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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, 1998
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _______ to_______
Commission File 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 1,1998
as reported by NASDAQ, was approximately $49,931,000.
The number of outstanding shares of the registrant's Common Stock on December 1,
1998 was 32,227,000.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Proxy Statement for the 1998 Annual Meeting of Stockholders as filed with
the Commission (the "Proxy Statement") - Part III, Items 10, 11, 12 and 13.
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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 Section 27A 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 and analog circuit
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, SEEQ introduced the industry's first Fast
Ethernet (100 megabits per second "Mbps") four-port controller. In 1997, the
Company introduced the industry's first Gigabit Ethernet (1000 megabits per
second "Mbps") controller for backbone connectivity, and in 1998 introduced the
first four port physical layer device with Reduced Media Independent Interface
(RMII).
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 enterprise
markets. The Company's more than 150 customers worldwide include such industry
leaders as 3COM, Cabletron, Cisco Systems, Compaq, Fore Systems, Intel,
Kingston, Northern Telecom, and Xircom. 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 product line includes Ethernet media access controllers, AutoDUPLEX(TM)
Ethernet chip sets for automatic full duplex switched Ethernet applications,
encoders/decoders, coaxial cable CMOS transceivers, 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
both Fast Ethernet and Gigabit Ethernet, in addition to traditional 10Base-T
Ethernet (10Mbps) products.
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 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.
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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 the Internet, 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 10Mbps Ethernet or 16 Mbps Token Ring. Fast Ethernet (100Mbps), Gigabit
Ethernet (1000Mbps) and ATM technologies are expected to satisfy the requirement
for greater bandwidth capacity on most local area networks. The rapid
price/performance improvements in the networking technology has further
increased demand.
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 SYSTEMS MANUFACTURERS
The primary focus of SEEQ's business strategy is to provide "connectivity
solutions" to leading systems manufacturers in rapidly growing High Speed
Ethernet 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
Gigabit Ethernet), 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, 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 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 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 four
semiconductor manufacturers; AMI Semiconductor, Ricoh Electronics, 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, the Company's product design and
applications teams must focus on understanding and meeting the customer's
specific system requirements. A close working relationship enables SEEQ to
identify
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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 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 1998, Fast Ethernet
related product sales accounted for approximately 76% of SEEQ's total revenues.
Even as the market for Fast Ethernet solutions accelerates, network providers
are developing products supporting even higher data rates. SEEQ has worked
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. Today the vast majority of Ethernet products are based on
IEEE 802.3 standards. The most rapidly growing Ethernet standard is 100Base-Tx,
the operation of Ethernet over unshielded twisted pair ("UTP") wiring, at
100Mbps data rates.
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, Ethernet physical layer devices (PHYs) , 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 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 Mbps.
SEEQ has extended this technique to Fast Ethernet to effectively increase the
network bandwidth to 200 Mbps.
MARKETING AND SALES
The Company sells its products to OEMs and distributors representing a wide
range of markets, including adapter cards, workstations, media attachment units,
print servers, file servers, repeaters, switches, bridges and routers. The
Company's ten largest customers accounted for approximately 79%, 74%, and 77% of
net revenues for fiscal years 1996, 1997 and 1998, respectively. [Bay Networks
(acquired by Northern Telecom in 1998) and Serial Systems accounted for
approximately 42% and 10% of revenues in fiscal 1996, respectively. Northern
Telecom and Cabletron accounted for approximately 25% and 17% of revenues in
fiscal 1997, respectively. Northern Telecom and Cabletron accounted for
approximately 41% and 14% of revenues in fiscal 1998, respectively.]
The Company coordinates all domestic sales through its Burlington,
Massachusetts, and its Blue Bell, Pennsylvania, regional sales offices in
addition to its Fremont, California headquarters. The Company's three 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 various
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
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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 for fiscal years 1996, 1997 and 1998, were approximately,
$8.0 million, $9.8 million, and $7.6 million, representing approximately 25%,
28%, and 27% of product sales, respectively. Internationally, the Company sells
its products through a network of approximately 22 manufacturer's
representatives (seven 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 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 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 controllers and media signaling integrated circuits for the
Fast Ethernet market and the Gigabit Ethernet market.
The Company's research and development expenditures for the fiscal years 1996,
1997 and 1998, were approximately $3,303,000, $3,446,000, and $4,587,000,
respectively. As of September 30, 1998, 19 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 four 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.
For its mixed signal products, 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.
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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, among others,
success in designing and subcontracting the manufacture of new products that
implement new technologies, adequate sources of raw materials, protection of the
Company's products by effective utilization of intellectual property laws,
product quality, reliability and 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 certain inventions. The
Company has obtained nonexclusive licenses from certain other organizations,
such as Xerox Corporation, Level One Communications and Lucent Technologies, for
use of product designs or patents in the development of the Company's products.
Such license arrangements on a non-exclusive basis are customary in the
industry.
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. 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 has been issued eight United States patents for various
data-communications technologies. These patents expire at various dates from
2011 to 2015. 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. The Company presently has on file with the U.S.
Patent Office eleven applications, most of which relate to Fast Ethernet design
technologies. In addition, the Company avails itself of mask work protection for
its designs.
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.
EMPLOYEES
As of September 30, 1998, the Company had 75 employees, including 10 in
marketing and sales, 19 in research, development and engineering related
functions, 38 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
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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.
ITEM 2. DESCRIPTION OF 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 Blue Bell,
Pennsylvania, and Burlington, Massachusetts.
ITEM 3. LEGAL PROCEEDINGS.
On September 25, 1998, SEEQ settled a lawsuit filed by Level One Communications,
Level One Communications, Inc. v. SEEQ Technology, Inc. (United States District
Court for the Northern District of California, San Francisco Division, Case No.
95-04254 MHP). SEEQ agreed to take a fully-paid up license to Level One's
asserted technology, and an initial agreement between Level One and SEEQ not to
sue or counter-sue each other for patent infringement or otherwise for a period
of two years from the date of execution of the settlement agreement. None of the
Company's product lines will be affected by the settlement, nor will any
continuing royalty or fee obligation exist in the future with respect to Level
One's asserted technology. The Company took a one-time charge for the settlement
of $3,156,000 in the fourth quarter ending September 30, 1998. Settlement costs
included a cash payment and common stock issuance to Level One.
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 arose out of a nitrogen supply contract between the Company
and the plaintiff. The Complaint purported to state causes of action for breach
of contract and promissory estoppel. The Complaint alleged that as a result of
purported breaches of the nitrogen supply contract, the Company was obligated to
pay plaintiff approximately $1,300,000 plus cost of suit, not including
attorney's fees. On September 9, 1997, SEEQ and Praxair agreed to settle the
lawsuit. Under the terms of settlement, SEEQ paid Praxair $300,000. In exchange,
SEEQ received a full general release of known and unknown claims and an
agreement that the lawsuit would be dismissed with prejudice. The case was
dismissed with prejudice on September 11, 1997.
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, 1998, $1,368,000
was on deposit in escrow (including interest of $839,000 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 former 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.
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, 1998.
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PART II
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON 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 market prices for fiscal years
1998 and 1997. The Company has never paid dividends on common shares and has no
present plans to do so. The Company's bank line of credit expired in August
1998, and thus was not in place at the end of the fiscal year. The Company
renewed the line of credit agreement in November 1998. The financial covenants
of this line of credit also restrict the amount the Company could pay in
dividends.
