-----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, H2tw6KQJHO9xwt5nFoGEY8P1QmT3WLfWnd1rjfvWFUDBG9j5yqhe/WezMPQKj3Uk wfcQ/IgXDPP/Hh0+01UmpA== 0000891618-99-000432.txt : 19990211 0000891618-99-000432.hdr.sgml : 19990211 ACCESSION NUMBER: 0000891618-99-000432 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990210 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-Q SEC ACT: SEC FILE NUMBER: 000-11778 FILM NUMBER: 99528526 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-Q 1 FORM 10-Q FOR THE PERIOD ENDED DECEMBER 31, 1998 1 - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------- FORM 10-Q (Mark One) [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the quarterly period ended December 31, 1998 [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the transition period from _____ to_____ Commission file number: 0-11778 -------------------- SEEQ TECHNOLOGY INCORPORATED ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 94-2711298 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.)
47200 Bayside Parkway Fremont, California 94538 (510) 226-7400 (Address, including zip code, of Registrant's principal executive offices and telephone number, including area code) -------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock, $0.01 par value 32,247,752 (Class of common stock) (Shares outstanding at December 31, 1998)
- -------------------------------------------------------------------------------- This report on Form 10-Q, including all exhibits, contains 13 pages. 1 2 SEEQ TECHNOLOGY INCORPORATED FORM 10-Q Table of Contents
PAGE ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements............................................ 3 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....................................... 8 PART II. OTHER INFORMATION Item 1. Legal Proceedings............................................... 18 Item 2. Changes in Securities and Use of Proceeds....................... 18 Item 3. Defaults upon Senior Securities................................. 18 Item 4. Submission of Matters to a Vote of Security Holders............. 18 Item 5. Other Information................................................ 18 Item 6. Exhibits and Reports on Form 8-K................................. 18
2 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS SEEQ TECHNOLOGY INCORPORATED CONDENSED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) (Unaudited)
Three months ended December 31, December 31, 1998 1997 ------------ ------------ Net revenues $ 5,633 $ 7,552 Cost of revenues 4,213 4,183 -------- -------- Gross profit 1,420 3,369 Operating expenses Research and development 1,347 850 Marketing, general and administrative 1,342 1,534 -------- -------- Total operating expenses 2,689 2,384 -------- -------- Income (loss) from operations (1,269) 985 Interest and other, net 13 47 -------- -------- Income (loss) before income taxes (1,256) 1,032 Income tax (provision) benefit -- 48 -------- -------- Net income (loss) ($ 1,256) $ 1,080 ======== ======== Net income (loss) per share: Basic ($0.04) $ 0.04 Diluted ($0.04) $ 0.03 Shares used in per share calculation: Basic 31,994 30,473 Diluted 31,994 32,556 - -----------------------------------------------------------------------------
See accompanying notes to condensed financial statements. 3 4 SEEQ TECHNOLOGY INCORPORATED CONDENSED BALANCE SHEETS (In thousands) (Unaudited)
BALANCE SHEETS - ----------------------------------------------------------------------------------------- December 31, September 30, (Thousands, except share amounts) 1998 1998 - ----------------------------------------------------------------------------------------- ASSETS Current assets: Cash, cash equivalents and restricted cash $10,226 $10,172 Accounts receivable, less allowances for sales returns and doubtful accounts of $525 and $245 3,568 5,971 Inventories 3,333 4,080 Other current assets 391 426 - ----------------------------------------------------------------------------------------- Total current assets 17,518 20,649 - ----------------------------------------------------------------------------------------- Property and equipment, net 6,143 6,560 Other assets 147 1,540 - ----------------------------------------------------------------------------------------- $23,808 $28,749 ========================================================================================= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 2,012 $ 3,315 Accrued salaries, wages and employee benefits 637 732 Other accrued liabilities 734 2,489 Deferred income on sales to distributors 458 543 Current portion of capitalized lease obligations 1,612 1,644 - ----------------------------------------------------------------------------------------- Total current liabilities 5,453 8,723 - ----------------------------------------------------------------------------------------- Long-term liabilities 4,017 4,448 - ----------------------------------------------------------------------------------------- Total stockholders' equity 14,338 15,578 - ----------------------------------------------------------------------------------------- $23,808 $28,749 =========================================================================================
See accompanying notes to financial statements 4 5 SEEQ TECHNOLOGY INCORPORATED CONDENSED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
Three months ended ----------------------- Dec. 31, Dec. 31, 1998 1997 -------- -------- OPERATING ACTIVITIES: Net income (loss) ($ 1,256) $ 1,080 Adjustments to reconcile net income (loss) to cash provided by operating activities: Depreciation and amortization 559 463 Deferred taxes -- (79) Changes in assets and liabilities: Accounts receivable 2,403 1,513 Inventories 747 (629) Other assets 27 (28) Accounts payable (1,303) 774 Accrued liabilities and long term obligations (1,981) (284) -------- -------- Net cash provided by (used for) operating activities (804) 2,810 -------- -------- INVESTING ACTIVITIES: Capital expenditures (117) (74) Release of funds held in escrow 1,376 -- -------- -------- Net cash provided by (used for) investing activities 1,259 (74) -------- -------- FINANCING ACTIVITIES: Payments of capital lease obligations (417) (268) Proceeds from issuance of stock 16 111 -------- -------- Net cash used for financing activities (401) (157) -------- -------- Net increase in cash and cash equivalents 54 2,579 Cash and cash equivalents at beginning of period 10,172 6,937 ======== ======== Cash and cash equivalents at end of period $ 10,226 $ 9,516 ======== ========
