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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the quarterly period ended December 31, 1998
[ ] 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
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SEEQ TECHNOLOGY INCORPORATED
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(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 94-2711298
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
47200 Bayside Parkway
Fremont, California 94538
(510) 226-7400
(Address, including zip code, of Registrant's principal
executive offices and telephone number, including area code)
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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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<S> <C>
Common Stock, $0.01 par value 32,247,752
(Class of common stock) (Shares outstanding at December 31, 1998)
</TABLE>
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This report on Form 10-Q, including all exhibits, contains 13 pages.
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SEEQ TECHNOLOGY INCORPORATED
FORM 10-Q
Table of Contents
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements............................................ 3
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................... 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................... 18
Item 2. Changes in Securities and Use of Proceeds....................... 18
Item 3. Defaults upon Senior Securities................................. 18
Item 4. Submission of Matters to a Vote of Security Holders............. 18
Item 5. Other Information................................................ 18
Item 6. Exhibits and Reports on Form 8-K................................. 18
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SEEQ TECHNOLOGY INCORPORATED
CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Net revenues $ 5,633 $ 7,552
Cost of revenues 4,213 4,183
-------- --------
Gross profit 1,420 3,369
Operating expenses
Research and development 1,347 850
Marketing, general and administrative 1,342 1,534
-------- --------
Total operating expenses 2,689 2,384
-------- --------
Income (loss) from operations (1,269) 985
Interest and other, net 13 47
-------- --------
Income (loss) before income taxes (1,256) 1,032
Income tax (provision) benefit -- 48
-------- --------
Net income (loss) ($ 1,256) $ 1,080
======== ========
Net income (loss) per share:
Basic
($0.04) $ 0.04
Diluted ($0.04) $ 0.03
Shares used in per share calculation:
Basic 31,994 30,473
Diluted 31,994 32,556
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</TABLE>
See accompanying notes to condensed financial statements.
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SEEQ TECHNOLOGY INCORPORATED
CONDENSED BALANCE SHEETS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
BALANCE SHEETS
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December 31, September 30,
(Thousands, except share amounts) 1998 1998
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<S> <C> <C>
ASSETS
Current assets:
Cash, cash equivalents and restricted cash $10,226 $10,172
Accounts receivable, less allowances for sales
returns and doubtful accounts of $525 and $245 3,568 5,971
Inventories 3,333 4,080
Other current assets 391 426
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Total current assets 17,518 20,649
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Property and equipment, net 6,143 6,560
Other assets 147 1,540
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$23,808 $28,749
=========================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
Accounts payable $ 2,012 $ 3,315
Accrued salaries, wages and employee benefits 637 732
Other accrued liabilities 734 2,489
Deferred income on sales to distributors 458 543
Current portion of capitalized lease obligations 1,612 1,644
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Total current liabilities 5,453 8,723
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Long-term liabilities 4,017 4,448
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Total stockholders' equity 14,338 15,578
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$23,808 $28,749
=========================================================================================
</TABLE>
See accompanying notes to financial statements
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SEEQ TECHNOLOGY INCORPORATED
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
-----------------------
Dec. 31, Dec. 31,
1998 1997
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) ($ 1,256) $ 1,080
Adjustments to reconcile net income (loss) to
cash provided by operating activities:
Depreciation and amortization 559 463
Deferred taxes -- (79)
Changes in assets and liabilities:
Accounts receivable 2,403 1,513
Inventories 747 (629)
Other assets 27 (28)
Accounts payable (1,303) 774
Accrued liabilities and long term obligations (1,981) (284)
-------- --------
Net cash provided by (used for) operating activities (804) 2,810
-------- --------
INVESTING ACTIVITIES:
Capital expenditures (117) (74)
Release of funds held in escrow 1,376 --
-------- --------
Net cash provided by (used for) investing activities 1,259 (74)
-------- --------
FINANCING ACTIVITIES:
Payments of capital lease obligations (417) (268)
Proceeds from issuance of stock 16 111
-------- --------
Net cash used for financing activities (401) (157)
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Net increase in cash and cash equivalents 54 2,579
Cash and cash equivalents at beginning of period 10,172 6,937
======== ========
Cash and cash equivalents at end of period $ 10,226 $ 9,516
======== ========
</TABLE>
See accompanying notes to condensed financial statements.
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SEEQ TECHNOLOGY INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements of SEEQ
Technology Incorporated ("SEEQ" or the "Company") have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the rules and regulations of the Securities and Exchange
Commission. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements and should be read in conjunction with the financial
statements and the notes thereto included in the Company's Annual Report to
Stockholders for the fiscal year ended September 30, 1998. These financial
statements reflect, in the opinion of management, all adjustments (which include
only normal recurring adjustments) necessary to present fairly the financial
position and results of operations as of and for the periods indicated.