<TABLE>
<CAPTION>
Fiscal 1998 Fiscal 1997
Quarter High Low High Low
<S> <C> <C> <C> <C>
First $4.375 $2.750 $3.938 $2.500
Second $3.031 $2.156 $3.188 $1.750
Third $3.188 $1.844 $2.563 $1.406
Fourth $1.875 $0.688 $3.969 $1.875
</TABLE>
The approximate number of stockholders at September 30, 1998 was 12,000.
STOCKHOLDER PROPOSALS.
Proposals of stockholders intended to be presented at the Company's 1999 annual
meeting of stockholders only included those received at the Company's principal
executive offices by October 8, 1998 in order to be included in the Company's
proxy statement and form of proxy relating to the 1999 annual meeting. Pursuant
to new amendments to Rule 14a-4(c) of the Securities Exchange Act of 1934, as
amended, if a stockholder who intends to present a proposal at the 1999 annual
meeting of stockholders does not notify the Company of such proposal on or prior
to December 22, 1998, then management proxies would be allowed to use their
discretionary voting authority to vote on the proposal when the proposal is
raised at the annual meeting, even though there is no discussion of the proposal
in the 1999 proxy statement. The Company currently believes that the 1999 annual
meeting of stockholders will be held during the fourth week of February 1999.
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ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
----------------------------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues $ 21,480 $ 22,512 $ 31,338 $ 31,423 $ 28,109
Costs and expenses:
Cost of revenues 15,632 14,758 20,680 19,498 17,290
Research and development 3,278 3,069 3,303 3,446 4,587
Marketing, general and 6,939 3,827 4,579 5,397 6,884
administrative
Restructuring and other, net 4,932(1) (399)(2) -- -- --
-------- --------- -------- -------- --------
Total costs and expenses 30,781 21,255 28,562 28,341 28,761
-------- -------- -------- -------- --------
Income (loss) from operations (9,301) 1,257 2,776 3,082 (652)
Interest (expense) (456) (431) (240) (357) (375)
Interest and other income, net 187 518 403 382 614
Settlement costs (300)(3) (3,156)(4)
Gain on sale of stock 1,693(5) -- -- -- --
-------- -------- -------- -------- --------
Income (loss) before income taxes (7,877) 1,344 2,939 2,807 (3,569)
Income tax provision -- (14) (88) 1,880 (1,941)
-------- -------- -------- -------- --------
Net income (loss) $ (7,877) $ 1,330 $ 2,851 $ 4,687 $ (5,510)
-------- -------- -------- -------- --------
Net income (loss) per share:
Basic $ (0.33) $ 0.05 $ 0.09 $ 0.15 $ (0.18)
Diluted (0.33) $ 0.04 $ 0.09 $ 0.15 $ (0.18)
Shares used in per share calculation:
Basic 23,777 27,244 30,070 30,305 30,635
Diluted 23,777 30,894 32,148 32,180 30,635
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
(in thousands)
--------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital $ 908 $ 6,382 $ 9,153 $ 15,165 $ 11,926
Total assets 17,307 18,934 26,435 27,040 28,749
Long-term obligations 2,564 1,524 3,466 3,308 4,448
Stockholders' equity 4,056 10,768 14,193 19,218 15,578
</TABLE>
(1) 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.
(2) The Company recorded $399,000 as a benefit against operations in fiscal
1995 representing a change in the estimates of its restructuring reserves.
(3) The Company recorded a charge of $300,000 for the settlement of litigation
in fiscal 1997 relating to a contract dispute with a former supplier.
(4) The Company recorded a charge of $3,156,000 for the settlement of
litigation in fiscal 1998 relating to a patent dispute.
(5) The Company recorded a gain on the sale of stock in the amount of
$1,693,000.
9
<PAGE> 10
The following table sets forth consolidated statements of operations data for
each of the eight quarters beginning October 1, 1996 and ending September 30,
1998. This information has been derived from unaudited consolidated quarterly
financial statements of the Company, which include all adjustments, consisting
only of normal recurring adjustments 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,
1996 1997 1997 1997 1997 1998 1998 1998
-------- -------- -------- -------- -------- -------- -------- --------
(in thousands, except per share data)
-------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 6,624 $ 8,031 $ 7,611 $ 9,157 $ 7,552 $ 7,880 $ 6,171 $ 6,506
-------- -------- -------- -------- -------- -------- -------- --------
Costs and expenses:
Cost of revenues 4,560 5,059 4,591 5,288 4,183 4,442 3,999 4,666
Research and development 780 902 899 865 850 1,072 1,097 1,568
Marketing, general and
administrative 1,252 1,444 1,277 1,424 1,534 1,445 1,814 2,091
-------- -------- -------- -------- -------- -------- -------- --------
Total costs and expenses 6,592 7,405 6,767 7,577 6,567 6,959 6,910 8,325
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) from operations 32 626 844 1,580 985 921 (739) (1,819)
Interest (expense) (83) (87) (96) (91) (89) (80) (95) (111)
Interest and other income, net 86 95 87 114 136 164 159 155
Settlement costs -- -- -- (300) -- -- -- (3,156)
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before income 35 634 835 1,303 1,032 1,005 (675) (4,931)
taxes
Provision for income taxes (1) (20) (24) 1,925 48 (32) 20 (1,977)
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss) $ 34 $ 614 $ 811 $ 3,228 $ 1,080 $ 973 $ (655) $ (6,908)
======== ======== ======== ======== ======== ======== ======== ========
Net income (loss) per share:
Basic $ 0.00 $ 0.02 $ 0.03 $ 0.11 $ 0.04 $ 0.03 $ (0.02) $ (0.22)
Diluted $ 0.00 $ 0.02 $ 0.03 $ 0.10 $ 0.03 $ 0.03 $ (0.02) $ (0.22)
Shares used in per share
calculation:
Basic 30,272 30,288 30,304 30,357 30,473 30,624 30,714 30,727
Diluted 31,885 31,571 31,284 31,951 32,556 32,036 30,714 30,727
</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 Section 27A 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.
10
<PAGE> 11
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, the fourth quarter of fiscal 1996, the fourth
quarter of fiscal 1997, and the fourth quarter of fiscal 1998, $300,000 and
$1,000,000, and $1,200,000, and $1,300,000 respectively, was distributed to SEEQ
from the escrow account, leaving $1,368,000 on deposit therein as of September
30, 1998 (including interest earned to date of $839,000). 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.
EEPROM ASSET SALE RESTRUCTURING
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.
The following table summarizes the activity under this restructuring plan for
the years ended September 30, 1997 and 1998 (in thousands):
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Reserve at Utilization Reserve at Utilization Reserve at
September 30, Charge During September 30, Charge During September 30,
1996 Fiscal 1997 1997 Fiscal 1998 1998
<S> <C> <C> <C> <C> <C>
Excess facilities $(682) $ 122 $(560) $ 122 $(438)
</TABLE>
11
<PAGE> 12
In connection with the EEPROM Asset Sale, the Company incurred certain
restructuring costs or realized certain benefits during fiscal 1995 and 1996 as
follows:
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, 1997, and 1998, the Company
recorded $119,000 $122,000, and $122,000, respectively, of facility lease
payments in excess of the sublease amount.