See accompanying notes to condensed financial statements. 5 6 SEEQ TECHNOLOGY INCORPORATED NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1. BASIS OF PRESENTATION The accompanying unaudited condensed financial statements of SEEQ Technology Incorporated ("SEEQ" or the "Company") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements and should be read in conjunction with the financial statements and the notes thereto included in the Company's Annual Report to Stockholders for the fiscal year ended September 30, 1998. These financial statements reflect, in the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position and results of operations as of and for the periods indicated. The results of operations for the three months ended December 31, 1998 are not necessarily indicative of the results expected for the year ending September 30, 1999. For purposes of presentation, the Company has shown its fiscal quarters as ending on December 31, March 31, June 30 and September 30; whereas, in fact, the Company operates on a 52/53-week fiscal year ending on the last Sunday in September of each year. The fiscal quarter ends are actually December 27, March 28, June 27 and September 26 for the year ending September 30, 1999, and December 28, March 29, June 28 and September 27 for the year ending September 30, 1998. NOTE 2. INVENTORIES
- --------------------------------------------------------------- December 31, September 30, 1998 1998 ------------- -------------- Work in process $ 1,186 $ 1,686 Finished goods 2,147 2,394 - --------------------------------------------------------------- $ 3,333 $ 4,080 ===============================================================
NOTE 3. NON-RECURRING PRODUCTION TRANSFER COSTS Non-recurring costs such as tooling and engineering costs resulting from transferring production of current products to new foundries are capitalized and amortized to cost of revenues over the shorter of: the remaining life of the product, the term of the foundry agreement or two years. Non-recurring costs associated with the development of new products are expensed as research and development costs when incurred. During the three month periods ended December 31, 1999 and December 31, 1998, the Company did not capitalize any of such costs. Amortization of aggregate capitalized non-recurring costs for the three month periods ended December 31, 1998 and December 31, 1997 was $25,000 and $119,000, respectively, and remaining capitalized non-recurring production transfer costs aggregated $1,000 and $219,000 respectively. 6 7 NOTE 4. EARNINGS PER SHARE Basic EPS is computed by dividing net income available to common stockholders (numerator) by the weighted average number of common shares outstanding (denominator) during the period. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock potions. Diluted EPS is computed using the weighted average number of common and all potential dilutive common shares outstanding during the period.
(In thousands, except per share amounts) Three Months Ended --------------------------- December 31, December 31, 1998 1997 --------------------------- Net income (loss) (numerator) ($ 1,256) $ 1,080 Shares calculation (denominator): Weighted average shares outstanding 31,994 30,473 Effect of dilutive securities: Options -- 2,083 Average shares outstanding assuming dilution 31,994 32,556 -------- -------- Basic earnings per share ($ 0.04) $ 0.04 ======== ======== Diluted earnings per share ($ 0.04) $ 0.03 ======== ========
Options to purchase 5,020,000 shares of common stock were outstanding during the three month period ended December 31, 1998, but were not included in the computations of diluted EPS as their effect was anti-dilutive. Options to purchase 330,000 shares of common stock were outstanding during the three month period ended December 31, 1997 but were not included in the computations of diluted EPS as the option exercise price was higher than the average market price of the common shares. NOTE 5. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). FAS 133 establishes a new model for accounting for derivatives and hedging activities and supersedes and amends a number of existing accounting standards. SFAS 133 requires that all derivatives be recognized in the balance sheet at their fair market value, and the corresponding derivative gains or losses be either reported in the statement of operations or as a deferred item depending on the type of hedge relationship that exists with respect to such derivative. Adopting the provisions of SFAS 133 is not expected to have a material effect on the Company's financial statements, which will be effective for the Company's fiscal 2000. 7 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Interim Condensed Financial Statements and Notes thereto and the SEEQ Technology Incorporated Annual Report on Form 10-K for the fiscal year ended September 30, 1998. This report contains forward looking statements that involve risks and uncertainties. The statements contained in this report that are not purely historical are forward looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Act of 1934, including without limitation, statements regarding the Company's expectations, beliefs, intentions or strategies regarding the future. All forward looking statements included in this report are based on information available to the Company on the date hereof, and the Company assumes no obligation to update any such forward looking statements. The Company's actual results could differ materially from those discussed in any such forward looking statements. Factors that might cause such a difference include, but are not limited to those discussed under the caption "Factors Affecting Operating Results" contained herein and under the caption "Business Risks" in the Company's fiscal 1998 annual report on form 10-K. RESULTS OF OPERATIONS Revenues Net revenues were $5,633,000 in the first quarter of fiscal 1999, a decrease