-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VX9M0AKEqsC93yRViNaYaRuGuyru0MdiocVrCEFhwWiVd+tUgaigN0BJ3cForg/g HE0WxPWipE1H++pbRw2o8A== 0000891618-97-005043.txt : 19971224 0000891618-97-005043.hdr.sgml : 19971224 ACCESSION NUMBER: 0000891618-97-005043 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971223 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SEEQ TECHNOLOGY INC CENTRAL INDEX KEY: 0000702756 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 942711298 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-11778 FILM NUMBER: 97743293 BUSINESS ADDRESS: STREET 1: 47200 BAYSIDE PARKWAY CITY: FREMONT STATE: CA ZIP: 94538 BUSINESS PHONE: 5102267400 MAIL ADDRESS: STREET 1: 47200 BAYSIDE PARKWAY CITY: FREMONT STATE: CA ZIP: 94538 10-K405 1 FORM 10-K405 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended September 30, 1997 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 1,1997 as reported by NASDAQ, was approximately $102,948,000. The number of outstanding shares of the registrant's Common Stock on December 1, 1997 was 30,503,000. DOCUMENTS INCORPORATED BY REFERENCE (1) Proxy Statement for the 1997 Annual Meeting of Stockholders as filed with the Commission (the "Proxy Statement") - Part III, Items 10, 11, 12 and 13. 2 PART I This Form 10-K contains forward-looking statements that involve risks and uncertainties. The statements contained in this Form 10-K that are not purely historical are forward-looking statements within the meaning of Section27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including without limitation statements regarding the Company's expectations, beliefs, intentions or strategies regarding the future. All forward-looking statements included in this document are based on information available to the Company on the date hereof, and the Company assumes no obligation to update any such forward-looking statements. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under the caption "Risk Factors" and elsewhere in this Form 10-K. ITEM 1. BUSINESS. SEEQ Technology Incorporated (herein "SEEQ" or the "Company") is a leading supplier of Ethernet data communication products for networking applications. Ethernet is the dominant local area network ("LAN") technology today and was originally developed by Xerox and Digital Equipment Corporation in the late 1970s. As an Ethernet pioneer, SEEQ introduced the industry's first Ethernet chip set in 1982. SEEQ combines its strengths in digital 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. SEEQ's product development and marketing strategy is to sell its products to systems manufacturers who are performance and volume leaders in the information networking, telecommunications, personal computer, workstation and printer markets. The Company's more than 150 customers worldwide include such industry leaders as Apple Computer, Bay Networks, Cabletron, Cisco Systems, Compaq, Hewlett Packard, Intel, and 3COM. SEEQ's Ethernet data communication products are sold in numerous market applications of Ethernet adapter cards, workstations, media attachment units, print servers, file servers, repeaters, switches, bridges and routers. SEEQ's complete product line includes Ethernet data communication controllers, AutoDUPLEXTM Ethernet chip sets for automatic full duplex switched Ethernet applications, encoders/decoders, coaxial cable CMOS transceivers and unshielded twisted pair cable CMOS transceivers, and networking modules. In order to meet customers' needs for higher-speed LAN solutions, the Company offers products which support both Fast Ethernet and Gigabit Ethernet, which are 100Mbps and 1000 Mbps versions, respectively, of 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 2 3 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. The PC LAN network consists of the following three major hardware elements allowing data communication through a network operating system: network interface cards ("NICs"), physical media transfer communication hardware and file servers. The NIC is the hardware which allows a PC or workstation to link via the physical media of transmission to the other network users and peripherals. The physical media transfer communication hardware are the connectors used to connect the NICs to the network and the type of wire the transmission media used through the LAN. The choices of wiring include thick and thin Ethernet cable, shielded and unshielded twisted pair (telephone cable), and fiber optic cabling. The use of twisted-pair copper telephone lines is expected to remain the primary means for local connectivity to the information superhighway. Currently, unshielded twisted-pair copper wire is the most cost-effective means of transmitting information at the data rates typically required for local connectivity. Demand for LAN products has grown rapidly in recent years, as a result of the growth in corporate networks, the introduction of client/server computing, the expansion of 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. 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. 3 4 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 to provide the Company with access to next generation silicon process technology. Due to the changing demand for world-wide foundry capacity, it is the Company's objective to maintain two suppliers for each of its "high-volume" products. Presently, SEEQ has foundry arrangements with four semiconductor manufacturers; AMI Semiconductor, Ricoh, Samsung Semiconductor and TSMC. EXTEND STRATEGIC RELATIONSHIPS WITH INDUSTRY LEADERS SEEQ continues to work closely with systems manufacturers that are market and technology leaders, which in selected cases has led to strategic sole-source supplier arrangements. The Company believes that in order to build a long-term business relationship with a customer, its product design and applications teams must focus on understanding and meeting the customer's specific system requirements. This close working relationship also enables SEEQ to identify requirements for future systems being developed by the customer. In addition, the Company plays an active role in industry-wide alliances aimed at developing standards for new LAN technologies. SEEQ is a contributing member of the Fast Ethernet Alliance and the recently formed Gigabit Ethernet Alliance. TARGET EMERGING MARKETS FOR HIGH SPEED ETHERNET APPLICATIONS Fast Ethernet has emerged over the last several years as a "user friendly" solution to expanding network throughput capacity. In Fiscal 1997, Fast Ethernet related product sales accounted for approximately 55% of SEEQ's total revenues. Even as the market for Fast Ethernet solutions begins to reach its stride, 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. This device was introduced in 1997. It is expected that in fiscal 1998, the Fast Ethernet and Gigabit Ethernet markets could comprise over 50% of the total available market for the Company's data communication products. PRODUCTS Electronic data communications is one of the largest and fastest growing segments of the integrated electronics market. LANs, representing networks connecting two or more computers and peripherals within a localized geographical area (e.g., office floor, building, or campus), address the need to share information among individuals in close proximity. The most popular data communication LAN technology in the market is Ethernet. The speed of standard Ethernet is 10Mbps. Signal detection on Ethernet is based upon the concept of carrier sense multiple access with collision detection ("CSMA/CD"). Today the vast majority of Ethernet products are based on IEEE 802.3 standards. The most popular Ethernet standard is 10Base-T, the operation of Ethernet over unshielded twisted pair ("UTP") wiring. The Company's Ethernet data link controllers are used in local area network systems that can interconnect a wide variety of computers and peripheral devices. They are generally used in Ethernet-compatible systems, and replace a substantial number of discrete components previously contained on a printed circuit board. The Company also produces a set of Ethernet encoder/decoder circuits, Ethernet physical layer devices (PHYs), and Ethernet transceiver circuits. 4 5 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. In order to meet customers' needs for higher-speed LAN solutions, the Company has developed a line of products for a high speed LAN technology called Fast Ethernet. During 1994, the Company introduced its first Fast Ethernet product, the 100Mbps four port Fast Ethernet controller. In 1996, SEEQ introduced a 100Mbps physical layer device (PHY), designed to the IEEE T4 standard for use on legacy Category 3 wiring. In 1997, the Company introduced a second PHY, designed to support the IEEE TX standard which operates on the more modern Category 5 wiring. MARKETING AND SALES The Company sells its products to OEMs and distributors representing a wide range of markets, including computer networking systems, facsimile equipment, engineering workstations, modems, process controllers, and commercial data processing systems. The Company's ten largest customers accounted for approximately 68%, 79%, and 74% of net revenues for fiscal years 1995, 1996 and 1997, respectively. Apple Computer and Serial Systems (an agent for Hewlett Packard and Compaq) accounted for approximately 17% and 16% of revenues in fiscal 1995, respectively. Bay Networks and Serial Systems accounted for approximately 42% and 10% of revenues in fiscal 1996, respectively. Bay Networks and Cabletron accounted for approximately 25% and 17% of revenues in fiscal 1997, respectively. The Company coordinates all domestic sales through its Burlington, Massachusetts, Blue Bell, Pennsylvania, and Westlake, California regional sales offices in addition to its Fremont, California headquarters. The Company's four OEM sales managers work closely with manufacturers' representatives and distributors to secure design-ins and production orders. The Company markets its products through a network of independent manufacturers' representatives and independent distributors. The Company has contracted with five national distributors to stock and sell the Company's products from five stocking locations. In addition, the Company has contracted with approximately 15 independent manufacturers' representatives throughout the United States, representing over 150 individual salespeople. The representatives obtain orders for SEEQ, which the Company fills by shipping directly to the purchaser and for which the Company pays the representatives commissions based on the sales. International sales were approximately, $8.6 million, $8.0 million, and $9.8 million, representing approximately 38%, 25%, and 28% of product sales, for fiscal years 1995, 1996 and 1997, 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 volume purchase orders do not necessarily result in sales as they are generally terminable by the customer without significant penalty. Consequently, backlog at any point in time is not necessarily indicative of future sales. 5 6 RESEARCH AND DEVELOPMENT Expertise in a variety of related disciplines and functions is necessary to design, develop and manufacture mixed signal semiconductor integrated circuits which combine both digital and analog circuits. These disciplines include systems and application engineering, computer aided design, device physics, semiconductor process engineering, circuit design, reliability physics and test engineering. The Company has committed and will continue to commit substantial resources over an extended period to develop new products and technologies utilizing all of these disciplines. The Company is concentrating on the application of its proprietary technologies for the development of mixed signal integrated circuits for the data communications market. Present research and development efforts are focused on the development of Ethernet controllers and media signaling integrated circuits for the 100Mbps Fast Ethernet market and the Gigabit Ethernet market. The Company has entered into a development agreement with a third party relating to a PCI version of its Gigabit Media Access Controller. Under this agreement, the third party will provide system and software design, while SEEQ will perform circuit design and will have responsibility for manufacturing. The new device will allow SEEQ to enter the Gigabit Network Interface Card (NIC) market, the low-cost Gigabit switch market, and embedded Gigabit applications. The Company's research and development expenditures were approximately $3,069,000, $3,303,000, and $3,446,000 for the fiscal years 1995, 1996 and 1997 respectively. As of September 30, 1997, 16 employees were engaged in research and development activities. MANUFACTURING The manufacturing process for semiconductors is comprised of three basic operations: silicon wafer fabrication, assembly and testing. SEEQ has chosen to use independent silicon foundries and assembly subcontractors to fabricate and assemble its integrated circuits. This strategy enables the Company to focus its resources on the design and test areas, where the Company believes it has greater competitive advantages, and to eliminate the high cost of owning and operating semiconductor silicon fabrication and assembly facilities. Presently, SEEQ has a business relationship with 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. SEEQ's Ethernet controller products are manufactured, including final testing, by two of its foundries. Although the manufacturing process is highly controlled, equipment malfunctions, process complexities, minute impurities, or defects in the masks may cause a substantial percentage of the silicon wafers to be rejected or individual chips to be non-functional. There can be no assurance that the Company or any of its foundry suppliers will not experience yield problems in the future. 