ANNUAL RESULTS OF OPERATIONS
FISCAL 1998 COMPARED TO FISCAL 1997
The Company's revenues in fiscal 1998 were $28,109,000, a decrease of 11% from
$31,423,000 in fiscal 1997. [Bay Networks (acquired by Northern Telecom in 1998)
accounted for 41% of the Company's total revenues in fiscal 1998 compared to 25%
of total revenues in fiscal 1997. Cabletron, accounted for 14% of revenues in
1998 compared to 17% in 1997.] Unit sales volumes decreased 32% and average
selling prices increased 34% in fiscal 1998 as compared to fiscal 1997. These
changes are due to the fact that the Company's product mix continued to shift
from standard Ethernet to Fast Ethernet products. Fast Ethernet products
accounted for 76% of the Company's revenues in fiscal 1998 compared to 55% in
fiscal 1997.
Gross margins were 38.5% in fiscal 1998, compared to 37.9% in fiscal 1997. The
improvement in gross margins is mainly attributable to the changing product mix
toward Fast Ethernet products. 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 $3,446,000 in fiscal 1997
to $4,587,000 in fiscal 1998, primarily due to higher payroll, tooling,
consulting and other outside services costs As a percentage of sales, research
and development expenditures increased from 11.0% in fiscal 1997 to 16.3% in
fiscal 1998. 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 products, but may vary as a percentage of
revenues.
Marketing, general and administrative expenses increased from $5,397,000 in
fiscal 1997 to $6,884,000 in fiscal 1998, and increased as a percentage of sales
from 17.2% to 24.5%, respectively. The dollar increase was attributable
primarily to higher legal expenses relating to litigation issues partly offset
by lower sales commissions. 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 increased from $357,000 in fiscal 1997 to
$375,000 in fiscal 1998 due to an increase in financing costs for new capital
equipment and software.
Interest income increased from $382,000 in fiscal 1997 to $614,000 in fiscal
1998 due to higher cash balances.
The Company incurred a settlement expense of $3,156,000 in 1998 for a patent
dispute. The Company incurred a settlement expense of $300,000 in 1997 related
to a contract dispute with a former supplier.
The net income tax provision in 1998 was $1,941,000 as compared to a credit of
$1,880,000 in fiscal 1997. The change was primarily due to the reversal in 1998
of the recognition of a portion of the Company's deferred tax assets. For
further explanation of the Company's deferred tax assets, see Note 9 to the
financial statements.
12
<PAGE> 13
FISCAL 1997 COMPARED TO FISCAL 1996
The Company's revenues in fiscal 1997 were $31,423,000 relatively unchanged from
$31,338,000 in fiscal 1996. Bay Networks (acquired by Northern Telecom in 1998)
accounted for 25% of the Company's total revenues in fiscal 1997 compared to 42%
of total revenues in fiscal 1996. Revenues from Cabletron, a new customer,
accounted for 17% of revenues in 1997. Unit sales volumes decreased 35% and
average selling prices increased 54% in fiscal 1997 as compared to fiscal 1996.
These changes were due to the fact that the Company's product mix continued to
shift from standard Ethernet to Fast Ethernet products. Fast Ethernet products
accounted for 55% of the Company's revenues in fiscal 1997 compared to 31% in
fiscal 1996.
Gross margins were 37.9% in fiscal 1997, compared to 34.0% in fiscal 1996. The
improvement in gross margins was mainly attributable to the changing product mix
toward Fast Ethernet products.
Research and development expenditures increased from $3,303,000 in fiscal 1996
to $3,446,000 in fiscal 1997, primarily due to higher payroll costs. As a
percentage of sales, research and development expenditures increased from 10.5%
in fiscal 1996 to 11.0% in fiscal 1997.
Marketing, general and administrative expenses increased from $4,579,000 in
fiscal 1996 to $5,397,000 in fiscal 1997, and increased as a percentage of sales
from 14.6% to 17.2%, respectively. The dollar increase was attributable
primarily to higher sales commissions, and legal expenses relating to litigation
issues.
Interest expense has resulted primarily from borrowings under the Company's
equipment leases. Interest expense increased from $240,000 in fiscal 1996 to
$357,000 in fiscal 1997 due to an increase in financing costs for new capital
equipment and software.
Interest income decreased from $403,000 in fiscal 1996 to $382,000 in fiscal
1997 due to a decline in interest rates.
The Company incurred a settlement expense of $300,000 in 1997 related to a
contract dispute with a former supplier.
The net income tax benefit in 1997 was $1,880,000 as compared to a provision of
$88,000 in fiscal 1996. The change was primarily due to the recognition of a
portion of the Company's deferred tax assets. The amount recognized was
$1,950,000. This was partially offset by alternative minimum state and federal
income taxes of $70,000. For further explanation of the Company's deferred tax
assets, see Note 9 to the financial statements.
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, capital leases and bank lines of credit.
Management believes that existing sources of liquidity and anticipated cash flow
from operations will be adequate to satisfy its projected working capital
expenditures through the end of fiscal 1999. 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.
The Company's cash and cash equivalents balance increased from $6,937,000 as of
September 30, 1997 to $10,172,000 as of September 30, 1998.
Operating Activities
Cash flows provided by operating activities were $3,586,000 in fiscal 1998
compared to $2,592,000 for fiscal 1997. The change in operating activities cash
flow from 1997 to 1998 was due primarily to the net loss in fiscal 1998 of
$5,510,000 compared to a net profit of $4,687,000 in fiscal 1997. Inventories
increased by $904,000 in fiscal 1998 and decreased by $2,176,000 in fiscal 1997.
Accounts payable increased by $1,733,000 in fiscal 1998 compared to a decrease
of $4,689,000 in fiscal 1997. Other accrued liabilities increased by $1,889,000
in fiscal 1998 compared to an increase of $119,000 in fiscal 1997. The Company
recorded the obligation to issue stock in settlement of litigation of
13
<PAGE> 14
$1,406,000 in 1998. The Company recorded a provision for deferred taxes of
$1,950,000 in 1998 compared to a benefit of $1,950,000 in 1997.
In fiscal 1997 cash flows provided by operating activities were $2,592,000
compared to cash used of $267,000 in 1996. The improvement was primarily
attributable to an increase in net profit of $1,836,000 and a reduction in
working capital.
Investing Activities
Cash flows provided by investing activities in fiscal 1998 were $543,000
compared to $1,069,000 in fiscal 1997. The release of funds held in escrow was
$1,300,000 and $1,200,000 in fiscal 1998 and 1997, respectively. Capital
acquisitions, primarily for test equipment, and engineering tools, in fiscal
1998 were $757,000. The Company anticipates capital expenditures in fiscal 1999
primarily for test equipment, engineering tools and software of approximately
$1,000,000 of which it is expected that approximately half of that will be
financed through equipment leases.
In fiscal 1997 cash flows provided by investing activities were $1,069,000
compared to $3,676,000 in 1996. The reduction was primarily attributable to the
retirement of short-term investments in a restricted account.
Financing Activities
Cash flows used in financing activities in fiscal 1998 were $894,000. During
fiscal 1998, the Company received proceeds of $464,000 from the issuance of its
common stock, primarily from stock option exercises. These were partially offset
by payments on capital lease obligations of $1,358,000.
