Base" has the meaning set forth in Section
2.1 hereof.
"Business Day" means any day that is not a Saturday,
Sunday, or other day on which banks in the State of California are authorized or
required to close.
"Closing Date" means the date of this Agreement.
"Code" means the California Uniform Commercial Code.
1
<PAGE> 5
"Collateral" means the property described in Exhibit
A attached hereto.
"Committed Line" means Seven Million Dollars
($7,000,000).
"Contingent Obligation" means, as applied to any
Person, any direct or indirect liability, contingent or otherwise, of that
Person with respect to (i) any indebtedness, lease, dividend, letter of credit
or other obligation of another, including, without limitation, any such
obligation directly or indirectly guaranteed, endorsed, co-made or discounted or
sold with recourse by that Person, or in respect of which that Person is
otherwise directly or indirectly liable; (ii) any obligations with respect to
undrawn letters of credit issued for the account of that Person; and (iii) all
obligations arising under any interest rate, currency or commodity swap
agreement, interest rate cap agreement, interest rate collar agreement, or other
agreement or arrangement designated to protect a Person against fluctuation in
interest rates, currency exchange rates or commodity prices; provided, however,
that the term "Contingent Obligation" shall not include endorsements for
collection or deposit in the ordinary course of business. The amount of any
Contingent Obligation shall be deemed to be an amount equal to the stated or
determined amount of the primary obligation in respect of which such Contingent
Obligation is made or, if not stated or determinable, the maximum reasonably
anticipated liability in respect thereof as determined by such Person in good
faith; provided, however, that such amount shall not in any event exceed the
maximum amount of the obligations under the guarantee or other support
arrangement.
"Current Assets" means, as of any applicable date,
all amounts that should, in accordance with GAAP, be included as current assets
on the consolidated balance sheet of Borrower and its Subsidiaries as at such
date.
"Current Liabilities" means, as of any applicable
date, all amounts that should, in accordance with GAAP, be included as current
liabilities on the consolidated balance sheet of Borrower and its Subsidiaries,
as at such date, plus, to the extent not already included therein, all
outstanding Advances made under this Agreement, including all Indebtedness that
is payable upon demand or within one year from the date of determination thereof
unless such Indebtedness is renewable or extendable at the option of Borrower or
any Subsidiary to a date more than one year from the date of determination, but
excluding Subordinated Debt.
"Daily Balance" means the amount of the Obligations
owed at the end of a given day.
"Eligible Accounts" means those Accounts that arise
in the ordinary course of Borrower's business that comply with all of Borrower's
representations and warranties to Bank set forth in Section 5.4; provided, that
standards of eligibility may be fixed and revised from time to time by Bank in
Bank's reasonable judgment and upon notification thereof to Borrower in
accordance with the provisions hereof. Unless otherwise agreed to by Bank,
Eligible Accounts shall not include the following:
(a) Accounts that the account debtor has failed to
pay within ninety (90) days of invoice date;
(b) Accounts with respect to an account debtor, fifty
percent (50%) of whose Accounts the account debtor has failed to pay within
ninety (90) days of invoice date;
(c) Accounts with respect to which the account debtor
is an officer, employee, or agent of Borrower;
2
<PAGE> 6
(d) Accounts with respect to which goods are placed
on consignment, guaranteed sale, sale or return, sale on approval, bill and
hold, or other terms by reason of which the payment by the account debtor may be
conditional;
(e) Accounts with respect to which the account debtor
is an Affiliate of Borrower;
(f) Accounts with respect to which the account debtor
does not have its principal place of business in the United States, except for
Eligible Foreign Accounts;
(g) Accounts with respect to which the account debtor
is the United States or any department, agency, or instrumentality of the United
States;
(h) Accounts with respect to which Borrower is liable
to the account debtor for goods sold or services rendered by the account debtor
to Borrower, but only to the extent of any amounts owing to the account debtor
against amounts owed to Borrower;
(i) Accounts with respect to Hewlett Packard, Bay
Networks, Compaq, Cisco, or Selectron, including Subsidiaries and Affiliates,
whose total obligations to Borrower exceed thirty-five percent (35%) of all
Accounts, and Accounts with respect to any other account debtor, including
subsidiaries and Affiliates, whose total obligations to Borrower exceed
twenty-five percent (25%) of all Accounts, to the extent such obligations exceed
the aforementioned percentages, except as approved in writing by Bank;
(j) Accounts with respect to which the account debtor
disputes liability or makes any claim with respect thereto as to which Bank
believes, in its sole discretion, that there may be a basis for dispute (but
only to the extent of the amount subject to such dispute or claim), or is
subject to any Insolvency Proceeding, or becomes insolvent, or goes out of
business; and
(k) Accounts the collection of which Bank reasonably
determines to be doubtful.
"Eligible Foreign Accounts" means Accounts with
respect to which the account debtor does not have its principal place of
business in the United States and that are: (1) covered by credit insurance in
form and amount, and by an insurer satisfactory to Bank less the amount of any
deductible(s) which may be or become owing thereon; or (2) supported by one or
more letters of credit in favor of Bank as beneficiary, in an amount and of a
tenor, and issued by a financial institution, acceptable to Bank; or (3) that
Bank approves on a case-by-case basis, it being acknowledged that Bank has
already approved of those accounts where the account debtor is Serial Systems or
Intel.
"Equipment" means all present and future machinery,
equipment, tenant improvements, furniture, fixtures, vehicles, tools, parts and
attachments in which Borrower has any interest.
"ERISA" means the Employment Retirement Income
Security Act of 1974, as amended, and the regulations thereunder.
"GAAP" means generally accepted accounting principles
as in effect from time to time.
"Indebtedness" means (a) all indebtedness for
borrowed money or the deferred purchase price of property or services, including
without limitation reimbursement and other obligations with respect to surety
bonds and letters of credit, (b) all obligations evidenced by notes,
3
<PAGE> 7
bonds, debentures or similar instruments, (c) all capital lease obligations and
(d) all Contingent Obligations.
"Insolvency Proceeding" means any proceeding
commenced by or against any person or entity under any provision of the United
States Bankruptcy Code, as amended, or under any other bankruptcy or insolvency
law, including assignments for the benefit of creditors, formal or informal
moratoria, compositions, extension generally with its creditors, or proceedings
seeking reorganization, arrangement, or other relief.
"Inventory" means all present and future inventory in
which Borrower has any interest, including merchandise, raw materials, parts,
supplies, packing and shipping materials, work in process and finished products
intended for sale or lease or to be furnished under a contract of service, of
every kind and description now or at any time hereafter owned by or in the
custody or possession, actual or constructive, of Borrower, including such
inventory as is temporarily out of its custody or possession or in transit and
including any returns upon any Accounts or other proceeds, including insurance
proceeds, resulting from the sale or disposition of any of the foregoing and any
documents of title representing any of the above, and Borrower's Books relating
to any of the foregoing.
"Investment" means any beneficial ownership of
(including stock, partnership interest or other securities) any Person, or any
loan, advance or capital contribution to any Person.
"IRC" means the Internal Revenue Code of 1986, as
amended, and the regulations thereunder.
"Lien" means any mortgage, lien, deed of trust,
charge, pledge, security interest or other encumbrance.
"Loan Documents" means, collectively, this Agreement,
any note or notes executed by Borrower, and any other agreement entered into
between Borrower and Bank in connection with this Agreement, all as amended or
extended from time to time.
"Material Adverse Effect" means a material adverse
effect on (i) the business operations or condition (financial or otherwise) of
Borrower and its Subsidiaries taken as a whole or (ii) the ability of Borrower
to repay the Obligations or otherwise perform its obligations under the Loan
Documents.
"Maturity Date" means August 18, 1997.
"Negotiable Collateral" means all of Borrower's
present and future letters of credit of which it is a beneficiary, notes,
drafts, instruments, securities, documents of title, and chattel paper, and
Borrower's Books relating to any of the foregoing.
"Obligations" means all debt, principal, interest,
Bank Expenses and other amounts owed to Bank by Borrower pursuant to this
Agreement or any other agreement, whether absolute or contingent, due or to
become due, now existing or hereafter arising, including any interest that
accrues after the commencement of an Insolvency Proceeding and including any
debt, liability, or obligation owing from Borrower to others that Bank may have
obtained by assignment or otherwise.
"Periodic Payments" means all installments or similar
recurring payments that Borrower may now or hereafter become obligated to pay to
Bank pursuant to the terms and provisions of any instrument, or agreement now or
hereafter in existence between Borrower and Bank.
4
<PAGE> 8
"Permitted Indebtedness" means:
(a) Indebtedness of Borrower in favor of Bank arising
under this Agreement or any other Loan Document;
(b) Indebtedness existing on the Closing Date and
disclosed in the Schedule;
(c) Subordinated Debt; and
(d) Indebtedness to trade creditors incurred in the
ordinary course of business.
"Permitted Investment" means:
(a) Investments existing on the Closing Date
disclosed in the Schedule; and
(b) (i) marketable direct obligations issued or
unconditionally guaranteed by the United States of America or any agency or any
State thereof maturing within one (1) year from the date of acquisition thereof,
(ii) commercial paper maturing no more than one (1) year from the date of
creation thereof and currently having the highest rating obtainable from either
Standard & Poor's Corporation or Moody's Investors Service, Inc., and (iii)
certificates of deposit maturing no more than one (1) year from the date of
investment therein issued by Bank.
"Permitted Liens" means the following:
(a) Any Liens existing on the Closing Date and
disclosed in the Schedule or arising under this Agreement or the other Loan
Documents;
(b) Liens for taxes, fees, assessments or other
governmental charges or levies, either not delinquent or being contested in good
faith by appropriate proceedings, provided the same have no priority over any of
Bank's security interests;
(c) Liens (i) upon or in any equipment acquired or
held by Borrower or any of its Subsidiaries to secure the purchase price of such
equipment or indebtedness incurred solely for the purpose of financing the
acquisition of such equipment, or (ii) existing on such equipment at the time of
its acquisition, provided that the Lien is confined solely to the property so
acquired and improvements thereon, and the proceeds of such equipment;
(d) Liens incurred in connection with the extension,
renewal or refinancing of the indebtedness secured by Liens of the type
described in clauses (a) through (c) above, provided that any extension, renewal
or replacement Lien shall be limited to the property encumbered by the existing
Lien and the principal amount of the indebtedness being extended, renewed or
refinanced does not increase.