6 7 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, price, efficiency of production, the pace at which customers incorporate the Company's integrated circuits into their products, success of competitors' products and general economic conditions. Because the Company does not currently manufacture its own semiconductor wafers, the Company is vulnerable to process technology advances utilized by competitors to manufacture higher performance or lower cost products. There is no assurance that the Company will be able to compete successfully in the future. PATENTS, TRADEMARKS AND LICENSES Although the Company believes its success depends primarily upon the experience and creative skills of its employees rather than the ownership of patents, the Company does pursue a policy of obtaining patents for appropriate inventions. The Company has obtained nonexclusive licenses from certain other organizations, such as Texas Instruments, Incorporated, Xerox Corporation, and AT&T, for use of product designs or specifications in the development of the Company's products. Such license arrangements on a non-exclusive basis are customary in the industry. As is the case with many companies in the semiconductor industry, it may become necessary or desirable in the future for SEEQ to obtain licenses relating to its products from others. SEEQ has in the past received notification of possible infringement of patents from certain other semiconductor manufacturers and these matters are under consideration. Although patent holders in the industry typically offer licenses, and SEEQ in the past has entered into license agreements, there can be no assurance that licenses can be obtained on acceptable terms. The Company has been issued four United States patents for various data-communications technologies. These patents expire at various dates from 2011 to 2014. However, there can be no assurance that these patents will provide SEEQ with any meaningful protection. The Company also has certain federally registered trademarks. The Company is pursuing a systematic strategy of submitting patent applications whenever justified by a combination of business and technical considerations. Presently, the Company has on file with the U.S. Patent Office, ten 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. 7 8 EMPLOYEES As of September 30, 1997, the Company had 68 employees, including 10 in marketing and sales, 16 in research, development and engineering related functions, 34 in manufacturing and 8 in management, administration and finance. The Company's success depends on a number of key employees, the loss of one or more of whom could adversely affect the Company. The Company believes that its future success will depend in large part upon its ability to attract, retain and motivate highly skilled employees. The Company has never had a work stoppage, slow-down or strike. None of the Company's employees are represented by a labor union. The Company considers its employee relations to be good. 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 Westlake, California, Blue Bell, Pennsylvania, and Burlington, Massachusetts. ITEM 3. LEGAL PROCEEDINGS. Pursuant to the Asset Purchase Agreement dated February 7, 1994, (the "Asset Purchase Agreement") by and between SEEQ and Atmel Corporation ("Atmel"), Atmel purchased the assets of SEEQ related to its electrically erasable programmable read only memory ("EEPROM") products (the "EEPROM Asset Sale"). A substantial portion of the consideration received by the Company in connection with the EEPROM Asset Sale was placed in escrow subject to certain claims of indemnity by Atmel under the Asset Purchase Agreement. As of September 30, 1997, $2,527,000 was on deposit in escrow (including interest of $698,000 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. On March 30, 1994, the Company filed a lawsuit against HMC in which, among other things, the Company sought a declaration by the court that the alleged license agreement is invalid. On August 16, 1995, the Company and HMC entered into a Settlement Agreement, Release and Tolling Agreement. Under the terms of such Agreement, the Company agreed, among other things, that the claims asserted against HMC in respect of the alleged license agreement would be tolled for such time and on such terms as provided therein. As a result, the Company is not currently pursuing such claims. The Company is entitled to pursue such claims in the future, however, subject to the terms of the Settlement Agreement, Release and Tolling Agreement. In the event that the Company does not cause the alleged license agreement to be invalidated, Atmel may assert a claim against the Company under the Asset Purchase Agreement, including a claim for damages, if suffered by Atmel as a result of HMC's use of any of such technology, and, in the event any such claim by Atmel is determined to be valid, Atmel may recover any such damages from the escrow described above. The Company believes that, in the event of any claim by Atmel, the amount of damages that may be payable by the Company upon a resolution thereof will not have a material adverse effect on the Company's cash flow, financial position or results of operations. However, there can be no assurance as to such matters. Under the terms of the settlement, the Company agreed to pay HMC an aggregate of $500,000 due in three consecutive monthly installments beginning in August 1995. The Company further agreed to issue to HMC 100,000 shares of SEEQ's common stock and reactivate and modify the 1990 Foundry and Co-Development Agreement. 8 9 On November 28, 1995, Level One Communications Incorporated ("Level One") filed a complaint against the Company, in the United States District Court of Northern California ("the Court"), alleging patent infringement. In the complaint, Level One claims that the Company has used and sold products in violation of two of Level One's patents. Level One seeks immediate and permanent injunctive relief preventing the Company from making, using, or selling any devices that infringe such patents and unspecified damages. The Company intends to vigorously contest all of Level One's claims. Based on the Company's review to date, management believes that the claims asserted by Level One are without merit and that the outcome of these legal proceedings will not have a material adverse effect on the Company's financial position or results of operations, although there can be no assurance as to such matters. Patent litigation is often highly complex, can extend for a protracted period of time, can involve substantial cost to the Company and may divert the attention of the Company's management and technical personnel, which can substantially increase the cost of such litigation. There can be no assurance that such costs and diversion of resources would not have a material adverse effect on the Company's business, financial condition and results of operations. As of December 5, 1997, SEEQ had filed, briefed and argued motions to declare all asserted claims of the Level One patents in the suit as invalid in view of certain prior art. The Company anticipates a ruling in the near future. In addition, on June 16, 1997, SEEQ filed a motion to amend its counterclaim to add SEEQ's U.S. Patent 5,504,738, entitled, DEFENDANT SEEQ TECHNOLOGY'S NOTICE OF MOTION AND MOTION FOR LEAVE TO SUPPLEMENT ITS ANSWER AND COUNTERCLAIM AND MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT THEREOF SEEQ asserts that level One's LXT 970 product infringes the '738 patent in the manner in which incorporates an auto negotiate feature. The motion was fully briefed, argued and submitted as of December 5, 1997. The Company expects a ruling in the near future. If the motion is denied, SEEQ will nonetheless file suit in an independent action. 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, SEEQ is involved in certain other routine litigation in the ordinary course of its business. SEEQ believes that the outcome of these legal proceedings will not have a material adverse effect on the Company's financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to a vote of security holders during the quarter ended September 30, 1997. 9 10 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 1997 and 1996. The Company has never paid dividends on common shares and has no present plans to do so. The financial covenants of the Company's bank line of credit also restrict the amount the Company could pay in dividends. The bank line of credit requires the Company to maintain a tangible net worth of $14,000,000.
Fiscal 1997 Fiscal 1996 ----------- ----------- Quarter High Low High Low ------- ---- --- ---- --- First $ 3.938 $ 2.500 $ 5.188 $ 3.500 Second $ 3.188 $ 1.750 $ 4.563 $ 2.625 Third $ 2.563 $ 1.406 $ 4.375 $ 2.750 Fourth $ 3.969 $ 1.875 $ 4.000 $ 2.500
The approximate number of stockholders at September 30, 1997 was 14,000. 10 11 ITEM 6. SELECTED FINANCIAL DATA.
FISCAL YEAR ENDED SEPTEMBER 30, (1) ------------------------------------------------------------- 1993 1994 1995 1996 1997 ---- ---- ---- ---- ---- (in thousands, except per share data) STATEMENT OF OPERATIONS DATA: Revenues $ 32,980 $ 21,480 $22,512 $31,338 $31,423 ------------------------------------------------------------- Costs and expenses: Cost of revenues 21,796 15,632 14,758 20,680 19,498 Research and development 3,289 3,278 3,069 3,303 3,446 Marketing, general and administrative 7,827 6,939 3,827 4,579 5,397 Restructuring and other, net 3,236(1,2) 4,932(3) (399)(4) -- -- ------------------------------------------------------------- Total costs and expenses 36,148 30,781 21,255 28,562 28,341 ------------------------------------------------------------- Income (loss) from operations (3,168) (9,301) 1,257 2,776 3,082 Interest (expense) (1,056) (456) (431) (240) (357) Interest and other income, net 100 187 518 403 382 Settlement costs (300)(5) Gain on sale of stock -- 1,693(6) -- -- -- ------------------------------------------------------------- Income (loss) before income taxes (4,124) (7,877) 1,344 2,939 2,807 Income tax provision -- -- (14) (88) 1,880 ============================================================= Net income (loss) $ (4,124) $(7,877) $1,330 $2,851 $ 4,687 ============================================================= Net income (loss) per share: $ (0.25) $ (0.32) $ 0.04 $ 0.09 $ 0.15 Shares used in per share calculation: 16,741 24,273 30,894 32,148 32,180 - ---------------------------------------------------------------------------------------------------
SEPTEMBER 30, -------------------------------------------------------------- 1993 1994 1995 1996 1997 ---- ---- ---- ---- ---- (in thousands) BALANCE SHEET DATA: Working capital $ 5,088 $ 908 $ 6,382 $ 9,153 $15,165 Total assets 17,871 17,307 18,934 26,435 27,040 Long-term obligations 1,926 2,564 1,524 3,466 3,308 Stockholders' equity 6,544 4,056 10,768 14,193 19,218
(1) The Selected Financial Data for fiscal year ended September 30, 1993 does not give effect to the sale of assets in the EEPROM Asset Sale on February 7, 1994, which constituted a significant portion of the Company's operations during that fiscal year. See the discussions under Notes 3 and 4 of Notes to the Consolidated Financial Statements. (2) The Company recorded $3,236,000 in charges against operations in fiscal 1993 reflecting an adjustment to its prior estimates in connection with closing its wafer fabrication facility and costs associated with the resignation of the Company's previous president and chief executive officer. (3) The Company recorded $4,932,000 in charges against operations in fiscal 1994 representing a loss and other restructuring costs associated with the EEPROM Asset Sale and the discontinuation of the Company's end-user Ethernet adapter board products. See Notes 3 and 4 of Notes to Consolidated Financial Statements. (4) The Company recorded $399,000 as a benefit against operations in fiscal 1995 representing a change in the estimates of its restructuring reserves. See Note 4 of Notes to Consolidated Financial Statements. (5) The Company recorded a charge of $300,000 for the settlement of litigation relating to a contract dispute with a former supplier. See Note 11 of Notes to Consolidated Financial Statements. (6) The Company recorded a gain on the sale of stock in the amount of $1,693,000. See Note 3 of Notes to Consolidated Financial Statements. 11 12 The following table sets forth consolidated statements of operations data for each of the eight quarters beginning October 1, 1995 and ending September 30, 1997. 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.