of 25% from net revenues of $7,552,000 for the first quarter of fiscal 1998. The change in revenue is primarily attributable to a decrease in revenues from the Company's media access controller product line partially offset by an increase in the Company's physical layer product line. The product mix continued to shift toward Fast Ethernet and Gigabit Ethernet products. In the first quarter of fiscal 1999, products servicing this market accounted for approximately 85% of revenues compared to 69% of revenues for the first quarter of fiscal 1997. Gross Product Margins The Company includes in cost of revenues all costs associated with subcontractor manufacturing, electrical testing, subcontractor assembly and final test of its integrated circuits and subsystems, warehousing, shipping, product returns and reserves for inventory obsolescence. Allowances for product returns are netted against revenues. Gross profit for the first quarter of fiscal 1999 was $1,420,000 or 25% of net revenues, a decrease of $1,949,000 compared to $3,369,000 or 45% of net revenues in the first quarter of 1998. The decrease in gross profit margins is primarily attributable to lower sales, a shift in product mix toward lower margin physical layer products, and lower product yields, partly offset by better factory utilization and lower charges for inventory reserves. Gross margins in future periods will be affected primarily by revenue levels and changes in product mix, average selling prices, factory utilization, wafer yields, the introduction of new products, and changes in manufacturing costs. Research and Development Research and development expenditures increased $497,000 from $850,000 in the first quarter of fiscal 1998 to $1,347,000 in the first quarter of fiscal 1999, primarily due to an increase in payroll, tooling costs, consulting and outside services. The increase in spending was due to a higher level of new product development activity. As a percentage of net revenues, research and development expenditures increased from 11% in the first quarter of fiscal 1998 to 24% in the first quarter of fiscal 1999. The Company expects that research and development spending will remain at levels similar to the first quarter of 1999 in absolute dollars for the next several quarters but may vary as a percentage of net revenues. Marketing, General and Administrative Expenses Marketing, general and administrative expenses decreased from $1,534,000, or 20% of revenues in the first quarter of fiscal 1997 to $1,342,000, or 24% or revenues in the first quarter of fiscal 1998. The absolute dollar decrease is primarily attributable to lower commissions for outside sales representatives due 8 9 to lower revenues, and lower legal fees. The Company anticipates that the level of marketing, general and administrative expenses will vary in future periods based on expected revenue growth. Interest and other, net Interest expense increased from $88,000 in the fiscal quarter of fiscal 1998 to $102,000 in the first quarter of fiscal 1999, due primarily to increased capital lease obligations. Interest and other income, net decreased from $135,000 in the first quarter of fiscal 1998 to $115,000 in the first quarter of fiscal 1999 primarily due to lower interest rates. Income Taxes For the first three months of fiscal 1999 the Company did not record a provision for income taxes, due to the year to date loss. For the first three months of fiscal 1998 the Company recognized a portion of its deferred tax asset in the amount of $79,000. This was partially offset by a provision of $31,000 for income taxes. The Company's provisions were computed by applying the estimated annual tax rate to income taxes, taking into account net operating loss carryforwards and alternative minimum taxes. LIQUIDITY AND CAPITAL RESOURCES The Company has satisfied its cash requirements principally through cash flow from operations, borrowings under bank lines of credit, capital lease financing and the public and private sale of securities. The Company believes that existing sources of liquidity, anticipated cash flow from operations, and borrowings under the Company's credit facility will be adequate to satisfy its cash requirements at least through the end of fiscal 1999. However, there can be no assurance that the Company will have adequate resources to satisfy such requirements. It may become necessary for the Company to raise funds from debt and/or equity financing. There can be no assurance that such funds will be available on terms acceptable to the Company, if at all. Issuance of additional equity securities could result in dilution to stockholders. The inability to fund capital requirements would have a material adverse effect on the Company's business, financial condition and results of operations. The Company's cash, cash equivalents and restricted cash balance increased from $10,172,000 as of September 30, 1998 to $10,226,000 as of December 31, 1998, primarily due to a release of funds held in escrow, partially offset by cash used by operating activities, and payments of capital lease obligations. Operating Activities Cash flows used by operating activities were $804,000 for the three months ended December 31, 1998, compared to cash provided by operating activities of $2,810,000 for the three months ended December 31, 1997. The change is primarily a result of a net loss in the first quarter of 1999 compared to a net profit in the first quarter of 1998, coupled with changes in working capital. Investing Activities Cash flows provided by investing activities were $1,259,000 during the first three months of fiscal 1999, compared to cash used of $74,000 during the first three months of fiscal 1998. The difference is primarily attributable to a release of funds held in escrow. Financing Activities Cash flows used for financing activities were $401,000 in the three month period ended December 31, 1998 compared to $157,000 in the three month period ended December 31, 1997. Net proceeds from the issuance of stock pursuant to stock options and the Company's employee periodic stock purchase plan were $16,000 for the first three months of fiscal 1999 compared to $111,000 for the first three months of fiscal 1998. Principal payments against capital lease obligations were $417,000 for the three months ended December 31, 1998, compared to $268,000 for the three months ended December 31, 1997. 