"Person" means any individual, sole proprietorship,
partnership, limited liability company, joint venture, trust, unincorporated
organization, association, corporation, institution, public benefit corporation,
firm, joint stock company, estate, entity or governmental agency.
"Prime Rate" means the variable rate of interest, per
annum, most recently announced by Bank, as its "prime rate," whether or not such
announced rate is the lowest rate available from Bank.
5
<PAGE> 9
"Quick Assets" means, at any date as of which the
amount thereof shall be determined, the consolidated cash, cash-equivalents,
accounts receivable and investments, with maturities not to exceed 90 days, of
Borrower determined in accordance with GAAP.
"Responsible Officer" means each of the Chief
Executive Officer, the Chief Financial Officer and the Controller of Borrower.
"Revolving Facility" means the facility under which
Borrower may request Bank to issue cash advances, as specified in Section 2.1
hereof.
"Schedule" means the schedule of exceptions attached
hereto, if any.
"Subordinated Debt" means any debt incurred by
Borrower that is subordinated to the debt owing by Borrower to Bank on terms
acceptable to Bank (and identified as being such by Borrower and Bank).
"Subsidiary" means any corporation or partnership in
which (i) any general partnership interest or (ii) more than 50% of the stock of
which by the terms thereof ordinary voting power to elect the Board of
Directors, managers or trustees of the entity shall, at the time as of which any
determination is being made, be owned by Borrower, either directly or through an
Affiliate.
"Tangible Net Worth" means at any date as of which
the amount thereof shall be determined, the consolidated total assets of
Borrower and its Subsidiaries minus, without duplication, (i) the sum of any
amounts attributable to (a) goodwill, (b) intangible items such as unamortized
debt discount and expense, patents, trade and service marks and names,
copyrights and research and development expenses except prepaid expenses, and
(c) all reserves not already deducted from assets, and (ii) Total Liabilities.
"Total Liabilities" means at any date as of which the
amount thereof shall be determined, all obligations that should, in accordance
with GAAP be classified as liabilities on the consolidated balance sheet of
Borrower, including in any event all Indebtedness.
1.2 Accounting Terms. All accounting terms not specifically
defined herein shall be construed in accordance with GAAP and all calculations
made hereunder shall be made in accordance with GAAP. When used herein, the
terms "financial statements" shall include the notes and schedules thereto.
2. LOAN AND TERMS OF PAYMENT
2.1 Advances. Subject to and upon the terms and conditions of
this Agreement, Bank agrees to make Advances to Borrower in an aggregate amount
not to exceed the lesser of (i) the Committed Line minus both the face amount of
all outstanding Letters of Credit (including drawn but unreimbursed Letters of
Credit) and the Foreign Exchange Reserve or (ii) the Borrowing Base minus both
the face amount of all outstanding Letters of Credit (including drawn but
unreimbursed Letters of Credit) and the Foreign Exchange Reserve. For purposes
of this Agreement, "Borrowing Base" shall mean an amount equal to Eighty percent
(80%) of Eligible Accounts. Subject to the terms and conditions of this
Agreement, amounts borrowed pursuant to this Section 2.1 may be repaid and
reborrowed at any time prior to the Maturity Date.
Whenever Borrower desires an Advance, Borrower will notify Bank by
facsimile transmission or telephone no later than 3:00 p.m. California time, on
the Business Day that the Advance is to be made. Each such notification shall be
promptly confirmed by a Payment/Advance Form in substantially the form of
Exhibit B hereto. Bank is authorized to make Advances under this Agreement,
based upon instructions received from a Responsible Officer, or without
instructions if in
6
<PAGE> 10
Bank's discretion such Advances are necessary to meet Obligations which have
become due and remain unpaid. Bank shall be entitled to rely on any telephonic
notice given by a person who Bank reasonably believes to be a Responsible
Officer, and Borrower shall indemnify and hold Bank harmless for any damages or
loss suffered by Bank as a result of such reliance. Bank will credit the amount
of Advances made under this Section 2.1 to Borrower's deposit account.
The Revolving Facility shall terminate on the Maturity Date, at which
time all Advances under this Section 2.1 shall be immediately due and payable.
2.1.1 Letters of Credit.
(a) Subject to the terms and conditions of
this Agreement, Bank agrees to issue or cause to be issued Letters of Credit for
the account of Borrower in an aggregate face amount not to exceed (i) the lesser
of the Committed Line or the Borrowing Base minus both (ii) the then outstanding
principal balance of the Advances and (iii) the Foreign Exchange Reserve,
provided that the Foreign Exchange Reserve plus the face amount of outstanding
Letters of Credit (including drawn but unreimbursed Letters of Credit) shall not
in any case exceed Four Million Dollars ($4,000,000). Each such Letter of Credit
shall have an expiry date no later than the Maturity Date. All such Letters of
Credit shall be, in form and substance, acceptable to Bank in its sole
discretion and shall be subject to the terms and conditions of Bank's form of
application and Letter of Credit agreement. All amounts actually paid by Bank in
respect of a Letter of Credit shall, when paid, constitute an Advance under this
Agreement.
(b) The Obligation of Borrower to
immediately reimburse Bank for drawings made under Letters of Credit shall be
absolute, unconditional and irrevocable, and shall be performed strictly in
accordance with the terms of this Agreement and such Letters of Credit, under
all circumstances whatsoever. Borrower shall indemnify, defend and hold Bank
harmless from any loss, cost, expense or liability, including, without
limitation, reasonable attorneys' fees, arising out of or in connection with any
Letters of Credit.
2.1.2 Letter of Credit Reimbursement; Reserve.
(a) Borrower may request that Bank issue a
letter of credit payable in a currency other than United States Dollars. If a
demand for payment is made under any such Letter of Credit, Bank shall treat
such demand as an advance to Borrower of the equivalent of the amount thereof
(plus cable charges) in United States currency at the then prevailing rate of
exchange in San Francisco, California, for sales of that other currency for
cable transfer to the country of which it is the currency.
(b) Upon the issuance of any Letter of
Credit payable in a currency other than United States Dollars, Bank shall create
a reserve under the Committed Line for Letters of Credit against fluctuations in
currency exchange rates, in an amount equal to twenty percent (20%) of the face
amount of such Letter of Credit. The amount of such reserve may be amended by
Bank from time to time to account for fluctuations in the exchange rate. The
availability of funds under the Committed Line shall be reduced by the amount of
such reserve for so long as such Letter of Credit remains outstanding.
2.1.3 Foreign Exchange Contract; Foreign Exchange
Settlements.
(a) Subject to the terms of this Agreement,
Borrower may utilize up to Four Million Dollars ($4,000,000) minus the face
value of all outstanding Letters of Credit for the purpose of obtaining foreign
exchange contracts (the "Exchange Contracts"), pursuant to which Bank shall sell
to or purchase from Borrower foreign currency on a spot or future basis. All
Exchange Contracts must provide for delivery of settlement on or before the
Maturity Date. The limit available
7
<PAGE> 11
at any time shall be reduced by the following amounts (the "Foreign Exchange
Reserve") on each day (the "Determination Date"): on all outstanding Exchange
Contracts on which delivery is to be effected or settlement allowed more than
two business days from the Determination Date, 10% of the gross amount of the
Exchange Contracts; plus (ii) on all outstanding Exchange Contracts on which
delivery is to be effected or settlement allowed within two business days after
the Determination Date, 100% of the gross amount of the Exchange Contracts. In
lieu of the Foreign Exchange Reserve for 100% of the gross amount of any
Exchange Contract, Borrower may request that Bank treat such amount as an
Advance under the Committed Line.
(b) Bank may, in its discretion, terminate
the Exchange Contracts at any time (a) that an Event of Default occurs or (b)
that there is no sufficient availability under the Committed Line and Borrower
does not have available funds in its bank account to satisfy the Foreign
Exchange Reserve. If Bank terminates the Exchange Contracts, and without
limitation of any applicable indemnities, Borrower agrees to reimburse Bank for
any and all fees, costs and expenses relating thereto or arising in connection
therewith.
(c) Borrower shall not permit the total
gross amount of all Exchange Contracts on which delivery is to be effected and
settlement allowed in any two business day period to be more than Four Million
Dollars ($4,000,000) nor shall Borrower permit the total gross amount of all
Exchange Contracts to which Borrower is a party, outstanding at any one time, to
exceed Four Million Dollars ($4,000,000).
(d) Borrower shall execute all standard form
applications and agreements of Bank in connection with the Exchange Contracts
and, without limiting any of the terms of such applications and agreements,
Borrower will pay all standard fees and charges of Bank in connection with the
Exchange Contracts.
2.2 Overadvances. If, at any time or for any reason, the
amount of Obligations owed by Borrower to Bank pursuant to Section 2.1 of this
Agreement is greater than the lesser of (i) the Committed Line minus the face
value of all outstanding Letters of Credit and the Foreign Exchange Reserve or
(ii) the Borrowing Base minus the face value of all outstanding Letters of
Credit and the Foreign Exchange Reserve, Borrower shall immediately pay to Bank,
in cash, the amount of such excess.
2.3 Interest Rates, Payments, and Calculations.
(a) Interest Rate. Except as set forth in Section
2.3(b), any Advances shall bear interest, on the average Daily Balance, at a
rate equal to three-fourths of a percentage point (0.75%) above the Prime Rate.
(b) Default Rate. All Obligations shall bear
interest, from and after the occurrence of an Event of Default, at a rate equal
to five (5) percentage points above the interest rate applicable immediately
prior to the occurrence of the Event of Default.
(c) Payments. Interest hereunder shall be due and
payable on the eighteenth calendar day of each month during the term hereof.