THREE MONTHS ENDED -------------------------------------------------------------------------------------------- Dec 31, Mar. 31 Jun. 30 Sep. 30 Dec 31 Mar. 31 Jun. 30 Sep. 30 1995 1996 1996 1996 1996 1997 1997 1997 ---- ---- ---- ---- ---- ---- ---- ---- (in thousands, except per share data) Revenues $ 4,801 $ 7,387 $ 8,644 $ 10,506 $ 6,624 $ 8,031 $ 7,611 $ 9,157 -------------------------------------------------------------------------------------------- Costs and expenses: Cost of revenues 3,487 4,874 5,893 6,426 4,560 5,059 4,591 5,288 Research and development 786 918 890 709 780 902 899 865 Marketing, general and administrative 921 1,121 1,210 1,327 1,252 1,444 1,277 1,424 -------------------------------------------------------------------------------------------- Total costs and expenses 5,194 6,913 7,993 8,462 6,592 7,405 6,767 7,577 -------------------------------------------------------------------------------------------- Income (loss) from operations (393) 474 651 2,044 32 626 844 1,580 Interest (expense) (83) (36) (49) (72) (83) (87) (96) (91) Interest and other income, net 183 58 67 95 86 95 87 114 Settlement costs -- -- -- -- -- -- -- (300) -------------------------------------------------------------------------------------------- Income (loss) before income taxes (293) 496 669 2,067 35 634 835 1,303 Provision for income taxes -- (6) (19) (63) (1) (20) (24) 1,925 ============================================================================================ Net income (loss) $ (293) $ 490 $ 650 $ 2,004 $ 34 $ 614 $ 811 $ 3,228 ============================================================================================ Net income (loss) per share: $ (0.01) $ 0.02 $ 0.02 $ 0.06 $ 0.00 $ 0.02 $ 0.03 $ 0.10 Shares used in per share calculation: 29,873 31,929 32,082 32,241 31,885 31,571 31,284 31,951
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. 12 13 BACKGROUND The Company was founded in 1981 to focus on the development and manufacture of electrically erasable programmable read only ("EEPROM") products and in 1982 began developing Ethernet data communication products. The Company recorded its first profitable year in fiscal 1987 and the growth continued in fiscal 1988 as both revenues and net income increased. In addition, the Company's financial condition was strengthened when a public common stock offering was completed in May 1988. Fiscal 1989 results were adversely affected by weakening market conditions and production problems. In fiscal 1989, the Company adopted a strategy to have its products manufactured by outside foundries. During the second quarter of fiscal 1994, the Company sold its assets related to its EEPROM products (the "EEPROM Asset Sale") to Atmel Corporation ("Atmel"). Under the terms of the Asset Purchase Agreement dated February 7, 1994 between SEEQ and Atmel, Atmel acquired all rights in SEEQ's assets related to EEPROM products, including intellectual property, equipment, inventory and a portion of the accounts receivable. The purchase price for such assets consisted of 135,593 shares of Atmel's Common Stock and $481,632 in cash. In addition, Atmel assumed certain liabilities under equipment leases for equipment used in producing EEPROM products. Since this sale, the Company has focused its business on data communication products. During the third quarter of fiscal 1994, SEEQ sold the 135,593 shares of Atmel Common Stock it received in the EEPROM Asset Sale for total proceeds of $6,693,000, reflecting a gain on the sale of $1,693,000. A significant portion of the proceeds from the stock sale was deposited in two escrow accounts subject to claims of indemnity by Atmel under the Asset Purchase Agreement. One escrow account, which contained $600,000, was subject to claims by Atmel with respect to the equipment, inventory and accounts receivable sold to Atmel in the EEPROM Asset Sale. Atmel asserted a claim for the full amount deposited in this escrow account. On January 30, 1995, the Company entered into an agreement with Atmel to settle Atmel's claim. Under the terms of the agreement, $250,000 was distributed to Atmel and the remaining $350,000 was distributed to the Company. The second escrow account, which initially contained $4,329,000 (recorded as other assets), is subject to any future claims that may be made by Atmel with respect to the EEPROM technology sold to Atmel in the EEPROM Asset Sale. During the first quarter of fiscal 1995, the fourth quarter of fiscal 1996, and the fourth quarter of fiscal 1997, $300,000 and $1,000,000, and $1,200,000, respectively, was distributed to SEEQ from the escrow account, leaving $1,829,000 on deposit therein as of September 30, 1997 (excluding interest earned to date of $698,000). Atmel has notified SEEQ that, based on certain claims asserted by HMC, one of SEEQ's foundries and joint development partners, that SEEQ previously granted HMC certain license rights to the EEPROM technology, Atmel believes it may be entitled to assert a claim against this escrow account, although, Atmel has not done so to date. The funds in this escrow account will remain in escrow until February 1999, or until a determination is made that SEEQ is entitled to such funds under any release condition in the escrow agreement, or if Atmel makes a claim prior to February 1999 under such escrow, then until such claim is resolved by a court. In connection with the EEPROM Asset Sale, Atmel acquired 3,614,701 shares of SEEQ's Common Stock pursuant to the Stock Purchase Agreement dated February 7, 1994, representing approximately 14% of SEEQ's outstanding shares of Common Stock as of such date. Such shares were purchased at a price of $1.25 per share, for a total purchase price of $4,518,376. The Company filed a registration statement for these shares that became effective with the Securities and Exchange Commission on March 24, 1995. In connection with the EEPROM Asset Sale and the Company's decision in fiscal 1994 to discontinue its end-user Ethernet adapter board product line, the Company adopted a restructuring plan pursuant to which, among other things, certain business operations were discontinued, certain facilities were eliminated and certain employees were terminated. The following table summarizes the activity under this restructuring plan for the years ended September 30, 1997 (in thousands):
Utilization Utilization Reserve at Charge Reserve at Charge Reserve at September During September During September 30, 1995 Fiscal 1996 30, 1996 Fiscal 1997 30, 1997 EEPROM Asset Sale Restructuring Excess facilities $(801) $119 $(682) $122 $(560) Other costs (195) 195 -- -- -- - ------------------------------------------------------------------------------------------------ Totals $(996) $314 $(682) $122 $(560) - ------------------------------------------------------------------------------------------------
13 14 FACILITY LEASE, INVENTORY AND OTHER EQUIPMENT COSTS During the second quarter of fiscal 1995, the Company entered into a final settlement of a lawsuit previously filed against the Company for rent and damages under a lease of certain premises previously occupied by the Company which the Company vacated in July 1992. In connection with the action and the proposed settlement thereof, the Company had previously recorded certain reserves covering, among other things, the proposed issuance of shares of its common stock. The market price of the Company's common stock increased during the second quarter of fiscal 1995, and, as a result, the Company recorded additional reserves of $122,000 to reflect the higher market price of the common stock at the time of the final settlement of the lawsuit. During fiscal 1995, the Company also sold equipment that had been fully reserved and settled certain associated lease obligations, resulting in a $133,000 reduction in the restructuring reserves. Upon settlement of this lawsuit, the balance of the restructuring reserves had been fully utilized. EEPROM ASSET SALE RESTRUCTURING In connection with the EEPROM Asset Sale, the Company incurred certain restructuring costs or realized certain benefits during fiscal 1995 and 1996 as follows: EEPROM Asset Sale. On January 30, 1995 the Company and Atmel entered into a settlement agreement to settle Atmel's claims made against the $600,000 escrow account previously established. Under the settlement agreement, $250,000 was distributed to Atmel and the remaining $350,000 was distributed to the Company. As a result, the Company recorded a $195,000 charge. Excess facilities. During fiscal 1994, the Company decided to sublease its headquarters' office and manufacturing facilities for the approximately eight years remaining on the term of the lease. The Company recorded reserves representing the Company's estimate of the difference between the rent payable by the Company under the lease and the anticipated rent payable to the Company under a sublease. During the first quarter of fiscal 1995, the Company sublet the entire facility in which its headquarters and operations were located at a higher rental rate than previously estimated, and as a result in 1995, recorded an $818,000 reduction to its restructuring reserves. The Company also recorded $915,000 of facility lease payments, broker fees and relocation costs in connection with the sublease. During fiscal 1996 and fiscal 1997, the Company recorded $119,000 and $122,000, respectively, of facility lease payments in excess of the sublease amount. Discontinued Inventories. As a result of the EEPROM Asset Sale, the Company discontinued certain inventories; in fiscal 1995 the Company paid $99,000 to foundries for inventories. Other costs. For the fiscal year ended September 30, 1995, the Company recorded other costs of approximately $338,000, primarily reflecting legal fees and settlement costs in connection with the agreement with Hualon Microelectronics Company (see Note 11 Litigation). The Company paid $435,000 for settlement costs, outside foundries for memory product process development and lease payments for certain equipment related to EEPROM products. During fiscal 1996, payments of $195,000 for settlement costs were made. END-USER ETHERNET ADAPTER BOARD PRODUCTS WRITE-OFF During the quarter ended March 31, 1994, the Company discontinued its end-user Ethernet adapter boards product line, and recorded restructuring costs as follows: Other costs. During fiscal 1995, the Company recorded as other costs a reserve of $39,000 reflecting the settlement of certain litigation relating to end-user Ethernet adapter board products. Offsetting this charge, the Company recorded a benefit of $91,000 from the collection of previously written-off accounts receivable and the reversal of excess warranty reserves. 14 15 ANNUAL RESULTS OF OPERATIONS FISCAL 1997 COMPARED TO FISCAL 1996 The Company's revenues in fiscal 1997 were $31,423,000 an increase of 0.3% from $31,338,000 in fiscal 1996. Revenues from 1996 to 1997 were relatively unchanged. Bay Networks 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 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 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. This 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 $3,303,000 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. The Company expects that the level of research and development spending will increase in absolute dollars in future periods as a result of increased development efforts on new LAN products and manufacturing cost reduction programs on existing programs, but may vary as a percentage of revenues. Marketing, general and administrative expenses increased from $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. 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 $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. FISCAL 1996 COMPARED TO FISCAL 1995 The Company's revenues in fiscal 1996 were $31,338,000, an increase of 39% from $22,512,000 in fiscal 1995. Products supporting the Fast Ethernet (100Mbps) market accounted for approximately 31% of total revenues in fiscal 1996 compared to less than 1% in fiscal 1995. Most of the Company's revenue growth in fiscal 1996 was attributable to substantially increased sales to one customer, Bay Networks, which accounted for 42% of total revenues in fiscal 1996. Unit sales volumes increased 36% and average selling prices increased 2.7% in fiscal 1996 as compared to fiscal 1995. LAN integrated circuit product average selling prices increased 23% in fiscal 1996 compared to fiscal 1995. During the first quarter of fiscal 1996, production from the Company's foundries was not sufficient to meet demand. Consequently, product availability and revenues were impacted. This situation steadily improved throughout fiscal 1996 as the Company completed the transition of its products to new foundries while worldwide wafer availability and fab 15 16 capacity improved significantly over fiscal 1995. As a result, the Company's revenues increased in each subsequent quarter due to higher demand and shipments against the past due backlog. Gross margins were 34.0% in fiscal 1996 compared to 34.4% in fiscal 1995. While the Company realized higher margins on its Fast Ethernet products, overall margins were impacted by price erosion on several of its older, standard Ethernet products. During the first quarter of fiscal 1996, gross margin percentages were impacted on certain products for which the Company experienced shortfalls in wafer production and higher costs relating to start-up production for several new product offerings. Research and development expenditures increased from $3,069,000 in fiscal 1995 to $3,303,000 in fiscal 1996. As a percentage of sales, research and development expenditures decreased from 13.6% in fiscal 1995 to 10.5% in fiscal 1996 primarily as a result of increased revenues. Marketing, general and administrative expenses increased from $3,827,000 in fiscal 1995 to $4,579,000 in fiscal 1996, and decreased as a percentage of sales from 17.0% to 14.6% for the same periods, respectively. The dollar increase was attributable primarily to higher sales commissions related to growth in annual revenues. Interest expense has resulted primarily from borrowings under the Company's equipment leases. Interest expense decreased from $431,000 in fiscal 1995 to $240,000 in fiscal 1996 due to a reduction in bank borrowings which were required under the Company's previous credit facility. Interest income decreased from $518,000 in fiscal 1995 to $403,000 in fiscal 1996 due to a reduction in cash borrowed under the Company's previous credit facility partially offset by increases in cash balances due to the exercise of warrants and stock options, higher revenues and the release of $1,000,000 from the EEPROM Asset Sale escrow account. The income tax provision is due primarily to alternative minimum state and federal income taxes. The provision for income taxes increased from $14,000 in fiscal 1995 to $88,000 in fiscal 1996. LIQUIDITY AND CAPITAL RESOURCES The Company has financed its operations and met its capital requirements primarily through cash raised from operations, private and public placements of equity and debt securities, capital leases and bank lines of credit. Management believes that existing sources of liquidity, anticipated cash flow from operations and borrowings under the Company's credit facility, will be adequate to satisfy its projected working capital expenditures through the end of fiscal 1998. 