The results of operations for the three months ended December 31, 1998 are
not necessarily indicative of the results expected for the year ending September
30, 1999.
For purposes of presentation, the Company has shown its fiscal quarters as
ending on December 31, March 31, June 30 and 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. The fiscal quarter ends are actually December 27, March
28, June 27 and September 26 for the year ending September 30, 1999, and
December 28, March 29, June 28 and September 27 for the year ending September
30, 1998.
NOTE 2. INVENTORIES
<TABLE>
<CAPTION>
- ---------------------------------------------------------------
December 31, September 30,
1998 1998
------------- --------------
<S> <C> <C>
Work in process $ 1,186 $ 1,686
Finished goods 2,147 2,394
- ---------------------------------------------------------------
$ 3,333 $ 4,080
===============================================================
</TABLE>
NOTE 3. NON-RECURRING PRODUCTION TRANSFER COSTS
Non-recurring costs such as tooling and engineering costs resulting from
transferring production of current products 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
associated with the development of new products are expensed as research and
development costs when incurred. During the three month periods ended December
31, 1999 and December 31, 1998, the Company did not capitalize any of such
costs. Amortization of aggregate capitalized non-recurring costs for the three
month periods ended December 31, 1998 and December 31, 1997 was $25,000 and
$119,000, respectively, and remaining capitalized non-recurring production
transfer costs aggregated $1,000 and $219,000 respectively.
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NOTE 4. EARNINGS PER SHARE
Basic EPS is computed by dividing net income available to common
stockholders (numerator) by the weighted average number of common shares
outstanding (denominator) during the period. In computing diluted EPS, the
average stock price for the period is used in determining the number of shares
assumed to be purchased from the exercise of stock potions. Diluted EPS is
computed using the weighted average number of common and all potential dilutive
common shares outstanding during the period.
<TABLE>
<CAPTION>
(In thousands, except per share amounts)
Three Months Ended
---------------------------
December 31, December 31,
1998 1997
---------------------------
<S> <C> <C>
Net income (loss) (numerator) ($ 1,256) $ 1,080
Shares calculation (denominator):
Weighted average shares outstanding 31,994 30,473
Effect of dilutive securities:
Options -- 2,083
Average shares outstanding assuming dilution 31,994 32,556
-------- --------
Basic earnings per share ($ 0.04) $ 0.04
======== ========
Diluted earnings per share ($ 0.04) $ 0.03
======== ========
</TABLE>
Options to purchase 5,020,000 shares of common stock were outstanding
during the three month period ended December 31, 1998, but were not included in
the computations of diluted EPS as their effect was anti-dilutive. Options to
purchase 330,000 shares of common stock were outstanding during the three month
period ended December 31, 1997 but were not included in the computations of
diluted EPS as the option exercise price was higher than the average market
price of the common shares.
NOTE 5. RECENT ACCOUNTING PRONOUNCEMENTS
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 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.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Interim
Condensed Financial Statements and Notes thereto and the SEEQ Technology
Incorporated Annual Report on Form 10-K for the fiscal year ended September 30,
1998.
This report contains forward looking statements that involve risks and
uncertainties. The statements contained in this report 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 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 report 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 discussed in any such forward looking statements. Factors
that might cause such a difference include, but are not limited to those
discussed under the caption "Factors Affecting Operating Results" contained
herein and under the caption "Business Risks" in the Company's fiscal 1998
annual report on form 10-K.
RESULTS OF OPERATIONS
Revenues
Net revenues were $5,633,000 in the first quarter of fiscal 1999, a
decrease of 25% from net revenues of $7,552,000 for the first quarter of fiscal
1998. The change in revenue is primarily attributable to a decrease in revenues
from the Company's media access controller product line partially offset by an
increase in the Company's physical layer product line. The product mix continued
to shift toward Fast Ethernet and Gigabit Ethernet products. In the first
quarter of fiscal 1999, products servicing this market accounted for
approximately 85% of revenues compared to 69% of revenues for the first quarter
of fiscal 1997.