Bank shall, at its option, charge such interest, all Bank Expenses, and all
Periodic Payments against any of Borrower's deposit accounts or against the
Committed Line, in which case those amounts shall thereafter accrue interest at
the rate then applicable hereunder. Any interest not paid when due shall be
compounded by becoming a part of the Obligations, and such interest shall
thereafter accrue interest at the rate then applicable hereunder.
(d) Computation. In the event the Prime Rate is
changed from time to time hereafter, the applicable rate of interest hereunder
shall be increased or decreased effective as of
8
<PAGE> 12
12:01 a.m. on the day the Prime Rate is changed, by an amount equal to such
change in the Prime Rate. All interest chargeable under the Loan Documents shall
be computed on the basis of a three hundred sixty (360) day year for the actual
number of days elapsed.
2.4 Crediting Payments. Prior to the occurrence of an Event of
Default, Bank shall credit a wire transfer of funds, check or other item of
payment to such deposit account or Obligation as Borrower specifies. After the
occurrence of an Event of Default, the receipt by Bank of any wire transfer of
funds, check, or other item of payment shall be immediately applied to
conditionally reduce Obligations, but shall not be considered a payment on
account unless such payment is of immediately available federal funds or unless
and until such check or other item of payment is honored when presented for
payment. Notwithstanding anything to the contrary contained herein, any wire
transfer or payment received by Bank after 12:00 noon California time shall be
deemed to have been received by Bank as of the opening of business on the
immediately following Business Day. Whenever any payment to Bank under the Loan
Documents would otherwise be due (except by reason of acceleration) on a date
that is not a Business Day, such payment shall instead be due on the next
Business Day, and additional fees or interest, as the case may be, shall accrue
and be payable for the period of such extension.
2.5 Fees. Borrower shall pay to Bank the following:
(a) Facility Fee. A Facility Fee equal to Thirty Five
Thousand Dollars ($35,000), which fee shall be due on the Closing Date and shall
be fully earned and nonrefundable;
(b) Financial Examination and Appraisal Fees. Bank's
customary fees and out-of-pocket expenses for Bank's audits of Borrower's
Accounts, and for each appraisal of Collateral and financial analysis and
examination of Borrower performed from time to time by Bank or its agents;
(c) Bank Expenses. Upon the date hereof, all Bank
Expenses incurred through the Closing Date, including reasonable attorneys' fees
and expenses, and, after the date hereof, all Bank Expenses, including
reasonable attorneys' fees and expenses, as and when they become due.
2.6 Additional Costs. In case any change in any law,
regulation, treaty or official directive or the interpretation or application
thereof by any court or any governmental authority charged with the
administration thereof or the compliance with any guideline or request of any
central bank or other governmental authority (whether or not having the force of
law), in each case after the date of this Agreement:
(a) subjects Bank to any tax with respect to payments
of principal or interest or any other amounts payable hereunder by Borrower or
otherwise with respect to the transactions contemplated hereby (except for taxes
on the overall net income of Bank imposed by the United States of America or any
political subdivision thereof);
(b) imposes, modifies or deems applicable any deposit
insurance, reserve, special deposit or similar requirement against assets held
by, or deposits in or for the account of, or loans by, Bank; or
(c) imposes upon Bank any other condition with
respect to its performance under this Agreement,
and the result of any of the foregoing is to increase the cost to Bank, reduce
the income receivable by Bank or impose any expense upon Bank with respect to
any loans, Bank shall notify Borrower thereof. Borrower agrees to pay to Bank
the amount of such increase in cost, reduction in income or additional expense
as and when such cost, reduction or expense is incurred or determined, upon
presentation by
9
<PAGE> 13
Bank of a statement of the amount and setting forth Bank's calculation thereof,
all in reasonable detail, which statement shall be deemed true and correct
absent manifest error.
2.7 Term. This Agreement shall become effective on the Closing
Date and, subject to Section 12.7, shall continue in full force and effect for a
term ending on the Maturity Date. Notwithstanding the foregoing, Bank shall have
the right to terminate its obligation to make Advances under this Agreement
immediately and without notice upon the occurrence and during the continuance of
an Event of Default. Notwithstanding termination, Bank's Lien on the Collateral
shall remain in effect for so long as any Obligations are outstanding.
3. CONDITIONS OF LOANS
3.1 Conditions Precedent to Initial Advance. The obligation of
Bank to make the initial Advance is subject to the condition precedent that Bank
shall have received, in form and substance satisfactory to Bank, the following:
(a) this Agreement;
(b) a certificate of the Secretary of Borrower with
respect to incumbency and resolutions authorizing the execution and delivery of
this Agreement;
(c) financing statements (Forms UCC-1);
(d) insurance certificate;
(e) a Collateral audit acceptable to Bank;
(f) payment of the fees and Bank Expenses then due
specified in Section 2.5 hereof; and
(g) such other documents, and completion of such
other matters, as Bank may reasonably deem necessary or appropriate.
3.2 Conditions Precedent to all Advances. The obligation of
Bank to make each Advance, including the initial Advance, is further subject to
the following conditions:
(a) timely receipt by Bank of the Payment/Advance
Form as provided in Section 2.1; and
(b) the representations and warranties contained in
Section 5 shall be true and correct in all material respects on and as of the
date of such Payment/Advance Form and on the effective date of each Advance as
though made at and as of each such date, and no Event of Default shall have
occurred and be continuing, or would result from such Advance. The making of
each Advance shall be deemed to be a representation and warranty by Borrower on
the date of such Advance as to the accuracy of the facts referred to in this
Section 3.2(b).
4. CREATION OF SECURITY INTEREST
4.1 Grant of Security Interest. Borrower grants and pledges to
Bank a continuing security interest in all presently existing and hereafter
acquired or arising Collateral in order to secure prompt repayment of any and
all Obligations and in order to secure prompt performance by Borrower of each of
its covenants and duties under the Loan Documents. Except as set forth in the
Schedule, such security interest constitutes a valid, first priority security
interest in the presently existing
10
<PAGE> 14
Collateral, and will constitute a valid, first priority security interest in
Collateral acquired after the date hereof.
4.2 Delivery of Additional Documentation Required. Borrower
shall from time to time execute and deliver to Bank, at the request of Bank, all
Negotiable Collateral, all financing statements and other documents that Bank
may reasonably request, in form satisfactory to Bank, to perfect and continue
perfected Bank's security interests in the Collateral and in order to fully
consummate all of the transactions contemplated under the Loan Documents.
4.3 Right to Inspect. Bank (through any of its officers,
employees, or agents) shall have the right, upon reasonable prior notice, from
time to time during Borrower's usual business hours, to inspect Borrower's Books
and to make copies thereof and to check, test, and appraise the Collateral in
order to verify Borrower's financial condition or the amount, condition of, or
any other matter relating to, the Collateral.
5. REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants as follows:
5.1 Due Organization and Qualification. Borrower and each
Subsidiary is a corporation duly existing and in good standing under the laws of
its state of incorporation and qualified and licensed to do business in, and is
in good standing in, any state in which the conduct of its business or its
ownership of property requires that it be so qualified.
5.2 Due Authorization; No Conflict. The execution, delivery,
and performance of the Loan Documents are within Borrower's powers, have been
duly authorized, and are not in conflict with nor constitute a breach of any
provision contained in Borrower's Articles of Incorporation or Bylaws, nor will
they constitute an event of default under any material agreement to which
Borrower is a party or by which Borrower is bound. Borrower is not in default
under any agreement to which it is a party or by which it is bound, which
default could have a Material Adverse Effect.
5.3 No Prior Encumbrances. Borrower has good and indefeasible
title to the Collateral, free and clear of Liens, except for Permitted Liens.
5.4 Bona Fide Eligible Accounts. The Eligible Accounts are
bona fide existing obligations. The property giving rise to such Eligible
Accounts has been delivered to the account debtor or to the account debtor's
agent for immediate shipment to and unconditional acceptance by the account
debtor. Borrower has not received notice of actual or imminent Insolvency
Proceeding of any account debtor that is included in any Borrowing Base
Certificate as an Eligible Account.
5.5 Merchantable Inventory. All Inventory is in all material
respects of good and marketable quality, free from all material defects.
5.6 Name; Location of Chief Executive Office. Except as
disclosed in the Schedule, Borrower has not done business under any name other
than that specified on the signature page hereof. The chief executive office of
Borrower is located at the address indicated in Section 10 hereof.
5.7 Litigation. Except as set forth in the Schedule, there are
no actions or proceedings pending by or against Borrower or any Subsidiary
before any court or administrative agency in which an adverse decision could
have a Material Adverse Effect or a material adverse effect on Borrower's
interest or Bank's security interest in the Collateral. Borrower does not have
knowledge of any such pending or threatened actions or proceedings.
11
<PAGE> 15
5.8 No Material Adverse Change in Financial Statements. All
consolidated financial statements related to Borrower and any Subsidiary that
have been delivered by Borrower to Bank fairly present in all material respects
Borrower's consolidated financial condition as of the date thereof and
Borrower's consolidated results of operations for the period then ended. There
has not been a material adverse change in the consolidated financial condition
of Borrower since the date of the most recent of such financial statements
submitted to Bank.
5.9 Solvency. Borrower is solvent and able to pay its debts
(including trade debts) as they mature.
5.10 Regulatory Compliance. Borrower and each Subsidiary has
met the minimum funding requirements of ERISA with respect to any employee
benefit plans subject to ERISA. No event has occurred resulting from Borrower's
failure to comply with ERISA that is reasonably likely to result in Borrower's
incurring any liability that could have a Material Adverse Effect. Borrower is
not an "investment company" or a company "controlled" by an "investment company"
within the meaning of the Investment Company Act of 1940. Borrower is not
engaged principally, or as one of the important activities, in the business of
extending credit for the purpose of purchasing or carrying margin stock (within
the meaning of Regulations G, T and U of the Board of Governors of the Federal
Reserve System). Borrower has complied with all the provisions of the Federal
Fair Labor Standards Act. Borrower has not violated any statutes, laws,
ordinances or rules applicable to it, violation of which could have a Material
Adverse Effect.