9 10 In August 1996, the Company entered into a one-year revolving line of credit agreement with Silicon Valley Bank. The Company renewed this credit agreement in August 1997 and November 1998. Under the current terms of the bank revolving line of credit, the Company can borrow the lesser of $7,000,000 or an amount determined by a formula applied to eligible accounts receivable, at a variable interest rate equal to the prime rate plus 0.25%. The revolving line of credit is secured by a security interest in the Company's assets, including intellectual property. The loan agreement requires the Company to meet certain profitability levels and to maintain certain financial ratios. To date, the Company has not utilized the line of credit. RISK FACTORS THAT MAY AFFECT FUTURE RESULTS The Company operates in a rapidly changing environment that involves a number of risks, some of which are beyond the Company's control. The following discussion highlights some of these risks. Other risks are presented elsewhere in this report. HISTORY OF OPERATING LOSSES; UNCERTAINTY OF FUTURE FINANCIAL RESULTS The Company incurred a net loss in fiscal 1998 of $5,510,000. The Company incurred net losses during each of the five fiscal years ended September 30, 1994. During the fiscal years ended September 30, 1990, 1991, 1992, 1993 and 1994, the Company incurred net losses of $26.1 million, $3.2 million, $11.3 million, $4.1 million and $7.9 million, respectively. The Company achieved a profit of approximately $1.3 million for the fiscal year ended September 30, 1995, approximately $2.9 million for the fiscal year ended September 30, 1996, and approximately $4.7 million for the fiscal year ended September 30, 1997. The Company had an accumulated deficit of approximately $110 million at September 30, 1998. There can be no assurance that the Company will be able to sustain profitability or revenue growth in the future. The Company's ability to maintain profitability in the future will depend, among other things, on its ability to successfully manufacture and sell its products, to develop new products and to control its costs and expenses. Failure by the Company to maintain revenue growth or profitability would impair the Company's ability to sustain its operations. CUSTOMER CONCENTRATION During certain periods, a relatively small number of the Company's customers have accounted for a significant portion of the Company's revenues. Sales to Bay Networks and Cabletron accounted for approximately 25% and 17% of the Company's revenues in fiscal 1997, respectively. Sales to Bay Networks and Cabletron accounted for approximately 41% and 14% of the Company's revenues in fiscal 1998, respectively. The reduction, delay or cancellation of orders from one or more of the Company's significant customers for any reason, including a reduction in the demand for data communications products that include the Company's products, could have a material adverse effect on the Company's results of operations and financial condition. The Company's sales to its customers are made under purchase orders and not pursuant to any long-term agreements. In addition, the Company's products are often sole-sourced to its customers, and the Company's operating results and financial condition could be materially and adversely affected if one or more of the Company's major customers were to develop other sources of supply. Furthermore, in view of the short product life cycles, in the market for data communications products, the Company's operating results would be materially and adversely affected if one or more of the Company's significant customers were to purchase integrated circuits manufactured by one of the Company's competitors for inclusion in new generations of products developed by its customers. The Company is also dependent upon sales representatives and distributors for the sales of its products to systems manufacturers. There can be no assurance that the Company's current customers will continue to place orders with the Company, that orders by existing customers will continue at the levels of previous periods, or that the Company will be able to obtain orders from new customers. The loss of one or more of the Company's current customers could have a material adverse effect on the Company's business, operating results and financial condition. FACTORS AFFECTING OPERATING RESULTS The Company believes that its future annual and quarterly operating results will be subject to quarterly variations based upon a wide variety of factors that could have a material adverse effect on the 10 11 Company's revenues and profitability, many of which are outside the control of the Company. These factors include fluctuations in manufacturing yields, the timing of introduction of new products by the Company and its competitors, changes in the markets addressed by the Company's products, market acceptance of the Company's and its customers' products, the volume and timing of orders received, changes in the Company's product mix and customer base, the timing and extent of research and development expenditures, the availability and cost of semiconductor wafers from outside foundries, product obsolescence, price erosion, competitive factors, cyclical semiconductor industry conditions and general economic conditions. The Company's net revenue and cost of sales vary depending upon the mix of products sold. Any unfavorable changes in manufacturing yields or product mix, delays in new product introductions, under-utilization of manufacturing capacity, increased price competition or other factors could have a material adverse effect on the Company's operating results and financial condition. Historically, average selling prices in the semiconductor industry have decreased over the life of any particular product. There can be no assurance that the average selling prices of the Company's current or future products will not be subject to significant pricing pressures in the future. In addition, the Company's business is characterized by short-term orders and shipment schedules, and customer orders typically can be canceled or rescheduled