In fiscal 1997 cash flows used in financing activities were $698,000 compared to
$3,117,000 in 1996. The reduction was primarily attributable to the repayment of
a short-term note payable.
In August 1996, the Company entered into a one-year revolving line of credit
agreement with Silicon Valley Bank. The Company renewed this credit agreement in
August 1997 and November 1998. Under the current terms of the bank revolving
line of credit, the Company can 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 0.25%. The revolving line of credit
is secured by a security interest in the Company's assets, including
intellectual property. The loan agreement requires the Company to meet certain
profitability levels and to maintain certain financial ratios.
Historically, the Company has financed a significant amount of its capital
expenditures through capital leases. For fiscal years 1998, 1997, and 1996,
capital lease obligations incurred were $3,230,000, $1,224,000, and $3,367,000,
respectively. Payments of principal and interest, for capital leases in place at
the end of fiscal 1998, will be $1,982,000, $1,566,000, and $1,082,000, for
fiscal years 1999, 2000, and 2001 respectively.
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.
14
<PAGE> 15
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company operates in a rapidly changing environment that involves a number of
risks, some of which are beyond the Company's control. The following discussion
highlights some of these risks. Other risks are presented elsewhere in this
report.
HISTORY OF OPERATING LOSSES; UNCERTAINTY OF FUTURE FINANCIAL RESULTS
The Company incurred a net loss in fiscal 1998 of $5,510,000. The Company
incurred net 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 net 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, approximately $2.9 million for the fiscal year ended September 30, 1996,
and approximately $4.7 million for the fiscal year ended September 30, 1997. The
Company had an accumulated deficit of approximately $110 million at September
30, 1998. 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.
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 Bay
Networks and Cabletron accounted for approximately 25% and 17% of the Company's
revenues in fiscal 1997, respectively. Sales to Bay Networks and Cabletron
accounted for approximately 41% and 14% of the Company's revenues in fiscal
1998, 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 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.
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, under-utilization 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
15
<PAGE> 16
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 non-cancelable backlog, the Company typically plans its
production and inventory levels based on internal forecasts of customer demand,
which is highly unpredictable and can fluctuate substantially. In addition, the
Company is limited in its 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
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.
LIQUIDITY; FUTURE CAPITAL REQUIREMENTS
The Company presently believes that anticipated cash provided by operations, and
existing cash 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
16
<PAGE> 17
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.
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. 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.
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, mask-work rights or such confidentiality and
nondisclosure agreements in foreign countries.
17
<PAGE> 18
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.
YEAR 2000
The "Year 2000 issue" arises because many computer systems and programs were
designed to handle only a two-digit year, not a four-digit year. When the year
2000 begins, these computers may interpret "00" as the year 1900 and could
either stop processing date-related computations or could process them
incorrectly. As is true for most companies, the Year 2000 issue creates risk for
the Company. The Company has identified four areas of potential problems
stemming from the Year 2000 issue: product, internal systems, vendor
dependencies, and economic factors.
The Company's products are designed to move data. The products contain no date
functions or dependencies and therefore will operate according to specification
through the year 2000 and beyond. The Company's customers, however, incorporate
the Company's components in products that are very complex, and the Company has
no control over the design and manufacture of such products. The Company can
make no assurance that its customers' products will not be adversely affected by
the year 2000 issue. In that event that such products are affected, the
Company's financial results could be materially adversely affected.
The Year 2000 issue has the potential to disrupt the systems that perform the
Company's business transactions including financial systems (general ledger,
accounts payable, accounts receivable, and purchasing), order entry, inventory
and production control, and material requirements planning. The Year 2000 issue
could also disrupt the Company's personal computer applications, engineering
workstations, product testing systems, telecommunications and network systems.
The Company has performed a detailed inventory and assessment of these systems
with respect to Year 2000 issues, and is in the process of modifying, upgrading
and testing affected systems. Management believes that it has identified all of
the significant internal systems related exposures, and expects to complete its
Year 2000 testing by March, 1999.
The Company believes that the most likely Year 2000 problem relates to the area
of vendor dependencies. The Company is in the process of contacting critical
outside vendors to determine that the vendors' operations, and the products and
services they provide are Year 2000 compliant. If the Company determines that
the vendor will not be compliant, the Company will attempt to seek alternative
sources of products and services, where practicable. However, the Company does
not have the resources to definitively determine the Year 2000 readiness of its
vendors, and relies wholly on the written assurances of the vendors in this
regard. Moreover, the Company believes that the greatest risk arises from
infrastructure, ie., power and water supplies, telecommunications, government
services, and transportation supply chains, over which the Company has minimal
influence. If critical suppliers fail to achieve compliance, the Company could
be materially adversely affected.
The Company believes that the Year 2000 problem may cause significant economic
effects that could materially affect the Company's results. The infrastructure
problems discussed above could result in regional or worldwide recessions, which
could reduce demand for the Company's products. Additionally, as businesses
commit resources to the Year 2000 problem, networking projects could be delayed
or cancelled, thus also reducing demand for the Company's products.
The Company is developing contingency plans to address the Year 2000 issues that
may pose a significant risk to its operations, and expects these plans
substantially complete by June 1999. The Company will monitor potential Year
2000 exposures thereafter, and adjust its contingency plans as necessary. Such
plans could include adjustment of production and shipping schedules, changes in
the work schedules of key information systems personnel, accelerated replacement
of affected equipment or software, temporary use of back-up equipment or
software or the implementation of manual
18
<PAGE> 19
procedures to compensate for system deficiencies. However, there can be no
assurance that any contingency plans implemented by the Company would be
adequate to meet the Company's needs without materially impacting its
operations, that any such plan would be successful or that the Company's results
of operations would not be materially and adversely affected.
The Company estimates that the cost of its Year 2000 efforts will be
approximately $800,000. (This includes approximately $750,000 for the Company's
enterprise computer system, which was installed in 1997 to replace a
non-compliant system. This cost is included here because, although the Company
had already planned to install this system, and is deriving benefits over and
above Year 2000 compliance from the system, the Year 2000 situation was a factor
in expediting its installation.) The Company estimates that the remaining cost
to complete the project will be approximately $25,000. This cost estimate was
derived utilizing numerous assumptions, including the assumption that the
Company has already identified its most significant Year 2000 issues and that
the compliance plans of its third party suppliers will be fulfilled in a timely
manner without cost to the Company. However, there can be no guarantee that
these assumptions are accurate, and actual results could differ materially from
those anticipated.
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 and economic 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
over-capacity. 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.
DEPENDENCE ON DATA COMMUNICATION MARKET
The Company anticipates that substantially all of the Company's revenues for the
foreseeable future 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'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 September 25, 1998, SEEQ settled a lawsuit filed by Level One Communications,
Level One Communications, Inc. v. SEEQ Technology, Inc.. As part of the
settlement the Company received a license to Level One's asserted technology,
and both parties entered into an initial agreement not to sue or counter-sue
each other for patent infringement or otherwise for a period of two years from
the date of execution of the settlement agreement. None of the Company's product
lines will be affected by the settlement, nor will any continuing royalty or fee
obligation exist in the future with respect to Level One's asserted technology.