Gross Product Margins
The Company includes in cost of revenues all costs associated with
subcontractor manufacturing, electrical testing, subcontractor assembly and
final test of its integrated circuits and subsystems, warehousing, shipping,
product returns and reserves for inventory obsolescence. Allowances for product
returns are netted against revenues. Gross profit for the first quarter of
fiscal 1999 was $1,420,000 or 25% of net revenues, a decrease of $1,949,000
compared to $3,369,000 or 45% of net revenues in the first quarter of 1998. The
decrease in gross profit margins is primarily attributable to lower sales, a
shift in product mix toward lower margin physical layer products, and lower
product yields, partly offset by better factory utilization and lower charges
for inventory reserves. Gross margins in future periods will be affected
primarily by revenue levels and changes in product mix, average selling prices,
factory utilization, wafer yields, the introduction of new products, and changes
in manufacturing costs.
Research and Development
Research and development expenditures increased $497,000 from $850,000 in
the first quarter of fiscal 1998 to $1,347,000 in the first quarter of fiscal
1999, primarily due to an increase in payroll, tooling costs, consulting and
outside services. The increase in spending was due to a higher level of new
product development activity. As a percentage of net revenues, research and
development expenditures increased from 11% in the first quarter of fiscal 1998
to 24% in the first quarter of fiscal 1999. The Company expects that research
and development spending will remain at levels similar to the first quarter of
1999 in absolute dollars for the next several quarters but may vary as a
percentage of net revenues.
Marketing, General and Administrative Expenses
Marketing, general and administrative expenses decreased from $1,534,000,
or 20% of revenues in the first quarter of fiscal 1997 to $1,342,000, or 24% or
revenues in the first quarter of fiscal 1998. The absolute dollar decrease is
primarily attributable to lower commissions for outside sales representatives
due
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to lower revenues, and lower legal fees. The Company anticipates that the level
of marketing, general and administrative expenses will vary in future periods
based on expected revenue growth.
Interest and other, net
Interest expense increased from $88,000 in the fiscal quarter of fiscal
1998 to $102,000 in the first quarter of fiscal 1999, due primarily to increased
capital lease obligations. Interest and other income, net decreased from
$135,000 in the first quarter of fiscal 1998 to $115,000 in the first quarter of
fiscal 1999 primarily due to lower interest rates.
Income Taxes
For the first three months of fiscal 1999 the Company did not record a
provision for income taxes, due to the year to date loss. For the first three
months of fiscal 1998 the Company recognized a portion of its deferred tax asset
in the amount of $79,000. This was partially offset by a provision of $31,000
for income taxes. The Company's provisions were computed by applying the
estimated annual tax rate to income taxes, taking into account net operating
loss carryforwards and alternative minimum taxes.
LIQUIDITY AND CAPITAL RESOURCES
The Company has satisfied its cash requirements principally through cash
flow from operations, borrowings under bank lines of credit, capital lease
financing and the public and private sale of securities.
The Company believes that existing sources of liquidity, anticipated cash
flow from operations, and borrowings under the Company's credit facility will be
adequate to satisfy its cash requirements at least 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 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.
Issuance of additional equity securities could result in dilution to
stockholders. The inability to fund capital requirements would have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company's cash, cash equivalents and restricted cash balance increased
from $10,172,000 as of September 30, 1998 to $10,226,000 as of December 31,
1998, primarily due to a release of funds held in escrow, partially offset by
cash used by operating activities, and payments of capital lease obligations.
Operating Activities
Cash flows used by operating activities were $804,000 for the three months
ended December 31, 1998, compared to cash provided by operating activities of
$2,810,000 for the three months ended December 31, 1997. The change is primarily
a result of a net loss in the first quarter of 1999 compared to a net profit in
the first quarter of 1998, coupled with changes in working capital.
Investing Activities
Cash flows provided by investing activities were $1,259,000 during the
first three months of fiscal 1999, compared to cash used of $74,000 during the
first three months of fiscal 1998. The difference is primarily attributable to a
release of funds held in escrow.
Financing Activities
Cash flows used for financing activities were $401,000 in the three month
period ended December 31, 1998 compared to $157,000 in the three month period
ended December 31, 1997. Net proceeds from the issuance of stock pursuant to
stock options and the Company's employee periodic stock purchase plan were
$16,000 for the first three months of fiscal 1999 compared to $111,000 for the
first three months of fiscal 1998. Principal payments against capital lease
obligations were $417,000 for the three months ended December 31, 1998, compared
to $268,000 for the three months ended December 31, 1997.
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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. To date, the
Company has not utilized the line of credit.
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
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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
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,
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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 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
12
<PAGE> 13
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.
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.
13
<PAGE> 14
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 May, 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 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.