without significant penalty to the customer. Due to the absence of substantial non-cancelable backlog, the Company typically plans its production and inventory levels based on internal forecasts of customer demand, which is highly unpredictable and can fluctuate substantially. In addition, the Company is limited in its ability to reduce costs quickly in response to any revenue shortfalls, which could have a material adverse effect on the Company's business, operating results and financial condition. Due to the foregoing factors, as well as other unanticipated factors, it is likely that in some future quarter the Company's operating results will be below the expectations of public market analysts or investors. In such event, the price of the Company's Common Stock would be materially adversely affected. DEPENDENCE ON NEW PRODUCT DEVELOPMENT AND TECHNOLOGICAL CHANGE The average selling prices of the Company's products historically have decreased over the products' lives and are expected to continue to do so. To offset average selling price decreases typically experienced over the life of any particular product, the Company relies primarily on obtaining cost reductions in the manufacture of those products and on introducing new, higher priced products which incorporate advanced features or address new or emerging markets. To the extent that such cost reductions and new product introductions do not occur in a timely manner, the Company's operating results will be adversely affected. As a result, the Company's operating results will depend to a substantial extent on its ability to continue to successfully introduce new products on a timely basis that compete effectively on the basis of price and performance and that address customer requirements. The success of new product introductions into the marketplace is dependent upon several factors, including proper new product definition, timely completion and introduction of new product designs, availability of production capacity, achievement of acceptable manufacturing yields and market acceptance of such new products. The development cycle for new products is generally one to two years, depending upon the complexity of the product. Accordingly, new product development requires a long-term forecast of market trends and customers' needs and may be adversely affected by competing technologies serving markets addressed by the Company's products. Although the Company has successfully developed new products in the past, there can be no assurance that it will continue to be able to do so in the future. In this regard, as a result of the Company's financial results in the past several years and other factors, the Company has been unable to introduce new products as fast as existing products become obsolete or as such product sales decline, as reflected by the reductions in sales over such period. The Company has experienced certain delays in the development of certain of its new products, which the Company believes may have a material adverse effect on the Company's results of operations in future periods. Although the Company has increased its development efforts over the past year, there can be no assurance that such delays will not continue to occur in future periods. The markets for the original equipment manufacturers who purchase the Company's products are characterized by rapidly changing technology, evolving industry standards and improvements in products and services. If technologies or standards supported by the Company's products become obsolete or fail to gain widespread commercial acceptance, the Company's business may be materially adversely affected. As a result, the Company believes that continued significant expenditures for research and development will be required in the future. If the Company were unable to design, 11 12 develop and introduce competitive products on a timely basis, its future operating results would be materially adversely affected. New products are generally incorporated into a customer's products or systems at the design stage. However, design wins, which can often require significant expenditures by the Company, may precede the generation of volume sales, if any, by a year or more. Moreover, the value of any design win will depend in large part on the ultimate success of the customer's product and on the extent to which the system's design accommodates components manufactured by the Company's competitors. No assurance can be given that the Company will achieve design wins or that any design win will result in significant future revenue. LIQUIDITY; FUTURE CAPITAL REQUIREMENTS The Company presently believes that anticipated cash provided by operations, and existing cash will be adequate to meet its cash needs for at least the next 12 months. However, the Company requires substantial working capital to fund its business, particularly to finance inventories and accounts receivable and/or capital expenditures. The Company's future capital requirements will depend on many factors, including the timing and extent of spending to support product development efforts and expansion of sales and marketing, the timing of introductions of new products and enhancements to existing products, and market acceptance of the Company's products. Accordingly, the Company expects that it may need to raise additional equity or debt financing in the future. There can be no assurance that additional debt and/or equity financing, if required, will be available on acceptable terms or at all. DEPENDENCE UPON INDEPENDENT MANUFACTURERS AND ASSEMBLY SUPPLIERS All of the Company's products are currently manufactured to the Company's specifications by independent subcontractors, and the Company maintains no wafer manufacturing or assembly operations of its own. The Company currently utilizes semiconductor wafer manufacturing subcontractors located in South Korea, Japan, Taiwan and the United States. The Company also contracts with independent assembly suppliers located in Asia for the assembly of all of its products, and relies principally on one assembly contractor located in South Korea. As a result, all of the Company's products are manufactured by independent foundries and assembled by foreign assembly contractors. Consequently, the