The Company took a one-time charge for the settlement of $3,156,000 in the
fourth quarter ending September 30, 1998. Settlement costs included a cash
payment and common stock issuance to Level One. In September of 1997 and June
1995, the Company settled litigation with a former supplier and landlord,
respectively. As of September 30, 1998 there was no litigation pending against
the Company. However, there can be no assurance that such litigation will not
arise in the future. 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
19
<PAGE> 20
costs and diversion of resources would not 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
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.
20
<PAGE> 21
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.
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, its customers, 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>
<S> <C>
Index to Financial Statements
Financial Statements
Page
Report of Independent Accountants 22
Balance Sheets at September 30, 1998 and 1997 23
Statements of Operations for the Years Ended September 30, 1998, 1997 and 1996 24
Statements of Stockholders' Equity for the Years Ended September 30, 1998, 1997 and 1996 25
Statements of Cash Flows for the Years Ended September 30, 1998, 1997, and 1996. 26
Notes to Financial Statements 27-34
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.
21
<PAGE> 22
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 at September 30, 1998 and 1997, and the results of its
operations and its cash flows for each of the three fiscal years in the period
ended September 30, 1998, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
San Jose, California
October 16, 1998
22
<PAGE> 23
BALANCE SHEETS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
SEPTEMBER 30, SEPTEMBER 30,
(Thousands, except share amounts) 1998 1997
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 10,172 $ 6,937
Accounts receivable, less allowances for sales returns and
doubtful accounts of $525 and $245 5,971 7,284
Inventories 4,080 3,176
Deferred tax asset -- 1,950
Other current assets 426 332
--------- ---------
Total current assets 20,649 19,679
--------- ---------
Property and equipment:
Machinery and equipment 10,976 8,265
Furniture and fixtures 5,193 3,931
Leasehold improvements 412 403
--------- ---------
16,581 12,599
Accumulated depreciation and amortization (10,021) (8,215)
--------- ---------
6,560 4,384
Other assets 1,540 2,977
--------- ---------
$ 28,749 $ 27,040
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,315 $ 1,582
Accrued salaries, wages and employee benefits 732 698
Other accrued liabilities 2,489 997
Deferred income on sales to distributors 543 146
Current portion of capitalized lease obligations 1,644 1,091
--------- ---------
Total current liabilities 8,723 4,514
--------- ---------
Long-term liabilities 4,448 3,308
--------- ---------
Commitments and contingencies (see Notes 7 and 9.)
Stockholders' equity:
Common stock to be issued for litigation settlement 1,406 --
Preferred stock, $0.01 par value; 1,000,000 shares authorized,
no shares outstanding -- --
Common stock, $0.01 par value; 40,000,000 shares authorized,
30,726,900 and 30,427,700 shares outstanding 307 304
Additional paid-in capital 124,221 123,760
Accumulated deficit (110,356) (104,846)
--------- ---------
Total stockholders' equity 15,578 19,218
--------- ---------
$ 28,749 $ 27,040
========= =========
</TABLE>
See accompanying notes to financial statements
23
<PAGE> 24
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(Thousands, except per share amounts) Year Ended September 30,
- ----------------------------------------------------------------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Revenues $28,109 $31,423 $31,338
------- ------- -------
Costs and expenses:
Cost of revenues 17,290 19,498 20,680
Research and development 4,587 3,446 3,303
Marketing, general and administrative 6,884 5,397 4,579
------- ------- -------
28,761 28,341 28,562
------- ------- -------
Income (loss) from operations (652) 3,082 2,776
Interest expense (375) (357) (240)
Interest and other income, net 614 382 403
Settlement costs (3,156) (300) --
------- ------- -------
Income (loss) before provision for income
taxes (3,569) 2,807 2,939
Income tax (provision) benefit (1,941) 1,880 (88)
------- ------- -------
Net income (loss) $(5,510) $ 4,687 $ 2,851
======= ======= =======
Net income (loss) per share:
Basic $ (0.18) $ 0.15 $ 0.09
Diluted $ (0.18) 0.15 0.09
Shares used in per share calculations:
Basic 30,635 30,305 30,070
Diluted 30,635 32,180 32,148
======= ======= =======
</TABLE>
See accompanying notes to financial statements
24
<PAGE> 25
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Years ended September 30, 1998, 1997 and 1996
Common Stock Common Stock
Additional to be issued for
Paid-in Litigation Accumulated
(In Thousands) Shares Amount Capital Settlement Deficit Total
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1995 29,770 $298 $122,854 $ -- $(112,384) $10,768
Issuance to employees under 339
employee stock plans -- 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 -- (109,533) 14,193
Issuance to employees under
employee stock plans 183 2 336 -- -- 338
Net income -- -- -- -- 4,687 4,687
------ ---- -------- ------ --------- -------
Balance at September 30, 1997 30,428 304 123,760 -- (104,846) 19,218
Issuance to employees under
employee stock plans 299 3 461 -- -- 464
Common stock to be issued -- -- -- 1,406 -- 1,406
for litigation settlement
Net loss -- -- -- -- (5,510) (5,510)
------ ---- -------- ------ --------- -------
Balance at September 30, 1998 30,727 $307 $124,221 $1,406 $(110,356) $15,578
====== ==== ======== ====== ========= =======
</TABLE>
See accompanying notes to financial statements
25
<PAGE> 26
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
Year Ended September 30,
------------------------------------
(Increase/(decrease) in cash and cash equivalents, 1998 1997 1996
in thousands)
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(5,510) $ 4,687 $ 2,851
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Depreciation and amortization 2,123 1,808 1,173
Common stock to be issued for litigation 1,406 -- --
settlement
(Gain) on disposal of equipment -- (62) (10)
(Benefit) provision for deferred taxes 1,950 (1,950) --
Changes in assets and liabilities:
Accounts receivable 1,313 951 (4,335)
Inventories (904) 2,176 (3,122)
Other current assets (94) 36 (156)
Other assets (175) (446) (1,068)
Accounts payable 1,733 (4,689) 4,333
Accrued salaries, wages and employee benefits 34 112 119
Other accrued liabilities and deferred income on sales
to distributors 1,889 119 74
Long term obligations (180) (150) (126)
------- ------- -------
Net cash provided by (used in) operating activities 3,586 2,592 (267)
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (757) (227) (334)
Proceeds on disposal of equipment -- 96 10
Release of funds held in escrow 1,300 1,200 1,000
Short-term investments in restricted account -- -- 3,000
------- ------- -------
Net cash provided by investing activities 543 1,069 3,676
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on short-term borrowings -- -- (3,000)
Payments of capital lease obligations (1,357) (1,036) (691)
Proceeds from issuance of stock 464 338 574
------- ------- -------
Net cash used in financing activities (894) (698) (3,117)
------- ------- -------
Net increase in cash and cash equivalents 3,235 2,963 292
Cash and cash equivalents at beginning of period 6,937 3,974 3,682
------- ------- -------
Cash and cash equivalents at end of period $10,172 $ 6,937 $ 3,974
------- ------- -------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest $ 375 $ 345 $ 264
Taxes 163 53 21
Capitalized lease obligations incurred for the
acquisition of equipment $ 3,230 $ 1,224 $ 3,367
</TABLE>
See accompanying notes to financial statements
26
<PAGE> 27
NOTES TO FINANCIAL STATEMENTS
NOTE 1. THE COMPANY
SEEQ Technology Incorporated (the "Company" or "SEEQ"), 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 1998 and
1997 are 52-week years and fiscal 1996 is 53 weeks. Two customers accounted for
approximately 41% and 14% of revenues in fiscal 1998, two customers accounted
for approximately 25% and 17% of revenues in fiscal 1997, and two customers
accounted for approximately 42% and 10% of revenues in fiscal 1996. Sales to
foreign customers in fiscal years 1998, 1997, and 1996 represented 21%, 31%, and
25%, respectively, of revenues during such years. During fiscal years 1998,
1997, and 1996, approximately $2.9 million, $3.1 million, and $2.0 million
respectively, represented sales to customers in Europe, and $3.1 million, $6.1
million, and $5.8 million, respectively, represented sales to customers in the
Asia/Pacific region. Sales to other foreign geographical regions during such
years were not material.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION. The preparation of financial statements in conformity
with generally accepted accounting principals requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from these estimates.