5.11 Environmental Condition. None of Borrower's or any
Subsidiary's properties or assets has ever been used by Borrower or any
Subsidiary or, to the best of Borrower's knowledge, by previous owners or
operators, in the disposal of, or to produce, store, handle, treat, release, or
transport, any hazardous waste or hazardous substance other than in accordance
with applicable law; to the best of Borrower's knowledge, none of Borrower's
properties or assets has ever been designated or identified in any manner
pursuant to any environmental protection statute as a hazardous waste or
hazardous substance disposal site, or a candidate for closure pursuant to any
environmental protection statute; no Lien arising under any environmental
protection statute has attached to any revenues or to any real or personal
property owned by Borrower or any Subsidiary; and neither Borrower nor any
Subsidiary has received a summons, citation, notice, or directive from the
Environmental Protection Agency or any other federal, state or other
governmental agency concerning any action or omission by Borrower or any
Subsidiary resulting in the releasing, or otherwise disposing of hazardous waste
or hazardous substances into the environment.
5.12 Taxes. Borrower and each Subsidiary has filed or caused
to be filed all tax returns required to be filed, and has paid, or has made
adequate provision for the payment of, all taxes reflected therein.
5.13 Subsidiaries. Borrower does not own any stock,
partnership interest or other equity securities of any Person, except for
Permitted Investments.
5.14 Government Consents. Borrower and each Subsidiary has
obtained all consents, approvals and authorizations of, made all declarations or
filings with, and given all notices to, all governmental authorities that are
necessary for the continued operation of Borrower's business as currently
conducted.
5.15 Full Disclosure. No representation, warranty or other
statement made by Borrower in any certificate or written statement furnished to
Bank contains any untrue statement of a material fact or omits to state a
material fact necessary in order to make the statements contained in such
certificates or statements not misleading.
12
<PAGE> 16
6. AFFIRMATIVE COVENANTS
Borrower covenants and agrees that, until payment in full of
all outstanding Obligations, and for so long as Bank may have any commitment to
make an Advance hereunder, Borrower shall do all of the following:
6.1 Good Standing. Borrower shall maintain its and each of its
Subsidiaries' corporate existence and good standing in its jurisdiction of
incorporation and maintain qualification in each jurisdiction in which the
failure to so qualify could have a Material Adverse Effect. Borrower shall
maintain, and shall cause each of its Subsidiaries to maintain, to the extent
consistent with prudent management of Borrower's business, in force all
licenses, approvals and agreements, the loss of which could have a Material
Adverse Effect.
6.2 Government Compliance. Borrower shall meet, and shall
cause each Subsidiary to meet, the minimum funding requirements of ERISA with
respect to any employee benefit plans subject to ERISA. Borrower shall comply,
and shall cause each Subsidiary to comply, with all statutes, laws, ordinances
and government rules and regulations to which it is subject, noncompliance with
which could have a Material Adverse Effect or a material adverse effect on the
Collateral or the priority of Bank's Lien on the Collateral.
6.3 Financial Statements, Reports, Certificates. Borrower
shall deliver to Bank: (a) within five (5) days upon becoming available, copies
of all statements, reports and notices sent or made available generally by
Borrower to its security holders or to any holders of Subordinated Debt and all
reports on Form 10-K and 10-Q filed with the Securities and Exchange Commission;
(b) promptly upon receipt of notice thereof, a report of any legal actions
pending or threatened against Borrower or any Subsidiary that could result in
damages or costs to Borrower or any Subsidiary of One Hundred Thousand Dollars
($100,000) or more; and (c) such budgets, sales projections, operating plans or
other financial information as Bank may reasonably request from time to time.
Within twenty (20) days after the last day of each month in which any
Obligations remain outstanding, Borrower shall deliver to Bank a Borrowing Base
Certificate signed by a Responsible Officer in substantially the form of Exhibit
C hereto, together with aged listings of accounts receivable and accounts
payable and a backlog report. Borrower shall deliver the same to Bank within
twenty (20) days after the last day of each fiscal quarter in periods in which
no Obligations remain outstanding.
Within forty-five (45) days after the last day of each fiscal quarter,
Borrower shall deliver to Bank with the quarterly financial statements a
Compliance Certificate signed by a Responsible Officer in substantially the form
of Exhibit D hereto.
Bank shall have a right from time to time hereafter to audit Borrower's
Accounts at Borrower's expense, provided that such audits will be conducted no
more often than every six (6) months unless an Event of Default has occurred and
is continuing.
6.4 Inventory; Returns. Borrower shall keep all Inventory in
good and marketable condition, free from all material defects. Returns and
allowances, if any, as between Borrower and its account debtors shall be on the
same basis and in accordance with the usual customary practices of Borrower, as
they exist at the time of the execution and delivery of this Agreement. Borrower
shall promptly notify Bank of all returns and recoveries and of all disputes and
claims, where the return, recovery, dispute or claim involves more than Fifty
Thousand Dollars ($50,000).
6.5 Taxes. Borrower shall make, and shall cause each
Subsidiary to make, due and timely payment or deposit of all material federal,
state, and local taxes, assessments, or contributions required of it by law, and
will execute and deliver to Bank, on demand, appropriate certificates
13
<PAGE> 17
attesting to the payment or deposit thereof; and Borrower will make, and will
cause each Subsidiary to make, timely payment or deposit of all material tax
payments and withholding taxes required of it by applicable laws, including, but
not limited to, those laws concerning F.I.C.A., F.U.T.A., state disability, and
local, state, and federal income taxes, and will, upon request, furnish Bank
with proof satisfactory to Bank indicating that Borrower or a Subsidiary has
made such payments or deposits; provided that Borrower or a Subsidiary need not
make any payment if the amount or validity of such payment is contested in good
faith by appropriate proceedings and is reserved against (to the extent required
by GAAP) by Borrower.
6.6 Insurance.
(a) Borrower, at its expense, shall keep the
Collateral insured against loss or damage by fire, theft, explosion, sprinklers,
and all other hazards and risks, and in such amounts, as ordinarily insured
against by other owners in similar businesses conducted in the locations where
Borrower's business is conducted on the date hereof. Borrower shall also
maintain insurance relating to Borrower's ownership and use of the Collateral in
amounts and of a type that are customary to businesses similar to Borrower's.
(b) All such policies of insurance shall be in such
form, with such companies, and in such amounts as reasonably satisfactory to
Bank. All such policies of property insurance shall contain a lender's loss
payable endorsement, in a form satisfactory to Bank, showing Bank as an
additional loss payee thereof and all liability insurance policies shall show
the Bank as an additional insured, and shall specify that the insurer must give
at least twenty (20) days notice to Bank before canceling its policy for any
reason. Upon Bank's request, Borrower shall deliver to Bank certified copies of
such policies of insurance and evidence of the payments of all premiums
therefor. All proceeds payable under any such policy shall, at the option of
Bank, be payable to Bank to be applied on account of the Obligations.
6.7 Principal Depository. Borrower shall maintain its
principal depository and operating accounts with Bank.
6.8 Quick Ratio. Borrower shall maintain, as of the last day
of each fiscal quarter, a ratio of Quick Assets to Current Liabilities of at
least 1.25 to 1.0.
6.9 Debt-Net Worth Ratio. Borrower shall maintain, as of the
last day of each fiscal quarter, a ratio of Total Liabilities less Subordinated
Debt to Tangible Net Worth plus Subordinated Debt of not more than 1.0 to 1.0.
6.10 Tangible Net Worth. Borrower shall maintain, as of the
last day of each fiscal quarter, a Tangible Net Worth of not less than Eleven
Million, Four Hundred Eighty-eight Thousand Dollars ($11,488,000) as of June 30,
1996, plus one hundred percent (100%) of the proceeds received from the sale of
Borrower's equity securities during each fiscal quarter, plus seventy five
percent (75%) of Borrower's profits from such quarter, with no deduction for
losses.
6.11 Profitability. Borrower shall have a minimum net profit
of One Dollar ($1) for each fiscal year. Borrower shall be profitable for each
fiscal quarter, except Borrower may suffer a loss for one fiscal quarter in any
fiscal year.
6.12 Further Assurances. At any time and from time to time
Borrower shall execute and deliver such further instruments and take such
further action as may reasonably be requested by Bank to effect the purposes of
this Agreement.
14
<PAGE> 18
7. NEGATIVE COVENANTS
Borrower covenants and agrees that, so long as any credit
hereunder shall be available and until payment in full of the outstanding
Obligations or for so long as Bank may have any commitment to make any Advances,
Borrower will not do any of the following:
7.1 Dispositions. Convey, sell, lease, transfer or otherwise
dispose of (collectively, a "Transfer"), or permit any of its Subsidiaries to
Transfer, all or any part of its business or property, other than: (i) Transfers
of Inventory in the ordinary course of business; (ii) Transfers of non-exclusive
licenses and similar arrangements for the use of the property of Borrower or its
Subsidiaries; or (iii) Transfers of worn-out or obsolete Equipment.
7.2 Change in Business. Engage in any business, or permit any
of its Subsidiaries to engage in any business, other than the businesses
currently engaged in by Borrower and any business substantially similar or
related thereto (or incidental thereto), or suffer a material change in
Borrower's ownership. Borrower will not, without thirty (30) days prior written
notification to Bank, relocate its chief executive office.
7.3 Mergers or Acquisitions. Merge or consolidate, or permit
any of its Subsidiaries to merge or consolidate, with or into any other business
organization, or acquire, or permit any of its Subsidiaries to acquire, all or
substantially all of the capital stock or property of another Person.
7.4 Indebtedness. Create, incur, assume or be or remain
liable with respect to any Indebtedness, or permit any Subsidiary so to do,
other than Permitted Indebtedness.
7.5 Encumbrances. Create, incur, assume or suffer to exist any
Lien with respect to any of its property, or assign or otherwise convey any
right to receive income, including the sale of any Accounts, or permit any of
its Subsidiaries so to do, except for Permitted Liens.