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 $3,974,000 as of September 30, 1996 to $6,937,000 as of September 30, 1997. Operating Activities Cash flows provided by operating activities were $2,592,000 in fiscal 1997 compared to cash used of $267,000 for fiscal 1996. The change in operating activities cash flow from 1996 to 1997 was due primarily to the net profit in fiscal 1997 of $4,687,000, depreciation of $1,808,000, reduction in accounts receivable of $951,000, reduction of inventories of $2,176,000, partially offset by a decrease in accounts payable of $4,689,000, and the benefit from deferred taxes of $1,950,000. Investing Activities Cash flows provided by investing activities in fiscal 1997 were $1,069,000 compared to $3,676,000 in fiscal 1996. The release of funds held in escrow was $1,200,000 and $1,000,000 in fiscal 1997 and 1996, respectively. Capital acquisitions, primarily for test equipment, engineering tools, and a new enterprise computing system, in fiscal 1997 were 16 17 $1,451,000 of which $1,224,000 was leased and $227,000 was paid for in cash. The Company anticipates capital expenditures in fiscal 1998 primarily for test equipment, engineering tools and software of approximately $5,000,000 of which it is expected that approximately $4,000,000 will be financed through equipment leases. Financing Activities Cash flows used for financing activities in fiscal 1997 were $698,000. During fiscal 1997, the Company made payments on capital lease obligations of $1,036,000, partially offset by $338,000 in proceeds from the issuance of its common stock, primarily from stock option exercises., In November 1993, the Company entered into a two-year line of credit agreement, subject to renewal, with the CIT Group ("CIT"). Although the Company was not required to make use of the bank line of credit, during the second quarter of fiscal 1994 it used cash resources to reduce its effective short-term credit borrowings interest rate by borrowing the minimum required borrowings of $3,000,000 under a secured bank line of credit with CIT, and investing the proceeds in a short-term certificate of deposit (restricted cash). Effective November 22, 1995, the Company renewed the credit facility with CIT for a two year term. Under the renewed credit agreement, the minimum borrowing requirement was reduced to $1,500,000 and was only applicable in the event the Company had a loan balance outstanding with CIT. Thus the Company liquidated its restricted cash and repaid the note payable to bank in November 1995. The credit agreement with CIT was terminated by the Company in August 1996. The agreement was replaced at that time by a one-year revolving line of credit agreement with Silicon Valley Bank. In August 1997, the Company renewed its one-year revolving line of credit agreement with Silicon Valley Bank. Under the terms of the bank revolving line of credit, the Company could borrow the lesser of $7,000,000 or an amount determined by a formula applied to eligible accounts receivable, at a variable interest rate equal to the prime rate plus 0.25%. The revolving line of credit is secured by a security interest in the Company's assets, including intellectual property and expires August 18, 1998. The loan agreement requires the Company to maintain a profit each fiscal year and to maintain certain financial ratios. The loan agreement also requires the Company to maintain a level of tangible net worth which, in effect, limits the ability of the Company to make payments of cash dividends. There were no borrowings outstanding under this revolving line of credit as of September 30, 1997. Historically, the Company has financed a significant amount of its capital expenditures through capital leases. For fiscal years 1997, 1996, and 1995, capital lease obligations incurred were $1,224,000, $3,367,000, and $94,000, respectively. Payments of principal and interest, for capital leases in place at the end of fiscal 1997, will be $1,377,000, $1,235,000 and $820,000 for fiscal years 1998, 1999 and 2000, 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. 17 18 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 substantial operating losses during each of the five fiscal years ended September 30, 1994. During the fiscal years ended September 30, 1990, 1991, 1992, 1993 and 1994, the Company incurred operating losses of $26.1 million, $3.2 million, $11.3 million, $4.1 million and $7.9 million, respectively. The Company achieved a profit of approximately $1.3 million for the fiscal year ended September 30, 1995, 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 $104.8 million at September 30, 1997. 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 Serial Systems accounted for approximately 42% and 10% of the Company's revenues in fiscal 1996, respectively. Sales to Bay Networks and Cabletron accounted for approximately 25% and 17% of the Company's revenues in fiscal 1997, 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 18 19 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 are 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 recently experienced certain delays in the development of certain of its new products, which the Company believes may have a material adverse effect on the Company's results of operations in future periods. Although the Company has increased its development efforts over the past year, there can be no assurance that such delays will not continue to occur in future periods. The markets for the original equipment manufacturers who purchase the Company's products are characterized by rapidly changing technology, evolving industry standards and improvements in products and services. If technologies or standards supported by the Company's products become obsolete or fail to gain widespread commercial acceptance, the Company's business may be materially adversely affected. As a result, the Company believes that continued significant expenditures for research and development will be required in the future. If the Company were unable to design, develop and introduce competitive products on a timely basis, its future operating results would be materially adversely affected. New products are generally incorporated into a customer's products or systems at the design stage. However, design wins, which can often require significant expenditures by the Company, may precede the generation of volume sales, if any, by a year or more. Moreover, the value of any design win will depend in large part on the ultimate success of the customer's product and on the extent to which the system's design accommodates components manufactured by the Company's competitors. No assurance can be given that the Company will achieve design wins or that any design win will result in significant future revenue. 19 20 LIQUIDITY; FUTURE CAPITAL REQUIREMENTS The Company presently believes that anticipated cash provided by operations, existing cash, and available lines of credit will be adequate to meet its cash needs for at least the next 12 months. However, the Company requires substantial working capital to fund its business, particularly to finance inventories and accounts receivable and/or capital expenditures. The Company's future capital requirements will depend on many factors, including the timing and extent of spending to support product development efforts and expansion of sales and marketing, the timing of introductions of new products and enhancements to existing products, and market acceptance of the Company's products. Accordingly, the Company expects that it may need to raise additional equity or debt financing in the future. There can be no assurance that additional debt and/or equity financing, if required, will be available on acceptable terms or at all. DEPENDENCE UPON INDEPENDENT MANUFACTURERS AND ASSEMBLY SUPPLIERS All of the Company's products are currently manufactured to the Company's specifications by independent subcontractors, and the Company maintains no wafer manufacturing or assembly operations of its own. The Company currently utilizes semiconductor wafer manufacturing subcontractors located in South Korea, Japan, Taiwan and the United States. The Company also contracts with independent assembly suppliers located in Asia for the assembly of all of its products, and relies principally on one assembly contractor located in South Korea. As a result, all of the Company's products are manufactured by independent foundries and assembled by foreign assembly contractors. Consequently, the Company currently relies exclusively on the manufacturing, assembly and other resources of these independent manufacturers and assembly suppliers. Currently, certain of these independent manufacturers serve as the sole source for several of the Company's products. The Company's reliance on subcontractors to manufacture and assemble its produce involves significant risks, including reduced control over delivery schedules, the potential lack of adequate capacity, reduced control over fluctuations in manufacturing yields, discontinuation or phase-out of such subcontractors' production processes, and potential misappropriation of proprietary intellectual property. There can be no assurance that the Company will not experience problems in timeliness, yields and quality of wafer deliveries from its wafer manufacturing subcontractors, each of which could have a material adverse effect on the Company's operations and operating results. In addition, although the Company has entered into manufacturing agreements with each of these independent manufacturers, there can be no assurance that such manufacturers will continue to manufacture products for the Company. The Company generally does not have long-term, non-cancelable contracts with its wafer suppliers. Therefore, the Company's wafer suppliers could choose to prioritize capacity for other uses or reduce or eliminate deliveries to the Company on short notice. Accordingly, there can be no assurance that the Company's foundries will allocate sufficient wafer manufacturing capacity to the Company to satisfy the Company's product requirements. In addition, the Company has been, and expects to continue to be in the future, particularly dependent on one or more foundries for its wafer manufacturing requirements. Any sudden demand for an increased amount of wafers or sudden reduction or elimination of any existing source or sources of wafers could result in a material delay in the shipment of the Company's products. In this regard, in the fourth quarter of fiscal 1995, the Company was notified by one of its foundry suppliers that it would no longer supply wafers to the Company. Although the Company recently added an additional independent wafer supplier, there can be no assurance that such events will not have a material adverse effect on the Company's results of operations and financial condition. There can be no assurance that material disruptions in supply, which have occurred periodically in the past, will not occur in the future. Any such disruption could have a material adverse effect on the Company's operating results and financial condition. In the event the Company were unable to qualify alternative manufacturing sources for existing or new products in a timely manner or such sources were unable to produce wafers with acceptable manufacturing yields, the Company's business, operating results and financial condition would be materially and adversely affected. 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 20 21 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. RISKS ASSOCIATED WITH FOREIGN SUPPLIERS A substantial number of the Company's products are manufactured, and all of the Company's products are assembled, by independent foundries and assembly suppliers located in foreign countries, including Taiwan, Japan and South Korea. The Company is, therefore, subject to certain risks generally associated with contracting with foreign suppliers, including currency exchange fluctuations, political instability, trade restrictions and changes in tariff and freight rates. THE SEMICONDUCTOR INDUSTRY The semiconductor industry is subject to rapid technological change, price erosion, occasional shortages of materials, variations in manufacturing efficiencies, significant expenditures for capital equipment and product development, and cyclical market patterns. In recent years, the industry has experienced intermittent significant economic downturns characterized by diminished product demand, accelerated erosion of selling prices and production 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. 21 22 LITIGATION On November 28, 1995, Level One Communications Incorporated ("Level One") filed a complaint against the Company, in the United States District Court of Northern California, alleging patent infringement. In the complaint, Level One claims that the Company has used and sold products in violation of two of Level One's patents. Level One seeks immediate and permanent injunctive relief preventing the Company from making, using, or selling any devices that infringe such patents and unspecified damages. The Company intends to vigorously contest all of Level One's claims. In addition, the Company believes that Level One products infringe on a recently issued SEEQ patent. The Company has filed a counterclaim motion with the Court requesting that this alleged Level One infringement be added to the existing patent suit. Based on the Company's limited review to date, management believes that the claims asserted by Level One are without merit and that the outcome of these legal proceedings will not have a material adverse effect on the Company's financial position or results of operations, although there can be no assurance as to such matters. Patent litigation is often highly complex, can extend for a protracted period of time, can involve substantial cost to the Company and may divert the attention of the Company's management and technical personnel, which can substantially increased the cost of such litigation. There can be no assurance that such costs and diversion of resources would not have a material adverse effect on the Company's business, financial condition and results of operations. 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 22 23 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 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. 23 24 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Index to Financial Statements Financial Statements