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 categorizes its debt
and equity securities, which are comprised of (i) investments in high grade
commercial paper included in cash and cash equivalents and, (ii) 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.
FAIR VALUE OF FINANCIAL INSTRUMENTS. For certain of the Company's financial
instruments, including cash and cash equivalents, short term investments and
accounts receivable, the carrying amounts approximate fair value.
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 (in thousands):
- ----------------------------------------------------
<TABLE>
<CAPTION>
September 30,
1998 1997
<S> <C> <C>
Work in process $ 1,686 $ 437
Finished goods 2,394 2,739
------- -------
$ 4,080 $ 3,176
======= =======
</TABLE>
PROPERTY AND EQUIPMENT. Property and equipment is recorded 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 1998, the Company did not capitalize any such non-recurring product
transfer costs and amortized $312,000 of accumulated costs. During fiscal 1997,
the Company capitalized $250,000 of non-recurring product transfer costs and
amortized $517,000 of accumulated costs. During fiscal 1996, the Company
capitalized $835,000 of non-recurring
27
<PAGE> 28
product transfer costs of which $231,000 was amortized in the same period. At
September 30, 1998, remaining capitalized non-recurring product transfer costs
aggregated $26,000.
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 are
recognized at the time of shipment. The level of inventory maintained at
international distributors that is subject to returns and allowances is not
material.
CONCENTRATION OF CREDIT RISK. Financial instruments which potentially subject
the Company to concentration of credit risk consist primarily 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 in the U.S., Europe and Asia/Pacific Rim. The Company performs ongoing
credit evaluations of its customers and generally does not require collateral.
At September 30, 1998, outstanding receivables from two customers accounted for
26%, and 19%, of the Company's accounts receivable. At September 30, 1997,
outstanding receivables from three customers accounted for 27%, 24%, and 10% of
the Company's accounts receivable
NET INCOME (LOSS) PER SHARE. The Company adopted Statement of Accounting
Standards No. 128 ("SFAS 128), Earnings per Share ("EPS"), which was issued in
February 1997. SFAS 128 requires presentation of both basic and diluted EPS on
the income statement. For all periods presented, basic EPS is computed by
dividing net income available to common stockholders (numerator) by the weighted
average number of common shares outstanding (denominator) during the period. In
computing diluted EPS, the average stock price for the period is used in
determining the number of shares assumed to be purchased from the exercise of
stock potions. Diluted EPS is computed using the weighted average number of
common and all potential dilutive common shares outstanding during the
period.
STOCK BASED COMPENSATION. The Company accounts for stock based compensation
using the intrinsic value method prescribed in Accounting Principles Board
opinion No. 25 "Accounting for Stock Issued to Employees." The Company's policy
is to grant options with an exercise price equal to the fair market value of the
underlying common stock as determined by the Board of Directors on the grant
date. The Company provides additional disclosures as required under Statement of
Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation."
RECENT ACCOUNTING PRONOUNCEMENTS. In June 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 130
("SFAS 130"), "Reporting Comprehensive Income." SFAS 130 establishes standards
for the reporting of comprehensive income and its components in a full set of
general-purpose financial statements for periods beginning after December 15,
1997. Comprehensive income as defined includes all changes in equity (net
assets) during the period from non-owner sources. Reclassification of financial
statements for earlier periods for comparative purposes is required.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosure About Segments
of an Enterprise and Related Information." SFAS 131 revises information
regarding the reporting of certain operating segments for periods beginning
after December 15, 1997. It also establishes standards for related disclosures
about products and services, geographic areas and major customers.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). FAS 133 establishes a new model for
accounting for derivatives and hedging activities and supersedes and amends a
number of existing accounting standards. SFAS 133 requires that all derivatives
be recognized in the balance sheet at their fair market value, and the
corresponding
28
<PAGE> 29
derivative gains or losses be either reported in the statement of operations or
as a deferred item depending on the type of hedge relationship that exists with
respect to such derivative. Adopting the provisions of SFAS 133 is not expected
to have a material effect on the Company's financial statements, which will be
effective for the Company's fiscal 2000.
NOTE 3. EXCESS FACILITY CHARGE.
During fiscal 1994, in connection with the sale of certain of the Company's
assets to Atmel, 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
reserves. The Company also recorded $915,000 of facility lease payments, broker
fees and relocation costs in connection with the sublease. During fiscal 1996,
1997, and 1998, the Company recorded $119,000, $122,000 and $122,000 of facility
lease payments in excess of the sublease amount, respectively.
NOTE 4. STOCKHOLDERS' EQUITY
PREFERRED STOCK. At September 30, 1998, 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, 1998. It
includes the Level One Communications shares issued after September 30, 1998 at
the share price as of September 25, 1998.
<TABLE>
<CAPTION>
- ------------------------------------------------------
Issuable upon Number of Shares
- ------------------------------------------------------
<S> <C>
Exercise of stock options, including
shares available for option grants 6,313,000
Level One Communications litigation
settlement 1,500,000
Periodic Purchase Plan 127,000
---------
7,940,000
---------
</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, which
was amended in August 1997 to change the definition of an acquirer. 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.
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
20% 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 20% 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 20% or
29
<PAGE> 30
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 20% 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.
EARNINGS PER SHARE. Under SFAS 128, the Company is required to disclose basic
EPS and diluted EPS, for all periods for which an income statement is presented,
which replaces the disclosures previously made for primary EPS and fully-diluted
EPS. SFAS 128 requires adoption for fiscal periods ending after December 15,
1997. Basic EPS and diluted EPS for the current reporting and comparable periods
in the prior year are as follows:
<TABLE>
<CAPTION>
Years Ended
-----------------------------------------------
September 30, September 30, September 30,
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Net income (loss) available to common stockholders $(5,510) $ 4,687 $ 2,851
======= ======= =======
Shares calculation (denominator):
Weighted average common shares outstanding 30,635 30,305 30,070
Effect of dilutive securities
Options -- 1,875 2,078
------- ------- -------
Average shares outstanding assuming dilution 30,635 32,180 32,148
------- ------- -------
Basic earnings (loss) per share $ (0.18) $ 0.15 $ 0.09
======= ======= =======
Diluted earnings (loss) per share $ (0.18) $ 0.15 $ 0.09
======= ======= =======
</TABLE>
NOTE 5. EMPLOYEE AND DIRECTOR 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 1998, 1997, and
1996, 41,000, 29,000, and 30,000 shares were issued at weighted average purchase
prices of $2.02, $2.33, and $2.36 per share, respectively. At September 30,
1998, 127,000 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 8,760,000 shares of common stock have been reserved for issuance under the
combined plan, including an increases of 1,400,000 and 1,000,000 shares of
common stock, approved by the stockholders at the Annual Meetings held March 21,
1996, and March 10, 1998 respectively. 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, 1998
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 2008.