7.6 Distributions. Pay any dividends or make any other
distribution or payment on account of or in redemption, retirement or purchase
of any capital stock.
7.7 Investments. Directly or indirectly acquire or own, or
make any Investment in or to any Person, or permit any of its Subsidiaries so to
do, other than Permitted Investments.
7.8 Transactions with Affiliates. Directly or indirectly enter
into or permit to exist any material transaction with any Affiliate of Borrower
except for transactions that are in the ordinary course of Borrower's business,
upon fair and reasonable terms that are no less favorable to Borrower than would
be obtained in an arm's length transaction with a nonaffiliated Person.
7.9 Subordinated Debt. Make any payment in respect of any
Subordinated Debt, or permit any of its Subsidiaries to make any such payment,
except in compliance with the terms of such Subordinated Debt, or amend any
provision contained in any documentation relating to the Subordinated Debt
without Bank's prior written consent.
7.10 Inventory. Store the Inventory with a bailee,
warehouseman, or similar party unless Bank has received a pledge of the
warehouse receipt covering such Inventory. Except for Inventory sold in the
ordinary course of business and except for such other locations as Bank may
approve in writing, Borrower shall keep the Inventory only at the location set
forth in Section 10 hereof and such other locations of which Borrower gives Bank
prior written notice and as to which Borrower signs and files a financing
statement where needed to perfect Bank's security interest.
15
<PAGE> 19
7.11 Compliance. Become an "investment company" controlled by
an "investment company," within the meaning of the Investment Company Act of
1940, or become principally engaged in, or undertake as one of its important
activities, the business of extending credit for the purpose of purchasing or
carrying margin stock, or use the proceeds of any Advance for such purpose. Fail
to meet the minimum funding requirements of ERISA, permit a Reportable Event or
Prohibited Transaction, as defined in ERISA, to occur, fail to comply with the
Federal Fair Labor Standards Act or violate any law or regulation, which
violation could have a Material Adverse Effect or a material adverse effect on
the Collateral or the priority of Bank's Lien on the Collateral, or permit any
of its Subsidiaries to do any of the foregoing.
8. EVENTS OF DEFAULT
Any one or more of the following events shall constitute an
Event of Default by Borrower under this Agreement:
8.1 Payment Default. If Borrower fails to pay the principal
of, or any interest on, any Advances when due and payable; or fails to pay any
portion of any other Obligations not constituting such principal or interest,
including without limitation Bank Expenses, within thirty (30) days of receipt
by Borrower of an invoice for such other Obligations;
8.2 Covenant Default. If Borrower fails to perform any
obligation under Sections 6.7, 6.8, 6.9, 6.10, or 6.11 or violates any of the
covenants contained in Article 7 of this Agreement, or fails or neglects to
perform, keep, or observe any other material term, provision, condition,
covenant, or agreement contained in this Agreement, in any of the Loan
Documents, or in any other present or future agreement between Borrower and Bank
and as to any default under such other term, provision, condition, covenant or
agreement that can be cured, has failed to cure such default within ten (10)
days after Borrower receives notice thereof or any officer of Borrower becomes
aware thereof; provided, however, that if the default cannot by its nature be
cured within the ten (10) day period or cannot after diligent attempts by
Borrower be cured within such ten (10) day period, and such default is likely to
be cured within a reasonable time, then Borrower shall have an additional
reasonable period (which shall not in any case exceed thirty (30) days) to
attempt to cure such default, and within such reasonable time period the failure
to have cured such default shall not be deemed an Event of Default (provided
that no Advances will be required to be made during such cure period);
8.3 Material Adverse Change. If there occurs a material
adverse change in Borrower's business or financial condition, or if there is a
material impairment of the prospect of repayment of any portion of the
Obligations or a material impairment of the value or priority of Bank's security
interests in the Collateral;
8.4 Attachment. If any material portion of Borrower's assets
is attached, seized, subjected to a writ or distress warrant, or is levied upon,
or comes into the possession of any trustee, receiver or person acting in a
similar capacity and such attachment, seizure, writ or distress warrant or levy
has not been removed, discharged or rescinded within ten (10) days, or if
Borrower is enjoined, restrained, or in any way prevented by court order from
continuing to conduct all or any material part of its business affairs, or if a
judgment or other claim becomes a lien or encumbrance upon any material portion
of Borrower's assets, or if a notice of lien, levy, or assessment is filed of
record with respect to any of Borrower's assets by the United States Government,
or any department, agency, or instrumentality thereof, or by any state, county,
municipal, or governmental agency, and the same is not paid within ten (10) days
after Borrower receives notice thereof, provided that none of the foregoing
shall constitute an Event of Default where such action or event is stayed or an
adequate bond has been posted pending a good faith contest by Borrower (provided
that no Advances will be required to be made during such cure period);
16
<PAGE> 20
8.5 Insolvency. If Borrower becomes insolvent, or if an
Insolvency Proceeding is commenced by Borrower, or if an Insolvency Proceeding
is commenced against Borrower and is not dismissed or stayed within ten (10)
days (provided that no Advances will be made prior to the dismissal of such
Insolvency Proceeding);
8.6 Other Agreements. If there is a default in any agreement
to which Borrower is a party with a third party or parties resulting in a right
by such third party or parties, whether or not exercised, to accelerate the
maturity of any Indebtedness in an amount in excess of One Hundred Thousand
Dollars ($100,000) or that could have a Material Adverse Effect;
8.7 Subordinated Debt. If Borrower makes any payment on
account of Subordinated Debt, except to the extent such payment is allowed under
any subordination agreement entered into with Bank;
8.8 Judgments. If a judgment or judgments for the payment of
money in an amount, individually or in the aggregate, of at least Fifty Thousand
Dollars ($50,000) shall be rendered against Borrower and shall remain
unsatisfied and unstayed for a period of ten (10) days (provided that no
Advances will be made prior to the satisfaction or stay of such judgment); or
8.9 Misrepresentations. If any material misrepresentation or
material misstatement exists now or hereafter in any warranty or representation
set forth herein or in any certificate delivered to Bank by any Responsible
Officer pursuant to this Agreement or to induce Bank to enter into this
Agreement or any other Loan Document.
9. BANK'S RIGHTS AND REMEDIES
9.1 Rights and Remedies. Upon the occurrence and during the
continuance of an Event of Default, Bank may, at its election, without notice of
its election and without demand, do any one or more of the following, all of
which are authorized by Borrower:
(a) Declare all Obligations, whether evidenced by
this Agreement, by any of the other Loan Documents, or otherwise, immediately
due and payable (provided that upon the occurrence of an Event of Default
described in Section 8.5 all Obligations shall become immediately due and
payable without any action by Bank);
(b) Cease advancing money or extending credit to or
for the benefit of Borrower under this Agreement or under any other agreement
between Borrower and Bank;
(c) Demand that Borrower (i) deposit cash with Bank
in an amount equal to the amount of any Letters of Credit remaining undrawn, as
collateral security for the repayment of any future drawings under such Letters
of Credit, and Borrower shall forthwith deposit and pay such amounts, and (ii)
pay in advance all Letters of Credit fees scheduled to be paid or payable over
the remaining term of the Letters of Credit;
(d) Settle or adjust disputes and claims directly
with account debtors for amounts, upon terms and in whatever order that Bank
reasonably considers advisable;
(e) Without notice to or demand upon Borrower, make
such payments and do such acts as Bank considers necessary or reasonable to
protect its security interest in the Collateral. Borrower agrees to assemble the
Collateral if Bank so requires, and to make the Collateral available to Bank as
Bank may designate. Borrower authorizes Bank to enter the premises where the
Collateral is located, to take and maintain possession of the Collateral, or any
part of it, and to pay, purchase, contest, or compromise any encumbrance,
charge, or lien which in Bank's determination appears to be prior or superior to
its security interest and to pay all expenses incurred in connection
17
<PAGE> 21
therewith. With respect to any of Borrower's owned premises, Borrower hereby
grants Bank a license to enter into possession of such premises and to occupy
the same, without charge, in order to exercise any of Bank's rights or remedies
provided herein, at law, in equity, or otherwise;
(f) Without notice to Borrower set off and apply to
the Obligations any and all (i) balances and deposits of Borrower held by Bank,
or (ii) indebtedness at any time owing to or for the credit or the account of
Borrower held by Bank;
(g) Ship, reclaim, recover, store, finish, maintain,
repair, prepare for sale, advertise for sale, and sell (in the manner provided
for herein) the Collateral. Bank is hereby granted a license or other right,
solely pursuant to the provisions of this Section 9.1, to use, without charge,
Borrower's labels, patents, copyrights, rights of use of any name, trade
secrets, trade names, trademarks, service marks, and advertising matter, or any
property of a similar nature, as it pertains to the Collateral, in completing
production of, advertising for sale, and selling any Collateral and, in
connection with Bank's exercise of its rights under this Section 9.1, Borrower's
rights under all licenses and all franchise agreements shall inure to Bank's
benefit;
(h) Sell the Collateral at either a public or private
sale, or both, by way of one or more contracts or transactions, for cash or on
terms, in such manner and at such places (including Borrower's premises) as Bank
determines is commercially reasonable, and apply any proceeds to the Obligations
in whatever manner or order Bank deems appropriate;
(i) Bank may credit bid and purchase at any public
sale; and
(j) Any deficiency that exists after disposition of
the Collateral as provided above will be paid immediately by Borrower.