Page Report of Independent Accountants 25 Consolidated Balance Sheets at September 30, 1997 and 1996 26 Consolidated Statements of Operations for the Years Ended September 30, 1997, 1996 and 1995 27 Consolidated Statements of Stockholders' Equity for the Years Ended September 30, 1997, 1996 and 1995 28 Consolidated Statements of Cash Flows for the Years Ended September 30, 1997, 1996 and 1995 29 Notes to Consolidated Financial Statements 30-40 Financial Statement Schedule: II Valuation and Qualifying Accounts S-1
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. 24 25 REPORT OF INDEPENDENT ACCOUNTANTS TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF SEEQ TECHNOLOGY INCORPORATED In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of SEEQ Technology Incorporated and its subsidiary at September 30, 1997 and 1996, and the results of their operations and their cash flows for each of the three fiscal years in the period ended September 30, 1997, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICE WATERHOUSE LLP San Jose, California October 24, 1997 25 26 CONSOLIDATED BALANCE SHEETS - --------------------------------------------------------------------------------
SEPTEMBER 30, SEPTEMBER 30, (Thousands, except share amounts) 1997 1996 - ------------------------------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 6,937 $ 3,974 Accounts receivable, less allowances for sales returns and doubtful accounts of $245 and $240 7,284 8,235 Inventories 3,176 5,352 Deferred tax asset 1,950 -- Other current assets 332 368 - ------------------------------------------------------------------------------------------------------- Total current assets 19,679 17,929 - ------------------------------------------------------------------------------------------------------- Property and equipment: Machinery and equipment 8,265 8,923 Furniture and fixtures 3,931 2,680 Leasehold improvements 403 401 - ------------------------------------------------------------------------------------------------------- 12,599 12,004 Accumulated depreciation and amortization (8,215) (7,746) - ------------------------------------------------------------------------------------------------------- 4,384 4,258 Other assets 2,977 4,248 - ------------------------------------------------------------------------------------------------------- $ 27,040 $26,435 ======================================================================================================= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 1,582 $ 6,271 Accrued salaries, wages and employee benefits 698 586 Other accrued liabilities 997 754 Deferred income on sales to distributors 146 270 Current portion of capitalized lease obligations 1,091 895 - ------------------------------------------------------------------------------------------------------- Total current liabilities 4,514 8,776 - ------------------------------------------------------------------------------------------------------- Long-term liabilities 3,308 3,466 - ------------------------------------------------------------------------------------------------------- Commitments and contingencies (see Notes 3, 8 and 11.) Stockholders' equity: 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, 30,427,700 and 30,245,113 shares outstanding 304 302 Additional paid-in capital 123,760 123,424 Accumulated deficit (104,846) (109,533) - ------------------------------------------------------------------------------------------------------- Total stockholders' equity 19,218 14,193 - ------------------------------------------------------------------------------------------------------- $ 27,040 $ 26,435 =======================================================================================================
See accompanying notes to consolidated financial statements 26 27 CONSOLIDATED STATEMENTS OF OPERATIONS
(Thousands, except per share amounts) Year Ended September 30, - -------------------------------------------------------------------------------------------------- 1997 1996 1995 ---- ---- ---- Revenues $31,423 $31,338 $22,512 ----------------------------------------------------- Costs and expenses: Cost of revenues 19,498 20,680 14,758 Research and development 3,446 3,303 3,069 Marketing, general and administrative 5,397 4,579 3,827 Restructuring and other, net -- -- (399) - -------------------------------------------------------------------------------------------------- 28,341 28,562 21,255 - -------------------------------------------------------------------------------------------------- Income from operations 3,082 2,776 1,257 Interest expense (357) (240) (431) Interest and other income, net 382 403 518 Settlement costs (300) -- -- - -------------------------------------------------------------------------------------------------- Income before provision for income taxes 2,807 2,939 1,344 Income tax provision 1,880 (88) (14) - -------------------------------------------------------------------------------------------------- Net income $4,687 $2,851 $1,330 ================================================================================================== Net income per share: Primary $0.15 $0.09 $0.05 Fully diluted 0.15 0.09 0.04 Shares used in per share calculations: Primary 31,707 32,032 29,205 Fully diluted 32,180 32,148 30,894 ==================================================================================================
See accompanying notes to consolidated financial statements 27 28 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - ------------------------------------------------------------------------------- Years ended September 30, 1997, 1996 and 1995
Common Stock Additional ----------------- Paid-in Accumulated (In Thousands) Shares Amount Capital Deficit Total ------ ------ ------- ------- ----- Balance at September 30, 1994 25,800 $258 $117,512 $(113,714) $4,056 Issuance to employees under employee stock plans 601 6 733 -- 739 Common stock issued in settlement of litigation 475 5 891 -- 896 Exercise of warrants 2,894 29 3,718 -- 3,747 Net income -- -- -- 1,330 1,330 - ------------------------------------------------------------------------------------- Balance at September 30, 1995 29,770 298 122,854 (112,384) 10,768 Issuance to employees under employee stock plans 339 3 475 -- 478 Exercise of warrants 136 1 95 -- 96 Net income -- -- -- 2,851 2,851 - ------------------------------------------------------------------------------------- Balance at September 30, 1996 30,245 302 123,424 (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 ======================================================================================
See accompanying notes to consolidated financial statements 28 29 CONSOLIDATED STATEMENTS OF CASH FLOWS - --------------------------------------------------------------------------------
Year Ended September 30, --------------------------------------- (Increase/(decrease) in cash and cash equivalents, in thousands) 1997 1996 1995 - ------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $4,687 $2,851 $1,330 Adjustments to reconcile net income to net cash provided by (used for) operating activities: Depreciation and amortization 1,808 1,173 717 Restructuring and other -- -- (399) (Gain) on disposal of equipment (62) (10) (19) Deferred tax asset (1,950) -- -- Changes in assets and liabilities: Accounts receivable 951 (4,335) (646) Inventories 2,176 (3,122) (92) Other current assets 36 (156) 738 Other assets (446) (1,068) (297) Accounts payable (4,689) 4,333 (1,247) Accrued salaries, wages and employee benefits 112 119 (319) Other accrued liabilities and deferred income on sales 119 74 (1,421) to distributors Long term obligations (150) (126) (499) - ------------------------------------------------------------------------------------------------ Net cash provided by (used in) operating activities 2,592 (267) (2,154) - ------------------------------------------------------------------------------------------------ CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (227) (334) (851) Proceeds on disposal of equipment 96 10 46 Release of funds held in escrow 1,200 1,000 300 Short-term investments in restricted account -- 3,000 -- - ------------------------------------------------------------------------------------------------- Net cash provided by (used in) investing activities 1,069 3,676 (505) - ------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Payments on short-term borrowings -- (3,000) -- Payments of capital lease obligations (1,036) (691) (398) Proceeds from issuance of stock 338 574 4,486 - ------------------------------------------------------------------------------------------------- Net cash provided by (used in) investing activities (698) (3,117) 4,088 - ------------------------------------------------------------------------------------------------- Net increase in cash and cash equivalents 2,963 292 1,429 Cash and cash equivalents at beginning of period 3,974 3,682 2,253 ================================================================================================= Cash and cash equivalents at end of period $6,937 $3,974 $3,682 ================================================================================================= SUPPLEMENTAL DISCLOSURES OF CASH PAID DURING THE YEAR: Interest $345 $264 $464 Taxes 53 21 7 Capitalized lease obligations incurred for the acquisition of equipment $1,224 $3,367 $94 Issuance of stock for settlement of litigation $ -- $ -- $896 - ------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements 29 30 NOTES TO CONSOLIDATED 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 1995 and 1997 are 52-week years and fiscal 1996 is 53 weeks. Two customers accounted for approximately 25% and 17% of revenues in fiscal 1997, two customers accounted for approximately 42% and 10% of revenues in fiscal 1996, and two customers accounted for approximately 17% and 16% of the Company's revenues in fiscal 1995. Sales to foreign customers in fiscal years 1997, 1996, and 1995 represented 31%, 25%, and 38% , respectively, of revenues during such years. During fiscal years 1997, 1996, and 1995, approximately $3.1 million, $2.0 million, $2.3 million, respectively, represented sales to customers in Europe, and $6.1 million, $5.8 million, $6.2 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 consolidated financial statements include the accounts of SEEQ Technology Incorporated and its wholly owned subsidiary. Upon consolidation, all significant inter-company accounts and transactions are eliminated. 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 classifies 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. 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):
September 30, 1997 1996 ----------------------------------------------------------- Raw materials $ -- $ 22 Work in process 437 3,147 Finished goods 2,739 2,183 =========================================================== $3,176 $5,352 ===========================================================
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 1997, the Company capitalized $250,000 of non-recurring product transfer costs and amortized $517,000 of accumulated costs. 30 31 During fiscal 1996, the Company capitalized $835,000 of non-recurring product transfer costs of which $231,000 was amortized in the same period. Non-recurring product transfer costs in fiscal 1995 were not material. 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, 1997, outstanding receivables from three customers accounted for 27%, 24%, and 10% of the Company's accounts receivable. At September 30, 1996, outstanding receivables from three customers accounted for 45%, 11%, and 11% of the Company's accounts receivable. NET INCOME PER SHARE. Net income per share is computed using the weighted average number of common and common equivalent shares outstanding during the period. Common equivalent shares consist of stock options (using the "treasury stock" method). Common equivalent shares are excluded from the computation if their effect is anti-dilutive. 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 pro-forma disclosures as required under Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation. See Note 6. RECENT ACCOUNTING ANNOUNCEMENTS. Statement of Financial Accounting Standards No. 128 (SFAS 128), "Earnings Per Share (EPS)", was issued in February 1997. Under SFAS 128, the Company will be required to disclose basic EPS and diluted EPS, for all periods for which an income statement is presented, which will replace the disclosures currently being made for primary EPS and fully-diluted EPS. SFAS 128 requires adoption for fiscal periods ending after December 15, 1997. Pro forma disclosure of basic EPS and diluted EPS for the current reporting and comparable periods in the prior year are as follows:
Fiscal Year Ended Sep. 30, Sep. 30, Sep. 30, 1997 1996 1995 ---- ---- ---- Earnings per share Basic $0.15 $0.09 $0.05 Diluted $0.15 $0.09 $0.04