Company currently relies exclusively on the manufacturing, assembly and other resources of these independent manufacturers and assembly suppliers. Currently, certain of these independent manufacturers serve as the sole source for several of the Company's products. The Company's reliance on subcontractors to manufacture and assemble its produce involves significant risks, including reduced control over delivery schedules, the potential lack of adequate capacity, reduced control over fluctuations in manufacturing yields, discontinuation or phase-out of such subcontractors' production processes, and potential misappropriation of proprietary intellectual property. There can be no assurance that the Company will not experience problems in timeliness, yields and quality of wafer deliveries from its wafer manufacturing subcontractors, each of which could have a material adverse effect on the Company's operations and operating results. In addition, although the Company has entered into manufacturing agreements with each of these independent manufacturers, there can be no assurance that such manufacturers will continue to manufacture products for the Company. The Company generally does not have long-term, non-cancelable contracts with its wafer suppliers. Therefore, the Company's wafer suppliers could choose to prioritize capacity for other uses or reduce or eliminate deliveries to the Company on short notice. Accordingly, there can be no assurance that the Company's foundries will allocate sufficient wafer manufacturing capacity to the Company to satisfy the Company's product requirements. In addition, the Company has been, and expects to continue to be in the future, particularly dependent on one or more foundries for its wafer manufacturing requirements. Any sudden demand for an increased amount of wafers or sudden reduction or elimination of any existing source or sources of wafers could result in a material delay in the shipment of the Company's products. There can be no assurance that material disruptions in supply, which have occurred periodically in the past, will not occur in the future. Any such disruption could have a material adverse effect on the Company's operating results and financial condition. In the event the Company were unable to qualify alternative manufacturing sources for existing or new products in a timely manner or such sources were unable to 12 13 produce wafers with acceptable manufacturing yields, the Company's business, operating results and financial condition would be materially and adversely affected. DEPENDENCE ON FOUNDRY MANUFACTURING The manufacture of semiconductor wafers for the Company's products is a highly complex process that requires a high degree of technical skill, state-of-the-art equipment and effective cooperation between the wafer foundry and the Company's engineering staff to produce acceptable yields. Worldwide manufacturing capacity for these products is limited. Therefore, significant interruptions in supply from any of the Company's independent foundries could adversely affect the Company and its results of operations. Other unanticipated changes in the Company's wafer supply or assembly arrangements could reduce product availability, increase cost, impair quality and reliability or decrease yield. Many of the factors that could result in such changes are beyond the Company's control. To a considerable extent, the Company's ability to succeed in the future will depend on its ability to maintain access to advanced wafer fabrication technologies. Since the Company does not own or operate its own wafer fabrication or process development facility, the Company depends upon independent companies to provide access to such technologies. In light of this dependency, and the intensely competitive nature of the semiconductor industry, there is no assurance that either technology advantages or timely product introduction can be maintained in the future. In connection with its arrangements with foreign independent wafer suppliers, it is necessary for the Company to provide such suppliers with proprietary information regarding its process and product technologies. Although the Company has entered into confidentiality and nondisclosure agreements with its foreign suppliers, there can be no assurance that the Company will be able to protect its rights under its patents, copyrights, mask-work rights or such confidentiality and nondisclosure agreements in foreign countries. MANUFACTURING; VARIATION IN PRODUCTION YIELDS The manufacture of semiconductor products is highly complex, involving many precise and critical steps, and is sensitive to a wide variety of factors, including the level of contaminants in the manufacturing environment, impurities in the materials used and the performance of sophisticated electronic equipment. Technical problems which may arise in the manufacturing process at the manufacturing facilities of any of the Company's independent foundries can adversely affect manufacturing yields and the overall profitability of the Company. Such technical problems may occur or new problems may arise as the Company begins using new manufacturing processes in connection with the introduction of new products. While the Company is attempting to minimize the impact of such factors and potential problems by developing several sources of wafer supply, certain of the foundries utilized by the Company have experienced lower than anticipated yields. No assurance can be given that the Company or its suppliers will not experience yield problems in the future, which could have a material adverse effect on the Company's results of operations. YEAR 2000 The "Year 2000 issue" arises because many computer systems and programs were designed to handle only a two-digit year, not a four-digit year. When the year 2000 begins, these computers may interpret "00" as the year 1900 and could either stop processing date-related computations or could process them incorrectly. As is true for most companies, the Year 2000 issue creates risk for the Company. The Company has identified four areas of potential problems stemming from the Year 2000 issue: product, internal systems, vendor dependencies, and economic factors. The Company's products are designed to move data. The products contain no date functions or dependencies and therefore will operate according to specification through the year 2000 and beyond. The Company's customers, however, incorporate the Company's components in products that are very complex, and the Company has no control over the design and manufacture of such products. The Company can make no assurance that its customers' products will not be adversely affected by the year 2000 issue. In that event that such products are affected, the Company's financial results could be materially adversely affected. 