9.2 Power of Attorney. Effective only upon the occurrence and
during the continuance of an Event of Default, Borrower hereby irrevocably
appoints Bank (and any of Bank's designated officers, or employees) as
Borrower's true and lawful attorney to: (a) send requests for verification of
Accounts or notify account debtors of Bank's security interest in the Accounts;
(b) endorse Borrower's name on any checks or other forms of payment or security
that may come into Bank's possession; (c) sign Borrower's name on any invoice or
bill of lading relating to any Account, drafts against account debtors,
schedules and assignments of Accounts, verifications of Accounts, and notices to
account debtors; (d) make, settle, and adjust all claims under and decisions
with respect to Borrower's policies of insurance; and (e) settle and adjust
disputes and claims respecting the Accounts directly with account debtors, for
amounts and upon terms which Bank determines to be reasonable; provided Bank may
exercise such power of attorney to sign the name of Borrower on any of the
documents described in Section 4.2 regardless of whether an Event of Default has
occurred. The appointment of Bank as Borrower's attorney in fact, and each and
every one of Bank's rights and powers, being coupled with an interest, is
irrevocable until all of the Obligations have been fully repaid and performed
and Bank's obligation to provide advances hereunder is terminated.
9.3 Accounts Collection. At any time from the date of this
Agreement, Bank may notify any Person owing funds to Borrower of Bank's security
interest in such funds and verify the amount of such Account. Borrower shall
collect all amounts owing to Borrower for Bank, receive in trust all payments as
Bank's trustee, and immediately deliver such payments to Bank in their original
form as received from the account debtor, with proper endorsements for deposit.
9.4 Bank Expenses. If Borrower fails to pay any amounts or
furnish any required proof of payment due to third persons or entities, as
required under the terms of this Agreement, then Bank may do any or all of the
following: (a) make payment of the same or any part thereof; (b) set up such
reserves under the Revolving Facility as Bank deems necessary to protect Bank
from the exposure created by such failure; or (c) obtain and maintain insurance
policies of the type discussed in
18
<PAGE> 22
Section 6.6 of this Agreement, and take any action with respect to such policies
as Bank deems prudent. Any amounts so paid or deposited by Bank shall constitute
Bank Expenses, shall be immediately due and payable, and shall bear interest at
the then applicable rate hereinabove provided, and shall be secured by the
Collateral. Any payments made by Bank shall not constitute an agreement by Bank
to make similar payments in the future or a waiver by Bank of any Event of
Default under this Agreement.
9.5 Bank's Liability for Collateral. So long as Bank complies
with reasonable banking practices, Bank shall not in any way or manner be liable
or responsible for: (a) the safekeeping of the Collateral; (b) any loss or
damage thereto occurring or arising in any manner or fashion from any cause; (c)
any diminution in the value thereof; or (d) any act or default of any carrier,
warehouseman, bailee, forwarding agency, or other person whomsoever. All risk of
loss, damage or destruction of the Collateral shall be borne by Borrower.
9.6 Remedies Cumulative. Bank's rights and remedies under this
Agreement, the Loan Documents, and all other agreements shall be cumulative.
Bank shall have all other rights and remedies not inconsistent herewith as
provided under the Code, by law, or in equity. No exercise by Bank of one right
or remedy shall be deemed an election, and no waiver by Bank of any Event of
Default on Borrower's part shall be deemed a continuing waiver. No delay by Bank
shall constitute a waiver, election, or acquiescence by it. No waiver by Bank
shall be effective unless made in a written document signed on behalf of Bank
and then shall be effective only in the specific instance and for the specific
purpose for which it was given.
9.7 Demand; Protest. Borrower waives demand, protest, notice
of protest, notice of default or dishonor, notice of payment and nonpayment,
notice of any default, nonpayment at maturity, release, compromise, settlement,
extension, or renewal of accounts, documents, instruments, chattel paper, and
guarantees at any time held by Bank on which Borrower may in any way be liable.
10. NOTICES
Unless otherwise provided in this Agreement, all notices or
demands by any party relating to this Agreement or any other agreement entered
into in connection herewith shall be in writing and (except for financial
statements and other informational documents which may be sent by first-class
mail, postage prepaid) shall be personally delivered or sent by a recognized
overnight delivery service, certified mail, postage prepaid, return receipt
requested, or by telefacsimile to Borrower or to Bank, as the case may be, at
its addresses set forth below:
If to Borrower: SEEQ Technology, Incorporated
47200 Bayside Parkway
Fremont, CA 94538
Attn: Robert Hersch
FAX: (510) 657-2837
If to Bank: Silicon Valley Bank
3003 Tasman Drive
Santa Clara, CA 95054
Attn: Diane Thompson
FAX: (408) 944-0815
The parties hereto may change the address at which they are to receive
notices hereunder, by notice in writing in the foregoing manner given to the
other.
19
<PAGE> 23
11. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER
This Agreement shall be governed by, and construed in
accordance with, the internal laws of the State of California, without regard to
principles of conflicts of law. Each of Borrower and Bank hereby submits to the
exclusive jurisdiction of the state and Federal courts located in the County of
Santa Clara, State of California. BORROWER AND BANK EACH HEREBY WAIVE THEIR
RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR
ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED
THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL
OTHER COMMON LAW OR STATUTORY CLAIMS. EACH PARTY RECOGNIZES AND AGREES THAT THE
FOREGOING WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR IT TO ENTER INTO THIS
AGREEMENT. EACH PARTY REPRESENTS AND WARRANTS THAT IT HAS REVIEWED THIS WAIVER
WITH ITS LEGAL COUNSEL AND THAT IT KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY
TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL.
12. GENERAL PROVISIONS
12.1 Successors and Assigns. This Agreement shall bind and
inure to the benefit of the respective successors and permitted assigns of each
of the parties; provided, however, that neither this Agreement nor any rights
hereunder may be assigned by Borrower without Bank's prior written consent,
which consent may be granted or withheld in Bank's sole discretion. Bank shall
have the right without the consent of or notice to Borrower to sell, transfer,
negotiate, or grant participation in all or any part of, or any interest in,
Bank's obligations, rights and benefits hereunder.
12.2 Indemnification. Borrower shall defend, indemnify and
hold harmless Bank and its officers, employees, and agents against: (a) all
obligations, demands, claims, and liabilities claimed or asserted by any other
party in connection with the transactions contemplated by this Agreement; and
(b) all losses or Bank Expenses in any way suffered, incurred, or paid by Bank
as a result of or in any way arising out of, following, or consequential to
transactions between Bank and Borrower whether under this Agreement, or
otherwise (including without limitation reasonable attorneys fees and expenses),
except for losses caused by Bank's gross negligence or willful misconduct.
12.3 Time of Essence. Time is of the essence for the
performance of all obligations set forth in this Agreement.
12.4 Severability of Provisions. Each provision of this
Agreement shall be severable from every other provision of this Agreement for
the purpose of determining the legal enforceability of any specific provision.
12.5 Amendments in Writing, Integration. This Agreement cannot
be amended or terminated orally. All prior agreements, understandings,
representations, warranties, and negotiations between the parties hereto with
respect to the subject matter of this Agreement, if any, are merged into this
Agreement and the Loan Documents.
12.6 Counterparts. This Agreement may be executed in any
number of counterparts and by different parties on separate counterparts, each
of which, when executed and delivered, shall be deemed to be an original, and
all of which, when taken together, shall constitute but one and the same
Agreement.
12.7 Survival. All covenants, representations and warranties
made in this Agreement shall continue in full force and effect so long as any
Obligations remain outstanding. The obligations of Borrower to indemnify Bank
with respect to the expenses, damages, losses, costs and
20
<PAGE> 24
liabilities described in Section 12.2 shall survive until all applicable statute
of limitations periods with respect to actions that may be brought against Bank
have run.
12.8 Confidentiality. In handling any confidential information
Bank shall exercise the same degree of care that it exercises with respect to
its own proprietary information of the same types to maintain the
confidentiality of any non-public information thereby received or received
pursuant to this Agreement except that disclosure of such information may be
made (i) to the subsidiaries or affiliates of Bank in connection with their
present or prospective business relations with Borrower, (ii) to prospective
transferees or purchasers of any interest in the Loans, provided that they have
entered into a comparable confidentiality agreement in favor of Borrower and
have delivered a copy to Borrower, (iii) as required by law, regulations, rule
or order, subpoena, judicial order or similar order, (iv) as may be required in
connection with the examination, audit or similar investigation of Bank and (v)
as Bank may determine in connection with the enforcement of any remedies
hereunder. Confidential information hereunder shall not include information that
either: (a) is in the public domain or in the knowledge or possession of Bank
when disclosed to Bank, or becomes part of the public domain after disclosure to
Bank through no fault of Bank; or (b) is disclosed to Bank by a third party,
provided Bank does not have actual knowledge that such third party is prohibited
from disclosing such information.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above written.
SEEQ Technology, Incorporated
By: /s/ Robert Hersh
---------------------------
Title: Vice President, Finance
SILICON VALLEY BANK
By:
---------------------------
Title:
------------------------
21
<PAGE> 25
EXHIBIT A
The Collateral shall consist of all right, title and interest of
Borrower in and to the following:
(a) All goods and equipment now owned or hereafter acquired, including,
without limitation, all machinery, fixtures, vehicles (including motor vehicles
and trailers), and any interest in any of the foregoing, and all attachments,
accessories, accessions, replacements, substitutions, additions, and
improvements to any of the foregoing, wherever located;
(b) All inventory, now owned or hereafter acquired, including, without
limitation, all merchandise, raw materials, parts, supplies, packing and
shipping materials, work in process and finished products including such
inventory as is temporarily out of Borrower's custody or possession or in
transit and including any returns upon any accounts or other proceeds, including
insurance proceeds, resulting from the sale or disposition of any of the
foregoing and any documents of title representing any of the above, and
Borrower's Books relating to any of the foregoing;
(c) All contract rights and general intangibles now owned or hereafter
acquired, including, without limitation, goodwill, trademarks, servicemarks,
trade styles, trade names, patents, patent applications, leases, license
agreements, franchise agreements, blueprints, drawings, purchase orders,
customer lists, route lists, infringements, claims, computer programs, computer
discs, computer tapes, literature, reports, catalogs, design rights, income tax
refunds, payments of insurance and rights to payment of any kind;
(d) All now existing and hereafter arising accounts, contract rights,
royalties, license rights and all other forms of obligations owing to Borrower
arising out of the sale or lease of goods, the licensing of technology or the
rendering of services by Borrower, whether or not earned by performance, and any
and all credit insurance, guaranties, and other security therefor, as well as
all merchandise returned to or reclaimed by Borrower and Borrower's Books
relating to any of the foregoing;
(e) All documents, cash, deposit accounts, securities, letters of
credit, certificates of deposit, instruments and chattel paper now owned or
hereafter acquired and Borrower's Books relating to the foregoing;
(f) All copyright rights, copyright applications, copyright
registrations and like protections in each work of authorship and derivative
work thereof, whether published or unpublished, now owned or hereafter acquired;
all trade secret rights, including all rights to unpatented inventions,
know-how, operating manuals, license rights and agreements and confidential
information, now owned or hereafter acquired; all mask work or similar rights
available for the protection of semiconductor chips, now owned or hereafter
acquired; all claims for damages by way of any past, present and future
infringement of any of the foregoing; and
(g) Any and all claims, rights and interests in any of the above and
all substitutions for, additions and accessions to and proceeds thereof.