30
<PAGE> 31
Due to the decline in the Company's stock price, and the need to retain and
motivate key employees, on September 15, 1998 the Board of Directors authorized
the re-pricing of all outstanding employee stock options to $1.0625, the fair
market value on that date. All options which employees elected to reprice would
vest over a five-year period from the original date of grant, and would not be
exercisable before September 15, 1999.
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 50,000 shares were granted. In March 1998, the stockholders approved an
amendment to the plan to provide an additional 100,000 shares were allowed to be
granted under the plan, thus bringing the total number of options reserved under
the plan to 350,000 shares. 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 (in thousands, except per share amounts):
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Options Outstanding
--------------------------------
Options Weighted Average
Available Options Exercise Price
For Grant
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at September 30, 1995 1,164 3,369 1.4000
Additional shares authorized 1,400
Granted (1,013) 1,013 3.3775
Exercised -- (309) 1.3151
Canceled 109 (109) 2.2653
------ ------ -------
Balance at September 30, 1996 1,660 3,964 1.8925
Granted (1,171) 1,171 1.9485
Exercised -- (154) 1.7595
Canceled 595 (594) 3.2481
------ ------ -------
Balance at September 30, 1997 1,084 4,387 1.7283
Additional shares authorized 1,100
Granted (4,111) 4,111 1.2409
Exercised -- (258) 1.4781
Canceled 3,775 (3,775) 1.8557
====== ====== =======
Balance at September 30, 1998 1,848 4,465 1.1863
====== ====== =======
Options exercisable at September 30, 1998 -- 845 $1.643
====== ====== =======
</TABLE>
The following table summarizes options outstanding and exercisable by price
range as of September 30, 1998.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
--------------------------------------------------------------------------------
Avg. Remaining Weighted Weighted Average
Contractual Life Average Exercise Price
Exercise Price Range Options (Years) Exercise Price Options
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$1.0000 - $1.0000 113,208 4.87 $1.0000 113,136 $1.0000
$1.0625 - $1.0625 3,527,458 9.97 1.0625 -- 0.0000
$1.1250 - $2.1250 666,337 5.50 1.3944 587,677 1.3726
$2.3125 - $2.4063 45,433 9.08 2.3375 35,433 2.3357
$2.4380 - $3.6880 112,500 7.25 3.5587 108,452 3.5562
----------------- --------- ---- ------- ------- -------
$1.0000 - $3.6880 4,464,936 9.09 $1.1863 844,698 $1.6434
================= ========= ==== ======= ======= =======
</TABLE>
31
<PAGE> 32
As described in Note 2 to the financial statements, the Company has adopted only
the disclosure provisions as permitted by SFAS 123. As all options were granted
at an exercise price equal to the market value of the Company's common stock at
the date of grant, no compensation cost has been recognized in the Company's
statements of operations.
For pro forma disclosure purposes only, the Company has calculated the estimated
grant date fair value using the Black-Scholes Model. The Black-Scholes Model, as
well as other currently accepted option valuation models, was developed to
estimate the fair value of freely tradable, fully transferable options without
vesting restrictions, which significantly differ from the Company's stock option
awards. These models also require highly subjective assumptions, including
future stock price volatility and expected time until exercise which greatly
affect the grant date fair value.
The following weighted average assumptions are included in the estimated grant
date fair value calculations for the Company's stock option awards:
<TABLE>
<CAPTION>
EMPLOYEE STOCK OPTIONS EMPLOYEE STOCK PURCHASE PLAN
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Expected dividend yield 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Risk-free interest rate 4.6% 5.8% 5.8% 4.5% 5.30% 5.40%
Expected volatility 89.0% 67.9% 63.4% 89.2% 95.70% 54.2%
Expected life (in years) 4.0 4.0 4.0 0.5 0.5 0.5
</TABLE>
The weighted average estimated grant date fair value, as defined by SFAS 123,
for options granted during fiscal 1998, 1997 and 1996 was $0.91, $1.05 and $1.72
per option, respectively.
PRO-FORMA NET INCOME (LOSS) AND NET INCOME (LOSS) PER SHARE. Had the Company
recorded compensation costs based on the estimated grant date fair value (as
defined by SFAS 123) for awards granted under its stock option plans and stock
purchase plan, the Company's net income (loss) and net income (loss) per share
would have been reduced to the pro-forma amounts below for the years ended
September 30, 1998, 1997, and 1996 (in thousands, except per-share amounts):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net income (loss) - pro-forma $(6,934) $4,192 $2,162
Net income (loss) per share - pro-forma
Basic $ (0.23) $ 0.14 $ 0.07
Diluted $ (0.23) $ 0.13 $ 0.07
</TABLE>
NOTE 6. LINE OF CREDIT
In August 1996, the Company entered into a one-year revolving line of credit
agreement with Silicon Valley Bank. In August 1997, the Company renewed this
credit agreement. The agreement expired in August, 1998, and thus was not in
place at the end of the fiscal year.
NOTE 7. LONG-TERM OBLIGATIONS AND COMMITMENTS
<TABLE>
<CAPTION>
Long-term obligations consisted of the following (in thousands):
- ---------------------------------------------------------------
September 30,
1998 1997
- ---------------------------------------------------------------
<S> <C> <C>
Capitalized lease obligations $ 5,341 $ 3,468
Facility lease obligations 751 931
------- -------
6,092 4,399
Less: current portion (1,644) (1,091)
------- -------
$ 4,448 $ 3,308
======= =======
</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
32
<PAGE> 33
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) 1998 1997
- ----------------------------------------------------------------
<S> <C> <C>
Machinery and equipment $ 5,983 $ 3,505
Furniture and fixtures 1,934 1,181
------- --------
7,916 4,686
Accumulated amortization (2,427) (1,154)
======= ========
$ 5,489 $ 3,532
======= ========
</TABLE>
Minimum future lease payments (in thousands) for non-cancelable leases as of
September 30, 1998 were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Years ended Operating Capital
September 30, Leases Leases
- --------------------------------------------------------------------
<S> <C> <C>
1999 $ 658 $ 1,982
2000 687 1,566
2001 702 1,082
2002 650 459
2003 525 383
Thereafter 657 638
------ --------
Total minimum lease payments $3,879 6,110
------
Less: amount representing interest (770)
--------
Present value of minimum
lease payments 5,340
Less: current portion (1,644)
--------
Long term lease obligations $ 3,696
========
</TABLE>
Rental expense under all operating leases was $561,000 for fiscal 1998, $597,000
for fiscal 1997, and $634,000 for fiscal 1996.