31 32 NOTE 3. SALE OF EEPROM ASSETS AND SEEQ COMMON STOCK TO ATMEL. Pursuant to the Asset Purchase Agreement dated February 7, 1994 (the "Asset Purchase Agreement"), by and between SEEQ and Atmel Corporation ("Atmel"), Atmel purchased the assets of SEEQ related to its electrically erasable programmable read only memory ("EEPROM") products (the "EEPROM Asset Sale"). Under the terms of the Asset Purchase Agreement, Atmel acquired all of SEEQ's rights in assets related to SEEQ's EEPROM products, including intellectual property, equipment, inventory and a portion of the accounts receivable. The purchase price for such assets consisted of 135,593 shares of Atmel's common stock and $481,632 in cash. In addition, Atmel assumed certain liabilities under equipment leases for equipment used in producing EEPROM products. During the third quarter of fiscal 1994, SEEQ sold the 135,593 shares of Atmel Common Stock it received in the EEPROM Asset Sale for total proceeds of $6,693,000, reflecting a gain on the sale of $1,693,000. A significant portion of the proceeds from the stock sale was deposited in two escrow accounts subject to claims of indemnity by Atmel under the Asset Purchase Agreement. One escrow account, which contained $600,000, was subject to claims by Atmel with respect to the equipment, inventory and accounts receivable sold to Atmel in the EEPROM Asset Sale. Atmel asserted a claim for the full amount deposited in this escrow account. On January 30, 1995, the Company entered into an agreement with Atmel to settle Atmel's claim. Under the terms of the agreement, $250,000 was distributed to Atmel and the remaining $350,000 was distributed to the Company. The second escrow account, which initially contained $4,329,000 (recorded as other assets), is subject to any future claims that may be made by Atmel with respect to the EEPROM technology sold to Atmel in the EEPROM Asset Sale. During the first quarter of fiscal 1995, the fourth quarter of fiscal 1996, and the fourth quarter of fiscal 1997, $300,000 $1,000,000, and 1,200,000 respectively, was distributed to SEEQ from the escrow account, leaving $1,829,000 on deposit therein as of September 30, 1997 (excluding interest earned to date of $698,000). Such amount is included in "Other assets" in the accompanying "Consolidated Balance Sheet." 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. In 1994 Atmel believed that it may have been entitled to assert a claim against this escrow account, although Atmel has not done so to date. The funds in this escrow account will remain in escrow until February 1999, or until a determination is made that SEEQ is entitled to such funds under any release condition in the escrow agreement, or if Atmel makes a claim prior to February 1999 under such escrow, then until such claim is resolved by a court. In connection the EEPROM Asset Sale, Atmel acquired 3,614,701 shares of SEEQ's Common Stock pursuant to the Stock Purchase Agreement dated February 7, 1994, representing approximately 14% of SEEQ's outstanding shares of Common Stock as of such date. Such shares were purchased at a price of $1.25 per share, for a total purchase price of $4,518,376. The Company filed a registration statement for these shares that became effective with the Securities and Exchange Commission on March 24, 1995. NOTE 4. RESTRUCTURINGS. 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 restructuring reserves are included as part of other accrued liabilities and long term liabilities. 32 33 The following table summarizes the restructuring activity in fiscal 1995, 1996 and 1997 (in thousands):
Restructure Utilization Utilization Utilization Reserve Benefit (Benefit) Reserve (Benefit) Reserve (Benefit) Reserve at (Charge) Charge at Charge at Charge at Sept. 30, Recorded in During Sept. 30, During Sept. 30, During Sept. 30, 1994 Fiscal 1995 Fiscal 1995 1995 Fiscal 1996 1996 Fical 1997 1997 - ------------------------------------------------------------------------------------------------------------------------- Facility lease, inventory and other equipment costs $ (616) $ 11 $ 605 $-- $-- $-- $-- $ -- - ------------------------------------------------------------------------------------------------------------------------- EEPROM Asset Sale Restructuring Costs of assets transferred (55) (195) 250 -- -- -- -- -- Excess facilities (2,534) 818 915 (801) 119 (682) 122 (560) Discontinued inventories (150) 51 99 -- -- -- -- -- Other costs (292) (338) 435 (195) 195 -- -- -- - ------------------------------------------------------------------------------------------------------------------------- (3,031) 336 1,699 (996) 314 (682) 122 (560) - ------------------------------------------------------------------------------------------------------------------------- End-user Ethernet adapter board products write-off Other costs -- 52 (52) -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------- -- 52 (52) -- -- -- -- -- ========================================================================================================================= Totals $(3,647) $ 399 $ 2,252 $(996) $ 314 $(682) $ 122 $(560) =========================================================================================================================
EEPROM ASSET SALE RESTRUCTURING In connection with the EEPROM Asset Sale, the Company incurred certain restructuring costs or realized certain benefits during fiscal 1995, 1996 and 1997 as follows: EEPROM Asset Sale. On January 30, 1995 the Company and Atmel entered into a settlement agreement to settle Atmel's claims made against the $600,000 escrow account previously established. Under the settlement agreement, $250,000 was distributed to Atmel and the remaining $350,000 was distributed to the Company. As a result, the Company recorded a $195,000 charge in fiscal 1995 for that portion of the settlement which was not previously reserved. Excess facilities. During fiscal 1994, the Company decided to sublease its headquarters' office and manufacturing facilities for the approximately eight years remaining on the term of the lease. The Company recorded reserves representing the Company's estimate of the difference between the rent payable by the Company under the lease and the anticipated rent payable to the Company under a sublease. During the first quarter of fiscal 1995, the Company sublet the entire facility in which its headquarters and operations were located at a higher rental rate than previously estimated, and as a result in 1995, recorded an $818,000 reduction to its restructuring reserves. The Company also recorded $915,000 of facility lease payments, broker fees and relocation costs in connection with the sublease. During fiscal 1996, the Company recorded $119,000 of facility lease payments in excess of the sublease amount. Severance. The Company substantially reduced its workforce as a result of the termination of 78 employees in the quarter ended March 31, 1994. Discontinued Inventories. As a result of the EEPROM Asset Sale, the Company discontinued certain inventories; in fiscal 1995 the Company paid $99,000 to foundries for inventories. Excess property and leasehold improvements. In fiscal 1994 the Company wrote off fixtures and other property and leasehold improvements related to the assets sold that were no longer usable in the Company's continuing operations. Other costs. In fiscal 1994, the Company recorded other costs, including property tax obligations, obsolete computer systems and legal fees. For the fiscal year ended September 30, 1995, the Company recorded other costs of approximately $338,000, primarily reflecting legal fees and settlement costs in connection with the agreement with Hualon Microelectronics Company (see Note 11 Litigation). The Company paid $435,000 for settlement costs, outside foundries for memory product process development and lease payments for certain equipment related to EEPROM products. During fiscal 1996, payments of $195,000 for settlement costs were made. 33 34 NOTE 5. STOCKHOLDERS' EQUITY WARRANTS. In fiscal 1991, as a partial consideration for a bank credit agreement, the Company issued a warrant exercisable for five years to purchase 150,000 shares of the Company's common stock at $1.56 per share; this warrant was exercised during fiscal 1995. In fiscal 1992, as consideration to extend the credit agreement for an additional year, the Company issued a warrant exercisable through August 1, 1995 to purchase 100,000 shares of the Company's common stock at $3.13 per share; this warrant was not exercised and therefore expired in fiscal 1995. In fiscal 1993, in conjunction with a foreign equity offering, warrants were issued to purchase 120,385 shares of common stock at $1.25 per share. During fiscal 1995 and 1996, 84,270 and 36,115 of these warrants were exercised, respectively. In the third quarter of fiscal 1993, as part of a public offering of 4.6 million shares of the Company's common stock, warrants to purchase an additional 2.3 million shares at $1.40 per share were issued. In addition, the selling agent was granted warrants to purchase 460,000 shares of common stock at $1.06 per share. During fiscal 1995, all of the 2.3 million warrants at $1.40 per share were exercised and 360,000 of the $1.06 per share warrants were exercised, the remaining 100,000 of these warrants were exercised in fiscal 1996. The value of these warrants was immaterial at the date of issuance for fiscal years 1993, 1992 and 1991. PREFERRED STOCK. At September 30, 1997, 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, 1997: Issuable upon Number of Shares - ------------------------------------------------------ Exercise of stock options, including shares available for option grants 5,470,316 Periodic Purchase Plan 68,143 - ------------------------------------------------------ 5,538,459 ======================================================
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 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 34 35 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. NOTE 6. EMPLOYEE STOCK PLANS PERIODIC PURCHASE PLAN. All employees who have met the minimum service period are eligible to participate in the Company's Periodic Purchase Plan. Employees may purchase shares subject to the Plan at a price not less than 85% of the lesser of the fair market value at the beginning or end of the offering period. The term of each offering period is six months. During fiscal 1997, 1996, and 1995, 29,000, 30,000, and 15,000 shares were issued at weighted average purchase prices of $2.33, $2.36, and $0.90 per share, respectively. At September 30, 1997, 68,143 shares are available for issuance under the plan. STOCK OPTION PLANS. During fiscal 1982, the Company adopted two stock option plans; an incentive plan for employees and a non-statutory plan for certain employees, directors, sales representatives, distributors and consultants. The plans were subsequently combined. Under the restated plan, as amended, a total of 7,760,000 shares of common stock have been reserved for issuance under the combined plan, including an increase of 1,400,000 shares of common stock, approved by the stockholders at the Annual Meeting held March 21, 1996. Options are granted for a period not in excess of ten years from the date of grant. Terms for exercising options are determined by the Board of Directors. Options outstanding at September 30, 1997 become exercisable in cumulative increments proportionately over a four-year period from the date of grant, except that if termination occurs within six months from commencement date, no options are exercisable. Options are granted to purchase shares at prices not less than the fair market value at the date of grant. The plan expires in 2002. In fiscal 1990, the Company adopted a non-statutory stock option plan for non-employee directors. A total of 200,000 shares of common stock were reserved for issuance under the plan. Options are automatically granted to eligible board members at the director's initial election or appointment and subsequent annual meetings commencing with the second annual meeting following the date of initial election or appointment. In March 1996, the stockholders approved an amendment to the plan to provide for a special one-time option grant to two non-employee members of the Company's Board of Directors. Options to purchase a combined total of 40,000 shares were granted. Options are exercisable after an initial six month waiting period following the date of grant at prices not less than the fair market value on the date of the grant. Options are subject to repurchase rights by the Company to the extent that they are not vested at the time of termination of Board membership. The following table summarizes stock option activity under the stock option plans (in thousands, except per share amounts):
Options Outstanding ------------------------------- Options Weighted Available Average For Grant Options Exercise Price - --------------------------------------------------------------------------------- Balance at September 30, 1994 1,998 3,121 $1.3608 Granted (1,877) 1,877 1.4761 Exercised (586) 1.2376 Canceled 1,043 (1,043) 1.5119 - --------------------------------------------------------------------------------- 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 ================================================================================ Options exercisable at September 30, 1997 2,233 $1.6216 ================================================================================
35 36 The following table summarizes options outstanding and exercisable by price range as of September 30, 1997.
Options Outstanding Options Exercisable --------------------------------------------------------------------- Weighted Avg. Remaining Weighted Average Contractual Life Average Exercise Exercise Price Range Options (Years) Exercise Price Options Price - ------------------------------------------------------------------------------------------- $1.0000 - $ 1.3440 558,424 6.24 $1.2087 501,103 $1.2043 $1.3750 - $ 1.3750 2,079,630 6.79 1.3750 1,261,056 1.3750 $1.4375 - $ 2.4063 1,187,552 8.84 1.8719 202,636 1.9292 $2.4380 - $ 7.8750 561,129 8.48 3.2512 268,442 3.3268 - ------------------------------------------------------------------------------------------- $1.0000 - $ 7.8750 4,386,735 7.49 $1.7283 2,233,237 $1.6216 ===========================================================================================
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:
Employee Stock Options Employee Stock Purchase Plan ---------------------- ---------------------------- 1997 1996 1997 1996 ---- ---- ---- ---- Expected dividend yield 0.0% 0.0% 0.0% 0.0% Risk-free interest rate 6.4% 5.9% 5.3% 5.4% Expected volatility 68% 63% 95.7% 54.2% Expected life (in years) 4 4 0.5 0.5
The weighted average estimated grant date fair value, as defined by SFAS 123, for options granted during fiscal 1997 and 1996 was $1.05 and $1.72 per option, respectively. PRO FORMA NET INCOME AND NET INCOME 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 and net income per share would have been reduced to the pro forma amounts below for the years ended September 30, 1997 and 1996 (in thousands, except per-share amounts):