14
<PAGE> 15
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 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'
15
<PAGE> 16
products and general economic conditions. Because the Company does not currently
manufacture its own semiconductor wafers, the Company is vulnerable to process
technology advances utilized by competitors to manufacture higher performance or
lower cost products. There is no assurance that the Company will be able to
compete successfully in the future.
PATENTS, LICENSES AND INTELLECTUAL PROPERTY CLAIMS
The Company's success depends in part on its ability to obtain patents,
licenses and other intellectual property rights covering its products and
manufacturing processes. To that end, the Company has in the past acquired
certain patents and patent licenses and intends to continue to seek patents on
its inventions and manufacturing processes in appropriate circumstances. The
process of seeking patent protection can be long and expensive and there can be
no assurance that patents will issue from currently pending or future
applications or that existing patents or any new patents that may be issued will
be of sufficient scope or strength to provide meaningful protection or any
commercial advantage to the Company. The Company may be subject to or may
initiate interference proceedings in the patent office, which can demand
significant financial and management resources. As is typical in the
semiconductor industry, the Company has from time to time received, and may in
the future receive, communications alleging possible infringement of patents or
other intellectual property rights of others. Based on industry practice, the
Company believes that any necessary licenses or other rights are often
obtainable on commercially reasonable terms, but no assurance can be given that
licenses would be available or that litigation would not ensue. Litigation,
which could result in substantial cost to and diversion of effort by the
Company, may be necessary to enforce patents or other intellectual property
rights of the Company or to defend the Company against claimed infringement of
the rights of others. The failure to obtain necessary licenses or other rights
or litigation could have a material adverse effect on the Company's operations.
See "Risk Factors--Litigation."
ENVIRONMENTAL AND OTHER GOVERNMENTAL REGULATIONS
Certain of the Company's foundry and assembly subcontractors are subject to
a variety of government regulations related to the discharge or disposal of
toxic, volatile or otherwise hazardous chemicals used in their manufacturing
process. The failure by the Company's subcontractors to comply with present or
future environmental regulations could result in fines, suspension of production
or cessation of operations. Such regulations could also require the
subcontractors to acquire equipment or to incur substantial other expenses to
comply with environmental regulations. If substantial additional expenses were
incurred by the Company's subcontractors, product costs could significantly
increase, thus materially adversely affecting the Company's results of
operations. Additionally, the Company is subject to a variety of government
regulations relating to its operations, such as environmental, labor and export
control regulations. While the Company believes it has all permits necessary to
conduct its business, the failure to comply with present or future regulations
could result in fines being imposed on the Company or suspension or cessation of
operations. Any failure by the Company or its subcontractors to control the use
of, or adequately restrict the discharge of hazardous substances could subject
it to future liabilities, and could have a material adverse effect on the
Company.
ATTRACTION AND RETENTION OF KEY PERSONNEL
The Company's future success is dependent upon its ability to hire and
retain qualified technical and management personnel, particularly highly skilled
design engineers involved in new product development. The competition for such
personnel is intense and there can be no assurance that the Company will be able
to attract and retain skilled and experienced personnel in the future. Any
failure to attract or retain such personnel could adversely affect the Company's
future prospects and profitability.
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
16
<PAGE> 17
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.
17
<PAGE> 18
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27.1 Financial Data Schedule
(b) No reports on Form 8-K were filed for the period for which this
report is being filed.
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<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
SEEQ TECHNOLOGY INCORPORATED
(Registrant)
Dated: February 10, 1999 By:
/s/ Phillip J. Salsbury
-------------------------------------
Phillip J. Salsbury
President and Chief Executive Officer
Dated: February 10, 1999 By:
/s/ Gary R. Fish
-------------------------------------
Gary R. Fish
Vice President, Finance, Chief
Financial Officer and Secretary
19
<PAGE> 20
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 10,226
<SECURITIES> 0
<RECEIVABLES> 3,568
<ALLOWANCES> 0
<INVENTORY> 3,333
<CURRENT-ASSETS> 17,518
<PP&E> 16,696
<DEPRECIATION> 10,553
<TOTAL-ASSETS> 23,808
<CURRENT-LIABILITIES> 5,453
<BONDS> 4,017
0
0
<COMMON> 322
<OTHER-SE> 14,016
<TOTAL-LIABILITY-AND-EQUITY> 23,808
<SALES> 5,633
<TOTAL-REVENUES> 5,633
<CGS> 4,213
<TOTAL-COSTS> 4,213
<OTHER-EXPENSES> 2,689
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 102
<INCOME-PRETAX> (1,256)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,256)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,256)
<EPS-PRIMARY> (0.04)
<EPS-DILUTED> (0.04)
</TABLE>