13 14 The Year 2000 issue has the potential to disrupt the systems that perform the Company's business transactions including financial systems (general ledger, accounts payable, accounts receivable, and purchasing), order entry, inventory and production control, and material requirements planning. The Year 2000 issue could also disrupt the Company's personal computer applications, engineering workstations, product testing systems, telecommunications and network systems. The Company has performed a detailed inventory and assessment of these systems with respect to Year 2000 issues, and is in the process of modifying, upgrading and testing affected systems. Management believes that it has identified all of the significant internal systems related exposures, and expects to complete its Year 2000 testing by May, 1999. The Company believes that the most likely Year 2000 problem relates to the area of vendor dependencies. The Company is in the process of contacting critical outside vendors to determine that the vendors' operations, and the products and services they provide are Year 2000 compliant. If the Company determines that the vendor will not be compliant, the Company will attempt to seek alternative sources of products and services, where practicable. However, the Company does not have the resources to definitively determine the Year 2000 readiness of its vendors, and relies wholly on the written assurances of the vendors in this regard. Moreover, the Company believes that the greatest risk arises from infrastructure, ie., power and water supplies, telecommunications, government services, and transportation supply chains, over which the Company has minimal influence. If critical suppliers fail to achieve compliance, the Company could be materially adversely affected. The Company believes that the Year 2000 problem may cause significant economic effects that could materially affect the Company's results. The infrastructure problems discussed above could result in regional or worldwide recessions, which could reduce demand for the Company's products. Additionally, as businesses commit resources to the Year 2000 problem, networking projects could be delayed or cancelled, thus also reducing demand for the Company's products. The Company is developing contingency plans to address the Year 2000 issues that may pose a significant risk to its operations, and expects these plans substantially complete by June 1999. The Company will monitor potential Year 2000 exposures thereafter, and adjust its contingency plans as necessary. Such plans could include adjustment of production and shipping schedules, changes in the work schedules of key information systems personnel, accelerated replacement of affected equipment or software, temporary use of back-up equipment or software or the implementation of manual procedures to compensate for system deficiencies. However, there can be no assurance that any contingency plans implemented by the Company would be adequate to meet the Company's needs without materially impacting its operations, that any such plan would be successful or that the Company's results of operations would not be materially and adversely affected. The Company estimates that the cost of its Year 2000 efforts will be approximately $800,000. (This includes approximately $750,000 for the Company's enterprise computer system, which was installed in 1997 to replace a non-compliant system. This cost is included here because, although the Company had already planned to install this system, and is deriving benefits over and above Year 2000 compliance from the system, the Year 2000 situation was a factor in expediting its installation.) The Company estimates that the remaining cost to complete the project will be approximately $25,000. This cost estimate was derived utilizing numerous assumptions, including the assumption that the Company has already identified its most significant Year 2000 issues and that the compliance plans of its third party suppliers will be fulfilled in a timely manner without cost to the Company. However, there can be no guarantee that these assumptions are accurate, and actual results could differ materially from those anticipated. RISKS ASSOCIATED WITH FOREIGN SUPPLIERS A substantial number of the Company's products are manufactured, and all of the Company's products are assembled, by independent foundries and assembly suppliers located in foreign countries, including Taiwan, Japan and South Korea. The Company is, therefore, subject to certain risks generally associated with contracting with foreign suppliers, including currency exchange fluctuations, political and economic instability, trade restrictions and changes in tariff and freight rates. 14 15 THE SEMICONDUCTOR INDUSTRY The semiconductor industry is subject to rapid technological change, price erosion, occasional shortages of materials, variations in manufacturing efficiencies, significant expenditures for capital equipment and product development, and cyclical market patterns. In recent years, the industry has experienced intermittent significant economic downturns characterized by diminished product demand, accelerated erosion of selling prices and production over-capacity. Similar fluctuations may occur in the future, and there can be no assurance that the Company will not be materially and adversely affected is the future by such fluctuations or by cyclical conditions in the semiconductor industry or slower growth in any of the markets for the Company's products. DEPENDENCE ON DATA COMMUNICATION MARKET The Company anticipates that substantially all of the Company's revenues for the foreseeable future will be attributable to sales of data communication