1997 1996 ---- ---- Net income - pro-forma $ 4,192 $ 2,162 Net income per share - pro-forma $ 0.13 $ 0.07
36 37 NOTE 7. SHORT-TERM NOTE PAYABLE In November 1993, the Company entered into a two-year line of credit agreement, subject to renewal, with the CIT Group ("CIT"). Although the Company was not required to make use of the bank line of credit, during the second quarter of fiscal 1994 it used cash resources to reduce its effective short-term credit borrowings interest rate by borrowing the minimum required borrowings of $3,000,000 under a secured bank line of credit with CIT, and investing the proceeds in a short-term certificate of deposit (restricted cash). Effective November 22, 1995, the Company renewed the credit facility with CIT for a two year term. Under the renewed credit agreement, the minimum borrowing requirement was reduced to $1,500,000 and was only applicable in the event the Company had a loan balance outstanding with CIT. Thus the Company liquidated its restricted cash and repaid the note payable to bank in November 1995. The credit agreement with CIT was terminated by the Company in August 1996. The agreement was replaced at that time by a one-year revolving line of credit agreement with Silicon Valley Bank. In August 1997, the Company renewed its one-year revolving line of credit agreement with. Silicon Valley Bank. Under the terms of the bank revolving line of credit, the Company could borrow the lesser of $7,000,000 or an amount determined by a formula applied to eligible accounts receivable, at a variable interest rate equal to the prime rate plus 0.25%. The revolving line of credit is secured by a first position security interest in the Company's assets, including intellectual property, and expires August 18, 1998. The loan agreement requires the Company to maintain a profit each fiscal year and to maintain certain financial ratios. The loan agreement also requires the Company to maintain a level of tangible net worth which, in effect, limits the ability of the Company to make payments of cash dividends. As of September 30, 1997, the Company was in compliance with all of the covenants of the credit agreement. There were no borrowings outstanding under this revolving line of credit as of September 30, 1997. NOTE 8. LONG-TERM OBLIGATIONS AND COMMITMENTS Long-term obligations consisted of the following (in thousands):
September 30, 1997 1996 - --------------------------------------------------------- Capitalized lease obligations $3,468 $3,280 Facility lease obligations 931 1,081 ========================================================= 4,399 4,361 Less: current portion (1,091) (895) ========================================================= $3,308 $3,466 =========================================================
The Company leases its facilities and certain manufacturing and office equipment under non-cancelable lease arrangements. The major facility lease expires in 2005 and provides for base rental rates which are increased at various times during the term of the lease and for a renewal option to extend the lease for an additional five-year period. The non-cancelable equipment leases are for terms of three to five years and generally provide for the lessor to retain the depreciation for income tax purposes. Most of the leases require the Company to pay property taxes, insurance and normal maintenance and repairs. Leases meeting certain specific criteria are accounted for as the acquisition of an asset and the incurrence of a liability (i.e., a capital lease). Assets recorded as property and equipment under capital leases were as follows:
September 30, (Thousands) 1997 1996 - --------------------------------------------------------------- Machinery and equipment $3,505 $3,195 Furniture and fixtures 1,181 266 - --------------------------------------------------------------- 4,686 3,461 Accumulated amortization (1,154) (309) ============================================================== $3,532 $3,152 ==============================================================
37 38 Minimum future lease payments (in thousands) for non-cancelable leases as of September 30, 1997 were as follows:
Years ended Operating Capital September 30, Leases Leases - -------------------------------------------------------------------- 1998 $ 652 $ 1,377 1999 658 1,235 2000 687 820 2001 702 574 2002 650 88 Thereafter 1,183 -- - -------------------------------------------------------------------- Total minimum lease payments $4,532 4,094 ------- ------- Less: amount representing interest (626) ------- Present value of minimum lease payments 3,468 Less: current portion (1,091) ------- Long term lease obligations $ 2,377 ===================================================================
Rental expense under all operating leases was $622,000 for fiscal 1997, $634,000 for fiscal 1996, and $597,000 for fiscal 1995. NOTE 9. 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 1996 and 1995, the Company recorded provisions of $88,000 and $14,000, respectively, for income taxes. The Company's provisions were computed by applying the estimated annual tax rate to income taxes, taking into account net operating loss carryforwards and alternative minimum taxes. At September 30, 1997, the Company had net operating loss carryforwards of approximately $103,400,000 for federal income tax purposes, which may be utilized to reduce future taxable income. These carryforwards expire in varying amounts from 1998 through 2010. Under the Tax Reform act of 1986, the amounts of and the benefit from net operating losses that can be carried forward may be impaired or limited in certain circumstances. Events which may cause changes in the amount of net losses that the Company may utilize in any one year include, but are not limited to, a cumulative stock ownership change of more than 50% over a three year period. Deferred tax assets (liabilities) are comprised of the following (in thousands):
September 30, 1997 September 30, 1996 ------------------ ------------------ Federal and state loss and credit $ 37,461 $39,165 carryforwards Inventory reserves and basis differences 840 168 Accounts receivable and sales return 160 215 reserves Compensation accruals 58 52 Restructuring accruals 229 278 Other -- 51 -------- -------- Deferred tax assets 38,748 39,929 Valuation allowance (36,787) (39,929) Deferred tax liabilities (11) -- -------- -------- Net deferred tax assets $ 1,950 $ -- ======== ========
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, 1997 and September 30, 1996 is attributed to U.S. federal and stated deferred tax assets. Management believes sufficient uncertainty exists such that a valuation allowance of $36,787,000 and $39,929,000 against those net deferred tax assets is required at September 30, 1997 and September 30, 1996, respectively. 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. 38 39 NOTE 10. DEVELOPMENT AND LICENSE AGREEMENTS In July 1990, the Company entered into an eight year renewable manufacturing and technology agreement with Hualon Microelectronics Corporation ("HMC"). HMC provided foundry services to the Company through the second quarter of fiscal 1994. In fiscal 1994, as a result of the EEPROM Asset Sale and disputes with HMC, the Company discontinued its use of HMC's foundry services (see Note 11. Litigation). In August 1995, the Company re-established its foundry and development relationship with HMC. The Company and HMC agreed to reactivate and modify their 1990 Foundry and Co-Development Agreement. Under the "amended" Agreement, HMC will, solely at the Company's request, manufacture wafers for certain of the Company's products through fiscal 1998. In connection with the transfer of production from another foundry to HMC, the Company paid Non-recurring Engineering ("NRE") charges of $240,000. The Company paid approximately $40,000 of these NRE charges in fiscal 1995 and $200,000 in fiscal 1996. The company did not incur any such NRE charges relating to this agreement in 1997. The Company has several other foundries which it operates on an individual purchase order basis. NOTE 11. LITIGATION On March 30, 1994, the Company filed a lawsuit against HMC in which, among other things, the Company sought a declaration by the court that an alleged license agreement, pursuant to which HMC had allegedly been granted certain license rights to the EEPROM technology sold to Atmel (see Note 3), is invalid. In response to the Company's claims, HMC asserted affirmative defenses and counterclaims. On August 16, 1995, the Company and HMC entered into a Settlement Agreement, Release and Tolling Agreement. Under the terms of such Agreement, the Company agreed, among other things, that the claims asserted against HMC in respect of the alleged license agreement would be tolled for such time and on such terms as provided therein. As a result, the Company is not currently pursuing such claims. The Company is entitled to pursue such claims in the future, however, subject to the terms of the Settlement Agreement, Release and Tolling Agreement. In the event that the Company does not cause the alleged license agreement to be invalidated, Atmel may assert a claim against the Company under the Asset Purchase Agreement, including a claim for damages, if suffered by Atmel as a result of HMC's use of any of such technology, and, in the event any such claim by Atmel is determined to be valid, Atmel may recover any such damages from the escrow described above. The Company believes that, in the event of any claim by Atmel, the amount of damages that may be payable by the Company upon a resolution thereof will not have a material adverse effect on the Company's cash flow, financial position or results of operations. However, there can be no assurance as to such matters. Under the terms of the settlement, the Company agreed to pay HMC $500,000 due in three consecutive monthly installments beginning in August 1995. The Company further agreed to issue to HMC 100,000 shares of SEEQ's common stock and reactivate and modify the 1990 Foundry and Co-Development Agreement (see Note 10. Development and License Agreements). On November 28, 1995, Level One Communications Incorporated ("Level One") filed a complaint against the Company, in the United States District Court of Northern California, alleging patent infringement. In the complaint, Level One claims that the Company has used and sold products in violation of two of Level One's patents. Level One seeks immediate and permanent injunctive relief preventing the Company from making, using, or selling any devices that infringe such patents and unspecified damages. The Company intends to vigorously contest all of Level One's claims. Based on the Company's review to date, management believes that the claims asserted by Level One are without merit and that the outcome of these legal proceedings will not have a material adverse effect on the Company's financial position or results of operations, although there can be no assurance as to such matters. Patent litigation is often highly complex, can extend for a protracted period of time, can involve substantial cost to the Company and may divert the attention of the Company's management and technical personnel, which can substantially increase the cost of such litigation. There can be no assurance that such costs and diversion of resources would not have a material adverse effect on the Company's business, financial condition and results of operations. As of December 5, 1997, SEEQ had filed, briefed and argued motions to declare all asserted claims of the Level One patents in the suit as invalid in view of certain prior art. The Company anticipates a ruling in the near future. In addition, on June 16, 1997, SEEQ filed a motion to amend its counterclaim to add SEEQ's U.S. Patent 5,504,738, entitled, DEFENDANT SEEQ TECHNOLOGY'S NOTICE OF MOTION AND MOTION FOR LEAVE TO SUPPLEMENT ITS ANSWER AND COUNTERCLAIM AND MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT THEREOF SEEQ asserts that Level One's LXT 970 product infringes the '738 patent in the manner in which incorporates an auto negotiate feature. The motion was fully briefed, argued and submitted as of December 5, 1997. The Company expects a ruling in the near future. If the motion is denied, SEEQ will nonetheless file suit in an independent action. 39 40 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. 40 41 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. 41 42 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. 1. Exhibits 3.1 Certificate of Incorporation (incorporated herein by reference to Registrant's Registration Statement on Form S-1 (Registration No. 33-47985)). 3.2 Bylaws (incorporated herein by reference to Registrant's Registration Statement on Form S-1 (Registration No. 33-47985)). 4.1 Rights Agreement dated as of April 21, 1995 between the Company and American Stock Transfer and Trust Company, including exhibits thereto (incorporated herein by reference to Registrant's Form 8-A on May 2, 1995). 10.0 Form of Indemnification Agreement with Directors and Officers (incorporated herein by reference to Registrant's Form 8-B filed on June 2, 1987). 10.2 Executive Compensation Plans and Arrangements. 10.2.1 Restated Periodic Purchase Plan, as amended (incorporated herein by reference to Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1991). 10.2.2 Restated 1982 Stock Option Plan, as amended (incorporated herein by reference to Registrant's Form S-8 Registration Statement (33-6544) filed on July 2, 1993. 10.2.3 1989 Non-Employee Director Stock Option Plan (incorporated herein by reference to Registrant's Form S-8 Registration Statement (Registration No. 33-35838) filed on July 11, 1990). 10.3 Technology Transfer and Foundry Agreement dated as of July 16, 1990 between the Company and HMC Microelectronics Corporation (subject to confidential treatment) (incorporated by reference to Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 1990). 10.4.1 Settlement Agreement, Release and Tolling Agreement dated as of August 16, 1995 by and between the Company and HMC Microelectronics Corporation (subject to confidential treatment). 10.4.2 Amendment to Technology Transfer and Foundry Agreement dated August 16, 1995 by and between the Company and HMC Microelectronics Corporation (subject to confidential treatment). 10.5 Business Loan Agreement with Silicon Valley Bank dated as of August 19, 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). 42 43 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.) 