22
<PAGE> 26
EXHIBIT B
LOAN PAYMENT/ADVANCE TELEPHONE REQUEST FORM
DEADLINE FOR SAME DAY PROCESSING IS 3:00 P.M., P.S.T.
TO: CENTRAL CLIENT SERVICE DIVISION DATE:____________
FAX#: (408) 496-2426 TIME:____________
FROM: SEEQ Technology, Incorporated, a California corporation
---------------------------------------------------------------------------
CLIENT NAME (BORROWER)
REQUESTED BY:___________________________________________________________________
AUTHORIZED SIGNER'S NAME
AUTHORIZED SIGNATURE:___________________________________________________________
PHONE NUMBER:___________________________________________________________________
FROM ACCOUNT #____________________________________ TO ACCOUNT #_______________
REQUESTED TRANSACTION TYPE REQUEST DOLLAR AMOUNT
- -------------------------- ---------------------
PRINCIPAL INCREASE (ADVANCE) $__________________________
PRINCIPAL PAYMENT (ONLY) $__________________________
INTEREST PAYMENT (ONLY) $__________________________
PRINCIPAL AND INTEREST (PAYMENT) $__________________________
OTHER INSTRUCTIONS:_____________________________________________________________
________________________________________________________________________________
All representations and warranties of Borrower stated in the Loan
Agreement are true, correct and complete in all material respects as of the date
of the telephone request for and Advance confirmed by this Borrowing
Certificate; provided, however, that those representations and warranties
expressly referring to another date shall be true, correct and complete in all
material respects as of such date.
BANK USE ONLY
TELEPHONE REQUEST:
The following person is authorized to request the loan payment transfer/loan
advance on the advance designated account and is known to me.
_______________________________________________ _____________________________
Authorized Requester Phone #
_______________________________________________ _____________________________
Received By (Bank) Phone #
_________________________________________
Authorized Signature (Bank)
23
<PAGE> 27
EXHIBIT C
BORROWING BASE CERTIFICATE
<TABLE>
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Borrower: SEEQ Technology, Incorporated Lender: Silicon Valley Bank
Commitment Amount: $7,000,000
- ------------------------------------------------------------------------------------------------------------------------------------
ACCOUNTS RECEIVABLE
1. Accounts Receivable Book Value as of ___________ $_______________
2. Additions (please explain on reverse) $_______________
3. TOTAL ACCOUNTS RECEIVABLE $_______________
ACCOUNTS RECEIVABLE DEDUCTIONS (without duplication)
4. Amounts over 90 days due $______________
5. Balance of 50% over 90 day accounts $______________
6. Concentration Limits $______________
7. Foreign Accounts $______________
8. Governmental Accounts $______________
9. Contra Accounts $______________
10. Promotion or Demo Accounts $______________
11. Intercompany/Employee Accounts $______________
12. Other (please explain on reverse) $______________
13. TOTAL ACCOUNTS RECEIVABLE DEDUCTIONS $_______________
14. Eligible Accounts (#3 minus #13) $_______________
15. LOAN VALUE OF ACCOUNTS (80% of #14) $_______________
BALANCES
16. Maximum Loan Amount $_______________
17. Total Funds Available [Lesser of #16 or #15] $_______________
18. Present balance owing on Line of Credit $_______________
19. Outstanding under Sublimits ( ) $_______________
20. RESERVE POSITION (#17 minus #18 and #19) $_______________
</TABLE>
The undersigned represents and warrants that the foregoing is true, complete and
correct, and that the information reflected in this Borrowing Base Certificate
complies with the representations and warranties set forth in the Loan and
Security Agreement between the undersigned and Silicon Valley Bank.
COMMENTS:
BANK USE ONLY
-------------
Rec'd By:____________
Auth. Signer
Date:________________
Verified:____________
Auth. Signer
Date:________________
SEEQ Technology, Incorporated,
a California corporation
By:____________________________________
Authorized Signer
24
<PAGE> 28
EXHIBIT D
COMPLIANCE CERTIFICATE
TO: SILICON VALLEY BANK
FROM: SEEQ TECHNOLOGY, INCORPORATED
The undersigned authorized officer of SEEQ Technology, Incorporated, a
California corporation, hereby certifies that in accordance with the terms and
conditions of the Loan and Security Agreement between Borrower and Bank (the
"Agreement"), (i) Borrower is in complete compliance for the period ending
_______________ with all required covenants except as noted below and (ii) all
representations and warranties of Borrower stated in the Agreement are true and
correct in all material respects as of the date hereof. Attached herewith are
the required documents supporting the above certification. The Officer further
certifies that these are prepared in accordance with Generally Accepted
Accounting Principles (GAAP) and are consistently applied from one period to the
next except as explained in an accompanying letter or footnotes.
PLEASE INDICATE COMPLIANCE STATUS BY CIRCLING YES/NO
UNDER "COMPLIES" COLUMN.
<TABLE>
<CAPTION>
REPORTING COVENANT REQUIRED COMPLIES
------------------ -------- --------
<S> <C> <C>
10Q Quarterly within 5 days Yes No
10K Annually within 5 days Yes No
A/R & A/P Agings Monthly within 20 days* Yes No
A/R Audit Initial and Semi-Annual Yes No
<CAPTION>
FINANCIAL COVENANT REQUIRED ACTUAL COMPLIES
------------------ -------- ------ --------
<S> <C> <C> <C>
Maintain on a Quarterly Basis:
Minimum Quick Ratio 1.25:1.0 _____:1.0 Yes No
Minimum Tangible Net Worth $11,488,000** $________ Yes No
Maximum Debt/Tangible Net Worth 1.0:1.0 _____:1.0 Yes No
Profitability: Quarterly $1.00*** $________ Yes No
Annually $1.00 $________ Yes No
</TABLE>
* Only quarterly reporting is required where no Obligations are
outstanding.
** (i) $11,000,488 as of 6/30/96 plus (ii) one hundred percent
(100%) of net new equity plus (iii) seventy five percent (75%)
of quarterly profitability, with no deduction made in the case
of a losing quarter.
*** One losing quarter per fiscal year is allowed.
COMMENTS REGARDING EXCEPTIONS: BANK USE ONLY
See Attached.
Received by:_______________________
AUTHORIZED SIGNER
Sincerely,
Date:______________________________
________________________________________ Verified:__________________________
SIGNATURE AUTHORIZED SIGNER
Date:______________________________
________________________________________
TITLE Compliance Status: Yes No
________________________________________
DATE
25
<PAGE> 29
DISBURSEMENT REQUEST AND AUTHORIZATION
<TABLE>
<S> <C>
Borrower: SEEQ Technology, Incorporated Bank: Silicon Valley Bank
===================================================================================================================================
LOAN TYPE. This is a Variable Rate, Revolving Line of Credit of a principal amount up to $7,000,000.
PRIMARY PURPOSE OF LOAN. The primary purpose of this loan is for business.
SPECIFIC PURPOSE. The specific purpose of this loan is: Short Term Working Capital.
DISBURSEMENT INSTRUCTIONS. Borrower understands that no loan proceeds will be disbursed until all of Bank's conditions for making
the loan have been satisfied. Please disburse the loan proceeds as follows:
Revolving Line
--------------
Amount paid to Borrower directly: $________
Undisbursed Funds $________
Principal $________
CHARGES PAID IN CASH. Borrower has paid or will pay in cash as agreed the following charges:
Prepaid Finance Charges Paid in Cash: $________
$35,000 Loan Fee
$______ Accounts Receivables Audit
Other Charges Paid in Cash: $________
$______ UCC Search Fees
$______ UCC Filing Fees
$______ Patent Filing Fees
$______ Trademark Filing Fees
$______ Copyright Filing Fees
$______ Outside Counsel Fees and Expenses (Estimate)
Total Charges Paid in Cash $_________
</TABLE>
AUTOMATIC PAYMENTS. Borrower hereby authorizes Bank automatically to deduct from
Borrower's account numbered 3300032.602 the amount of any loan payment. If
the funds in the account are insufficient to cover any payment, Bank shall not
be obligated to advance funds to cover the payment.
FINANCIAL CONDITION. BY SIGNING THIS AUTHORIZATION, BORROWER REPRESENTS AND
WARRANTS TO BANK THAT THE INFORMATION PROVIDED ABOVE IS TRUE AND CORRECT AND
THAT THERE HAS BEEN NO ADVERSE CHANGE IN BORROWER'S FINANCIAL CONDITION AS
DISCLOSED IN BORROWER'S MOST RECENT FINANCIAL STATEMENT TO BANK. THIS
AUTHORIZATION IS DATED AS OF ___________________, 19___.
BORROWER:
SEEQ Technology, Incorporated,
a California corporation
/s/ Robert Hersh
- -----------------------------
Authorized Officer
================================================================================
<PAGE> 30
AGREEMENT TO PROVIDE INSURANCE
GRANTOR: SEEQ Technology, Incorporated BANK: Silicon Valley Bank
================================================================================
INSURANCE REQUIREMENTS. SEEQ Technology, Incorporated, a California
corporation ("Grantor") understands that insurance coverage is required in
connection with the extending of a loan or the providing of other financial
accommodations to Grantor by Bank. These requirements are set forth in the Loan
Documents. The following minimum insurance coverages must be provided on the
following described collateral (the "Collateral"):
Collateral: All Inventory, Equipment and Fixtures.