NOTE 8. INCOME TAXES
At September 30, 1998, the Company had net operating loss carryforwards of
approximately $94,631,000 for federal income tax purposes, which may be utilized
to reduce future taxable income. These carryforwards expire in varying amounts
from 1999 through 2018. 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. For fiscal 1996 the Company recorded a provision of $88,000 for
income taxes. For fiscal 1997 the Company recognized a portion of its deferred
tax asset in the amount of $1,950,000. This was partially offset by a provision
of $70,000 for income taxes. For fiscal 1998 the Company reversed the previously
recognized portion of its deferred tax asset of $1,950,000. This was partially
offset by various adjustments of $9,000. 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.
33
<PAGE> 34
Deferred tax assets (liabilities) are comprised of the following (in thousands):
<TABLE>
<CAPTION>
September 30, 1998 September 30, 1997
------------------ ------------------
<S> <C> <C>
Federal and state loss and credit carryforwards $ 34,474 $ 37,461
Other 1,308 1,287
Deferred tax assets 35,782 38,748
Valuation allowance (35,757) (36,787)
Deferred tax liabilities (25) (11)
Net deferred tax assets $ -- $ 1,950
======== ========
</TABLE>
In applying SFAS 109, management has fully reserved net deferred tax assets that
may be realized beyond one year after the balance sheet date because of the
uncertainty regarding their realization. The deferred tax assets valuation
allowance at September 30, 1998 and September 30, 1997 is attributed to U.S.
federal and state deferred tax assets. Management believes sufficient
uncertainty exists such that a full valuation allowance against those net
deferred tax assets is required at September 30, 1998. If these reserved
deferred tax assets are recognized, they will reduce the Company's federal and
state tax provisions. During fiscal 1997, the Company recognized $1,950,000 of
assets previously reserved, reducing the valuation allowance by a corresponding
amount. During fiscal 1998, due to changes in business conditions, the Company
again reserved the previously recognized $1,950,000 of assets.
NOTE 9. LITIGATION
On September 25, 1998, SEEQ settled a lawsuit filed by Level One Communications,
Level One Communications, Inc. v. SEEQ Technology, Inc.. SEEQ agreed to take a
fully-paid up license to Level One's asserted technology, and an initial
agreement between Level One and SEEQ not to sue or counter-sue each other for
patent infringement or otherwise for a period of two years from the date of
execution of the settlement agreement. None of the Company's product lines will
be affected by the settlement, nor will any continuing royalty or fee obligation
exist in the future with respect to Level One's asserted technology. The Company
took a one-time charge for the settlement of $3,156,000 in the fourth quarter
ending September 30, 1998. Settlement costs included a cash payment of
$1,750,000, included in accrued liabilities, and common stock issuance to Level
One.
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 arose out of a nitrogen supply contract between the Company
and the plaintiff. The Complaint purported to state causes of action for breach
of contract and promissory estoppel. The Complaint alleged that as a result of
purported breaches of the nitrogen supply contract, the Company was obligated to
pay plaintiff approximately $1,300,000 plus cost of suit, not including
attorney's fees. On September 9, 1997, SEEQ and Praxair agreed to settle the
lawsuit. Under the terms of settlement, SEEQ paid Praxair $300,000. In exchange,
SEEQ received a full general release of known and unknown claims and an
agreement that the lawsuit would be dismissed with prejudice. The case was
dismissed with prejudice on September 11, 1997.
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.
34
<PAGE> 35
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.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
<TABLE>
<CAPTION>
1. Exhibits
--------
<S> <C>
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).
</TABLE>
35
<PAGE> 36
<TABLE>
<S> <C>
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, 1997.
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).
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).
10.10 License Agreement between the Company and Silicon Integrated Systems
Corporation effective as of September 26, 1997. (Subject to
confidential treatment.)
13.1 Registrant's Proxy Statement for the 1998 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.
23.1* Consent of PricewaterhouseCoopers LLP, Independent Accountants.
24.1 Power of Attorney. Reference is made to the Signature Page.
(a) Reports on Form 8-K. The Company filed an 8-K Report on August 26,
1997.
27.1* Financial Data Schedules
* Filed Herewith
</TABLE>
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
36
<PAGE> 37
(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.
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, 1998
37
<PAGE> 38
POWER OF ATTORNEY
Know All Persons By These Presents, that each person whose signature appears
below constitutes and appoints Phillip J. Salsbury and Gary R. Fish, and each of
them, as his true and lawful attorneys-in-fact and agents, with full power of
substitution and re-substitution, 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, 1998
- ----------------------------- and Director
(Phillip J. Salsbury) (Principal Executive Officer)
/s/ Gary R. Fish Vice President, Finance December 18, 1998
- ---------------- and Administration
(Gary R. Fish) (Principal Financial
and Accounting Officer)
/s/ Alan V. Gregory Chairman of the Board December 18, 1998
- ---------------------- and Director
(Alan V. Gregory)
/s/ Charles Harwood Director December 18, 1998
- ----------------------
(Charles Harwood)
/s/ Charles Giancarlo Director December 18, 1998
- ----------------------
(Charles Giancarlo)
</TABLE>
38
<PAGE> 39
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>
1996
Allowance for Doubtful Accounts
and Sales Returns $338 $-- $ 898 $ 996(1) $240
---- --- ------ ------ ----
1997
Allowance for Doubtful Accounts
and Sales Returns $240 $10 $1,315 $1,320(1) $245
---- --- ------ ------ ----
1998
Allowance for Doubtful Accounts
and Sales Returns $245 $28 581 329(1) $525
---- --- ------ ------ ----
</TABLE>
(1) Doubtful account write-offs and customer returns and price adjustments
(S-1)
<PAGE> 40
EXHIBIT INDEX
<TABLE>
<S> <C>
Exhibit
No. Document
---- --------
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, 1997.
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).
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).
10.10 License Agreement between the Company and Silicon Integrated Systems
Corporation effective as of September 26, 1997. (Subject to
confidential treatment.)
13.1 Registrant's Proxy Statement for the 1998 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.
23.1* Consent of PricewaterhouseCoopers LLP, Independent Accountants.
24.1 Power of Attorney. Reference is made to the Signature Page.
(a) Reports on Form 8-K. The Company filed an 8-K Report on August 26,
1997.
27.1* Financial Data Schedules
* Filed Herewith
</TABLE>
<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-8 (No. 33-27419, No. 33-6554 and No. 33-35838) of SEEQ
Technology Incorporated of our report dated October 16, 1998, appearing on page
22 of this Form 10-K.
/s/ PricewaterhouseCoopers LLP
San Jose, California
December 18, 1998
39
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000702756
<NAME> SEEQ TECHNOLOGY INC
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<CASH> 10,172
<SECURITIES> 0
<RECEIVABLES> 6,496
<ALLOWANCES> 525
<INVENTORY> 4,080
<CURRENT-ASSETS> 20,649
<PP&E> 16,581
<DEPRECIATION> 10,021
<TOTAL-ASSETS> 28,749
<CURRENT-LIABILITIES> 8,723
<BONDS> 4,448
0
0
<COMMON> 307
<OTHER-SE> 15,271
<TOTAL-LIABILITY-AND-EQUITY> 28,749
<SALES> 28,109
<TOTAL-REVENUES> 28,109
<CGS> 17,290
<TOTAL-COSTS> 17,290
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 375
<INCOME-PRETAX> (3,569)
<INCOME-TAX> 1,941
<INCOME-CONTINUING> (5,510)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,510)
<EPS-PRIMARY> (0.18)
<EPS-DILUTED> (0.18)
</TABLE>