11.0* Schedule of Computation of Earnings Per Share (See page 46 of this Form 10-K). 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 Price Waterhouse 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 Undertakings For purposes of complying with the amendments to the rules governing Form S-8 (effective July 13, 1990) and Form S-3 under the Securities Act of 1933, the undersigned registrant hereby undertakes as follows: Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers or controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the 1933 Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of the expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered on the Form S-8 and Form S-3 identified below, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the 1933 Act and will be governed by the final adjudication of such issue. The preceding undertaking shall be incorporated by reference into registrant's Registration Statement on Form S-8 Registration No.6554), filed July 2, 1993; registrant's Registration Statement on Form S-8 (Registration No. 33-35838), filed July 11, 1990; registrant's Registration Statement on Form S-8 (Registration No. 33-27419), filed March 7, 1989; and registrant's Registration Statement on Form S-3 (Registration No. 33-84018), filed May 22, 1996. 43 44 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 22, 1997 44 45 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 resubstitution, for him and in his name, place, and stead, in any and all capacities, to sign any and all amendments to this report on Form 10K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof: Pursuant to the requirements of the Securities Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date - --------- ----- ---- /s/ Phillip J. Salsbury Chief Executive Officer December 22, 1997 - ----------------------------- and Director (Phillip J. Salsbury) (Principal Executive Officer) /s/ Gary R. Fish Vice President, Finance December 22, 1997 - ----------------------------- and Administration (Gary R. Fish) (Principal Financial and Accounting Officer) /s/ Alan V. Gregory Chairman of the Board December 22, 1997 - ----------------------------- and Director (Alan V. Gregory) /s/ Charles Harwood Director December 22, 1997 - ----------------------------- (Charles Harwood) /s/ Charles Giancarlo Director December 22, 1997 - ----------------------------- (Charles Giancarlo)
45 46 SCHEDULE II SEEQ TECHNOLOGY INCORPORATED VALUATION AND QUALIFYING ACCOUNTS Years Ended September 30 (in thousands)
Additions --------------------- Balance at Charged to Charged Balance at Beginning Costs and Against End of Year Expenses Revenues Deductions of Year - ----------------------------------------------------------------------------------------------- 1995 Allowance for Doubtful Accounts and Sales Returns $664 $59 $ 530 $915 (1) $338 =============================================================================================== 1996 Allowance for Doubtful Accounts and Sales Returns $338 $-- $ 898 $996 (1) $240 =============================================================================================== 1997 Allowance for Doubtful Accounts and Sales Returns $240 $10 $1,315 $1,320 (1) $245 ===============================================================================================
(1) Doubtful account write-offs and customer returns and price adjustments (S-1) 47 EXHIBIT INDEX Exhibit No. Description ------- ------------ 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). 48 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.) 11.0* Schedule of Computation of Earnings Per Share (See page 46 of this Form 10-K). 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 Price Waterhouse 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 EX-10.10 2 LICENSE AGREEMENT 1 [*] Confidential treatment has been requested with respect to the information contained within the "[*]" markings. Such marked portions have been omitted from this filing and have been filed separately with the Securities and Exchange Commission. LICENSE AGREEMENT This License Agreement (the "Agreement") is made and is effective as of September 26, 1997, by and between SEEQ Technology Incorporated, a Delaware corporation, with a place of business at 47200 Bayside Parkway, Fremont, California 94538, United States of America ("SEEQ") and Silicon Integrated Systems Corporation, a Taiwan corporation, with a place of business at No. 16 Creation Road 1, Science-Based Industrial Park, Hsin Chu, Taiwan, Republic of China ("SiS"). Either SEEQ or SiS may be referred as a "Party" or collectively as the "Parties". 1. Definitions For purposes of this Agreement, the following terms shall have the meanings set forth adjacent to them: A. [*] designed and produced by SEEQ. B. Combo Chip: A device that SiS will produce incorporating Intellectual Property Rights embodied in the [*]. C. Intellectual Property Rights means and includes all intangible, intellectual, proprietary and industrial property rights, and all tangible embodiments thereof wherever located, including but not limited to the following: (i) all copyrights and other rights in works of authorship including all registrations and applications therefor; (ii) all mask works and other rights pertaining to semiconductors, including cell libraries, microcode, tapes, tape-outs and netlist rights, including all registrations and applications therefor; (iii) all patents and patent applications, patentable ideas, inventions and innovations; (iv) all knowhow and trade secrets; (v) all design and code documentation, methodologies, processes, design information, formulas, engineering specifications, technical data, testing procedures, drawings and techniques and other proprietary information and material of any kind; (vi) all documentation, records, databases, drafts, designs, code, drawings and algorithms; and (vii) any and all translations of any of the foregoing. 2. SiS' PRINCIPAL OBLIGATIONS A. License Fee: For the rights granted to SiS hereunder, SiS will pay the following fee in U.S. Dollars due as specified: 1. For the Intellectual Property Rights embodied in the [*], $[*] (the "license fee"), due per SEEQ's standard terms and conditions. -1- 2 2. SiS and SEEQ acknowledge that the license fee is subject to a withholding tax of twenty percent (20%) imposed by the government of Taiwan. SIS will apply for, and use its best efforts to obtain, a waiver by the government of Taiwan of such twenty percent (20%) withholding tax. 3. INTELLECTUAL PROPERTY RIGHTS A. OWNERSHIP 1. Except as expressly set forth herein, SEEQ retains all right, title and interest in and to the Intellectual Property Rights embodied in the [*] and the same are proprietary to SEEQ, and SEEQ retains all right, title and interest in and to such Intellectual Property Rights. Any portion of the Intellectual Property Rights embodied in the [*] incorporated into the Combo Chip are licensed without the right to sublicense, not sold, to SiS solely for the purposes, and subject to the applicable limitations, set forth herein. 2. Protection of Confidential Information. Each party agrees to take responsible measures to preserve the secrecy of all confidential information of the other party contained or embodied in the Combo Chip to avoid any disclosure which would forfeit trade secret protection for such confidential information. B. LICENSE GRANTS 1. Subject to the terms and conditions of this Agreement, SEEQ hereby grants to SiS a worldwide, nonexclusive, nontransferable license, without the right to sublicense, to SEEQ's Intellectual Property Rights embodied in the [*] solely for the purpose of SiS's development of the Combo Chip. 4. LIMITATIONS ON LIABILITY. NEITHER PARTY SHALL BE LIABLE TO THE OTHER PARTY FOR ANY INDIRECT, INCIDENTAL, CONSEQUENTIAL, SPECIAL OR PUNITIVE DAMAGES ARISING OUT OF OR RELATING TO THIS AGREEMENT, WHETHER LIABILITY IS BASED ON BREACH OF CONTRACT, BREACH OF WARRANTY (EXPRESS, IMPLIED OR OTHERWISE) OR OTHERWISE, AND WHETHER ASSERTED IN CONTRACT, TORT (INCLUDING NEGLIGENCE, INTENTIONAL ACTS AND STRICT LIABILITY) OR OTHERWISE, AND IRRESPECTIVE OF WHETHER THE PARTIES HAVE ADVISED OR BEEN ADVISED OF THE POSSIBILITY OF ANY SUCH DAMAGES. IN NO EVENT SHALL EITHER PARTY'S LIABILITY HEREUNDER EXCEED $[*]. 5. REPRESENTATIONS & WARRANTIES; DISCLAIMERS, CONSEQUENTIAL DAMAGES A. REPRESENTATIONS & WARRANTIES 1. Subject to the limitations of this Article 5, SEEQ represents and warrants to SiS as follows: -2- 3 a. As of the Effective Date: (1) Except for material in the public domain, either (i) SEEQ was the sole and exclusive legal and equitable owner of, and held good and marketable title to the Intellectual Property Rights embodied in the [*] and/or (ii) to the extent all or a portion of the Intellectual Property Rights embodied in the [*] were licensed by SEEQ from third parties, SEEQ has license rights from its licensors sufficient to permit SEEQ to perform its obligations under this Agreement; (2) the Intellectual Property Rights embodied in the [*] were not subject to any lien, security interest, royalty obligation or other interest or claim of any kind; (3) SEEQ and/or its licensors had the sole right to bring actions for infringements of any Intellectual Property Rights embodied in the [*]; and (4) none of the Intellectual Property Rights embodied in the [*] was subject to any escrow. b. To the best knowledge of SEEQ: (1) the Intellectual Property Rights embodied in the [*] and the marketing, reproduction or use of the Intellectual Property Rights embodied in the [*] did not infringe upon any patent, copyright, trade secret or other proprietary right of any third party; (2) none of the Intellectual Property Rights embodied in the [*] were being infringed upon by others; and (3) none of the Intellectual Property Rights embodied in the [*] were subject to any outstanding order or judgment. c. To the best knowledge of SEEQ, all SEEQ employees who had been directly involved in the development of the Intellectual Property Rights embodied in the [*] had executed confidentiality and non-disclosure agreements covering the source code and other non-public information contained in the Intellectual Property Rights embodied in the [*]. d. The Intellectual Property Rights embodied in the [*] materially conformed to the specifications contained in the user manual and documentation therefor. B. DISCLAIMERS Except as expressly set forth in Section 5-A and elsewhere in this Agreement, SEEQ hereby disclaims making any representations or warranties, whether arising by implication, estoppel or otherwise, and, more specifically, makes no warranty that the Intellectual Property Rights embodied in the [*] will be accurate, sufficient, or suitable for use by SiS or any intended use by SiS and SEEQ assumes no responsibility or liability for damages, whether direct, indirect, consequential or incidental which might arise out of use by SiS of said Intellectual Property Rights embodied in the [*]. 1. NO OTHER WARRANTIES. EACH PARTY UNDERSTANDS AND AGREES THAT THE COMBO CHIP WILL BE TESTED, USED AND MARKETED AT ITS SOLE RISK AND EXPENSE. EACH PARTY EXPRESSLY DISCLAIMS ALL WARRANTIES, EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION, WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, AND NONINFRINGEMENT WITH RESPECT TO THE COMBO CHIP AND IS SUITABLE OR OTHERWISE FIT FOR USE IN OR IN CONNECTION WITH ANY CHIP THAT SUCH OTHER PARTY MAY NOW OR HEREAFTER DEVELOP OR SEEK TO DEVELOP, AND FOR ANY OTHER USE OR PURPOSE. C. NO CONSEQUENTIAL DAMAGES NEITHER PARTY SHALL BE LIABLE TO THE OTHER PARTY FOR -3- 4 ANY INDIRECT, INCIDENTAL, CONSEQUENTIAL, SPECIAL OR PUNITIVE DAMAGES ARISING OUT OF OR RELATING TO THIS AGREEMENT, WHETHER LIABILITY IS BASED ON BREACH OF CONTRACT, BREACH OF WARRANTY (EXPRESS, IMPLIED OR OTHERWISE) OR OTHERWISE, AND WHETHER ASSERTED IN CONTRACT, TORT (INCLUDING NEGLIGENCE AND STRICT Chip LIABILITY) OR OTHERWISE, AND IRRESPECTIVE OF WHETHER THE PARTIES HAVE ADVISED OR BEEN ADVISED OF THE POSSIBILITY OF ANY SUCH DAMAGES. IN NO EVENT SHALL EITHER PARTY'S LIABILITY HEREUNDER EXCEED $[*]. IN WITNESS WHEREOF, the parties have had this Agreement executed by their respective authorized offices on the date written below. By and on behalf of SEEQ TECHNOLOGY INCORPORATED, a Delaware corporation By: Phillip Salsbury Its: Chief Executive Officer Date: 11/14/97 By and on behalf of SILICON INTEGRATED SYSTEMS CORPORATION, a Taiwan corporation By: Samuel Liu Its: President Date: 10/28/97 [*] Confidential treatment has been requested with respect to the information contained within the "[*]" markings. Such marked portions have been omitted from this filing and have been filed separately with the Securities and Exchange Commission. -4- EX-11.0 3 SCHEDULE OF COMPUTATION OF EARNINGS PER SHARE 1 SEEQ TECHNOLOGY INCORPORATED EXHIBIT 11 SCHEDULE OF COMPUTATION OF EARNINGS PER SHARE (in thousands except per share amounts)
Years Ended ---------------------------------------------- September 30, September 30, September 30, 1997 1996 1995 ------- ------- ------- PRIMARY Earnings: Net income $ 4,686 $ 2,851 $ 1,330 ======= ======= ======= Shares: Average common shares outstanding 30,305 30,070 27,244 Add effect of dilutive options and warrants (as determined by the treasury stock method) 1,402 1,962 1,961 ------- ------- ------- As adjusted 31,707 32,032 29,205 ======= ======= ======= Primary earnings per share $ 0.15 $ 0.09 $ 0.05 ======= ======= ======= FULLY DILUTED Earnings: Net income $ 4,686 $ 2,851 $ 1,330 ======= ======= ======= Shares: Average common shares outstanding 30,305 30,070 27,244 Add effect of dilutive options and warrants (as determined by the treasury stock method) 1,875 2,078 3,650 ------- ------- ------- As adjusted 32,180 32,148 30,894 ======= ======= ======= Fully diluted earnings per share $ 0.15 $ 0.09 $ 0.04 ======= ======= =======
EX-23.1 4 CONSENT OF PRICE WATERHOUSE LLP 1 SEEQ TECHNOLOGY INCORPORATED EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-3 (No. 33-84018) and 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 24, 1997, appearing on page 25 of this 1997 Annual Report on Form 10-K. /s/ PRICE WATERHOUSE LLP San Jose, California December 19, 1997 EX-27.1 5 FINANCIAL DATA SCHEDULE
5 1,000 YEAR SEP-30-1997 SEP-30-1997 6,937 0 7,512 228 3,176 19,679 12,599 8,215 27,040 4,514 3,308 0 0 304 18,914 27,040 31,423 31,423 19,498 19,498 0 0 357 2,807 (1,880) 4,687 0 0 0 4,687 0.15 0.15
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