Type: All risks, including fire, theft and liability.
Amount: Full insurable value.
Basis: Replacement value.
Endorsements: Loss payable clause to Bank with stipulation
that coverage will not be canceled or
diminished without a minimum of twenty (20)
days' prior written notice to Bank.
INSURANCE COMPANY. Grantor may obtain insurance from any insurance
company Grantor may choose that is reasonably acceptable to Bank. Grantor
understands that credit may not be denied solely because insurance was not
purchased through Bank.
FAILURE TO PROVIDE INSURANCE. Grantor agrees to deliver to Bank, on or
before closing, evidence of the required insurance as provided above, with an
effective date of August 19, 1996, or earlier. Grantor acknowledges and agrees
that if Grantor fails to provide any required insurance or fails to continue
such insurance in force, Bank may do so at Grantor's expense as provided in the
Loan and Security Agreement. The cost of such insurance, at the option of Bank,
shall be payable on demand or shall be added to the indebtedness as provided in
the security document. GRANTOR ACKNOWLEDGES THAT IF BANK SO PURCHASES ANY SUCH
INSURANCE, THE INSURANCE WILL PROVIDE LIMITED PROTECTION AGAINST PHYSICAL DAMAGE
TO THE COLLATERAL, UP TO THE BALANCE OF THE LOAN; HOWEVER, GRANTOR'S EQUITY IN
THE COLLATERAL MAY NOT BE INSURED. IN ADDITION, THE INSURANCE MAY NOT PROVIDE
ANY PUBLIC LIABILITY OR PROPERTY DAMAGE INDEMNIFICATION AND MAY NOT MEET THE
REQUIREMENTS OF ANY FINANCIAL RESPONSIBILITY LAWS.
AUTHORIZATION. For purposes of insurance coverage on the Collateral,
Grantor authorizes Bank to provide to any person (including any insurance agent
or company) all information Bank deems appropriate, whether regarding the
Collateral, the loan or other financial accommodations, or both.
GRANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS AGREEMENT
TO PROVIDE INSURANCE AND AGREES TO ITS TERMS. THIS AGREEMENT IS DATED AUGUST 19,
1996.
GRANTOR:
SEEQ Technology, Incorporated,
a California corporation
x________________________________
Authorized Officer
FOR BANK USE ONLY
INSURANCE VERIFICATION
DATE:___________________ PHONE:________________
AGENT'S NAME:__________________________________________________________________
INSURANCE COMPANY:_____________________________________________________________
POLICY NUMBER:_________________________________________________________________
EFFECTIVE DATES:_______________________________________________________________
COMMENTS:______________________________________________________________________
<PAGE> 31
CORPORATE RESOLUTIONS TO BORROW
================================================================================
BORROWER: SEEQ TECHNOLOGY, INCORPORATED, A CALIFORNIA CORPORATION
================================================================================
I, the undersigned Secretary or Assistant Secretary of SEEQ Technology,
Incorporated, a California corporation (the "Corporation"), HEREBY CERTIFY that
the Corporation is organized and existing under and by virtue of the laws of the
State of California.
I FURTHER CERTIFY that attached hereto as Attachments 1 and 2 are true
and complete copies of the Certificate of Incorporation and Bylaws of the
Corporation, each of which is in full force and effect on the date hereof.
I FURTHER CERTIFY that at a meeting of the Directors of the
Corporation, duly called and held, at which a quorum was present and voting (or
by other duly authorized corporate action in lieu of a meeting), the following
resolutions were adopted.
BE IT RESOLVED, that ANY ONE (1) of the following named officers,
employees, or agents of this Corporation, whose actual signatures are shown
below:
NAMES POSITIONS ACTUAL SIGNATURES
-------------------------------------------------------------------
Robert O. Hersh Vice President, CFO /s/ Robert Hersh
______________________ ______________________ _________________________
Gary R. Fish Corporate Controller /s/ Gary R. Fish
______________________ ______________________ _________________________
Philip M. Barton Director of Planning,IS /s/ PM Barton
______________________ ______________________ _________________________
Bruce Eller Accounting Manager /s/ B. Eller
______________________ ______________________ _________________________
______________________ ______________________ _________________________
acting for an on behalf of this Corporation and as its act and deed be, and they
hereby are, authorized and empowered:
BORROW MONEY. To borrow from time to time from Silicon Valley Bank
("Bank"), on such terms as may be agreed upon between the officers, employees,
or agents and Bank, such sum or sums of money as in their judgment should be
borrowed, without limitation, including such sums as are specified in that
certain Loan and Security Agreement dated as of August 19, 1996 (the "Loan
Agreement").
EXECUTE NOTES. To execute and deliver to Bank the promissory note or
notes of the Corporation, on Lender's forms, at such rates of interest and on
such terms as may be agreed upon, evidencing the sums of money so borrowed or
any indebtedness of the Corporation to Bank, and also to execute and deliver to
Lender one or more renewals, extensions, modifications, refinancings,
consolidations, or substitutions for one or more of the notes, or any portion of
the notes.
GRANT SECURITY. To grant a security interest to Bank in the Collateral
described in the Loan Agreement, which security interest shall secure all of the
Corporation's Obligations, as described in the Loan Agreement.
1
<PAGE> 32
NEGOTIATE ITEMS. To draw, endorse, and discount with Bank all drafts, trade
acceptances, promissory notes, or other evidences of indebtedness payable to or
belonging to the Corporation or in which the Corporation may have an interest,
and either to receive cash for the same or to cause such proceeds to be credited
to the account of the Corporation with Bank, or to cause such other disposition
of the proceeds derived therefrom as they may deem advisable.
LETTERS OF CREDIT; FOREIGN EXCHANGE. To execute letters of credit
applications, foreign exchange agreements and other related documents pertaining
to Bank's issuance of letters of credit and foreign exchange contracts.
FURTHER ACTS. In the case of lines of credit, to designate additional or
alternate individuals as being authorized to request advances thereunder, and in
all cases, to do and perform such other acts and things, to pay any and all fees
and costs, and to execute and deliver such other documents and agreements as
they may in their discretion deem reasonably necessary or proper in order to
carry into effect the provisions of these Resolutions.
BE IT FURTHER RESOLVED, that any and all acts authorized pursuant to these
resolutions and performed prior to the passage of these resolutions are hereby
ratified and approved, that these Resolutions shall remain in full force and
effect and Bank may rely on these Resolutions until written notice of their
revocation shall have been delivered to and received by Bank. Any such notice
shall not affect any of the Corporation's agreements or commitments in effect at
the time notice is given.
I FURTHER CERTIFY that the officers, employees, and agents named above are
duly elected, appointed, or employed by or for the Corporation, as the case may
be, and occupy the positions set forth opposite their respective names; that the
foregoing Resolutions now stand of record on the books of the Corporation; and
that the Resolutions are in full force and effect and have not been modified or
revoked in any manner whatsoever.
IN WITNESS WHEREOF, I have hereunto set my hand on August 27, 1996 and
attest that the signatures set opposite the names listed above are their genuine
signatures.
CERTIFIED TO AND ATTESTED BY:
X /s/ Robert Hersh
-----------------------------
2
<PAGE> 1
EXHIBIT 11.0
SEEQ TECHNOLOGY INCORPORATED
SCHEDULE OF COMPUTATION OF EARNINGS PER SHARE
(in thousands except per share amounts)
<TABLE>
<CAPTION>
Years Ended
-------------------------------------
September September September
30,1996 30,1995 30,1994
--------- --------- ---------
<S> <C> <C> <C>
PRIMARY
Earnings:
Net income (loss) $ 2,851 $ 1,330 $ (7,877)
------- ------- --------
Shares:
Average common shares outstanding 30,070 27,244 24,273
Add effect of dilutive options and warrants
(as determined by the treasury stock method) 1,962 1,961 --
------- ------- --------
As adjusted 32,032 29,205 24,273
------- ------- --------
Primary earnings per share $ 0.09 $ 0.05 $ (0.32)
------- ------- --------
FULLY DILUTED
Earnings:
Net income (loss) $ 2,851 $ 1,330
------- -------
Shares:
Average common shares outstanding 30,070 27,244
Add incremental effect of dilutive options and
warrants (as determined by the treasury
stock method) 2,078 3,650
------- -------
As adjusted 32,148 30,894
------- -------
Fully diluted earnings per share $ 0.09 $ 0.04
------- -------
</TABLE>
47
<PAGE> 1
EXHIBIT 23.1
SEEQ TECHNOLOGY INCORPORATED
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-3 (No. 33-84018) and in the Registration Statements on Form
S-8 (No. 33-27419, No. 33-6554, No. 33-35838) of SEEQ Technology Incorporated of
our report dated October 23, 1996, appearing on page 26 of this 1996 Annual
Report on Form 10-K.
/s/ PRICE WATERHOUSE LLP
San Jose, California
December 18, 1996
48
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000702756
<NAME> SEEQ TECHNOLOGY INC
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> SEP-30-1996
<CASH> 3974
<SECURITIES> 0
<RECEIVABLES> 8475
<ALLOWANCES> 240
<INVENTORY> 5352
<CURRENT-ASSETS> 17929
<PP&E> 12004
<DEPRECIATION> 7746
<TOTAL-ASSETS> 26435
<CURRENT-LIABILITIES> 8776
<BONDS> 3466
0
0
<COMMON> 302
<OTHER-SE> 13891
<TOTAL-LIABILITY-AND-EQUITY> 26435
<SALES> 31338
<TOTAL-REVENUES> 31338
<CGS> 20680
<TOTAL-COSTS> 20680
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 240
<INCOME-PRETAX> 2939
<INCOME-TAX> 88
<INCOME-CONTINUING> 2851
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2851
<EPS-PRIMARY> 0.09
<EPS-DILUTED> 0.09
</TABLE>