products. The market for data communications products is characterized by intense competition, relatively short product life cycles and rapid technological change. In addition, the market for data communications products has undergone a period of extremely rapid growth and has experienced consolidation among the competitors in the marketplace. The Company's results of operations and financial condition would be materially adversely affected in the event of any future slowdown or adverse events in the market for data communications products. LITIGATION On September 25, 1998, SEEQ settled a lawsuit filed by Level One Communications, Level One Communications, Inc. v. SEEQ Technology, Inc.. As part of the settlement the Company received a license to Level One's asserted technology, and both parties entered into an initial agreement not to sue or counter-sue each other for patent infringement or otherwise for a period of two years from the date of execution of the settlement agreement. None of the Company's product lines will be affected by the settlement, nor will any continuing royalty or fee obligation exist in the future with respect to Level One's asserted technology. The Company took a one-time charge for the settlement of $3,156,000 in the fourth quarter ending September 30, 1998. Settlement costs included a cash payment and common stock issuance to Level One. In September of 1997 and June 1995, the Company settled litigation with a former supplier and landlord, respectively. As of September 30, 1998 there was no litigation pending against the Company. However, there can be no assurance that such litigation will not arise in the future. Litigation is often highly complex, can extend for a protracted period of time, can involve substantial cost to the Company and may divert the attention of the Company's management and technical personnel, which can substantially increase the cost of such litigation. There can be no assurance that such costs and diversion of resources would not have a material adverse effect on the Company's business, financial condition and results of operations. COMPETITION The semiconductor industry is intensely competitive and is characterized by price erosion, rapid technological change, short product life cycles, cyclical market patterns and heightened domestic and international competition in many markets. The Company competes with major domestic and international semiconductor companies, most of which have substantially greater financial, technical, manufacturing and marketing resources than the Company, as well as other substantial resources with which to more effectively pursue engineering, manufacturing, marketing and distribution of their products. In addition, many of the Company's competitors maintain their own wafer fabrication and manufacturing facilities, which the Company considers to be a competitive advantage. Accordingly, the Company believes that it is at a substantial competitive disadvantage in comparison to larger companies with wafer fabrication and manufacturing facilities, broader product lines, greater technical, financial and other resources and a higher level of customer service and support. New entrants may also increase their participation in the semiconductor market. The ability of the Company to compete successfully in the rapidly evolving area of high performance integrated circuit technology depends on factors both within and outside of its control, including success in designing and subcontracting the manufacture of new products that implement new technologies, adequate sources of raw materials, protection of Company products by effective utilization of intellectual property laws, product quality, reliability, price, efficiency of production, the pace at which customers incorporate the Company's integrated circuits into their products, success of competitors' 15 16 products and general economic conditions. Because the Company does not currently manufacture its own semiconductor wafers, the Company is vulnerable to process technology advances utilized by competitors to manufacture higher performance or lower cost products. There is no assurance that the Company will be able to compete successfully in the future. PATENTS, LICENSES AND INTELLECTUAL PROPERTY CLAIMS The Company's success depends in part on its ability to obtain patents, licenses and other intellectual property rights covering its products and manufacturing processes. To that end, the Company has in the past acquired certain patents and patent licenses and intends to continue to seek patents on its inventions and manufacturing processes in appropriate circumstances. The process of seeking patent protection can be long and expensive and there can be no assurance that patents will issue from currently pending or future applications or that existing patents or any new patents that may be issued will be of sufficient scope or strength to provide meaningful protection or any commercial advantage to the Company. The Company may be subject to or may initiate interference proceedings in the patent office, which can demand significant financial and management resources. As is typical in the semiconductor industry, the Company has from time to time received, and may in the future receive, communications alleging possible infringement of patents or other intellectual property rights of others. Based on industry practice, the Company believes that any necessary licenses or other rights are often obtainable on commercially reasonable terms, but no assurance can be given that licenses would be available or that litigation would not ensue. Litigation, which could result in substantial cost to and diversion of effort by the Company, may be necessary to enforce patents or other intellectual property rights of the Company or to defend the Company against claimed infringement of the rights of others. The failure to obtain necessary licenses or other rights or litigation could have a material adverse effect on the Company's operations. See "Risk Factors--Litigation." ENVIRONMENTAL AND OTHER GOVERNMENTAL REGULATIONS Certain of the Company's foundry and assembly subcontractors are subject to a variety of government regulations related to the discharge or disposal of toxic, volatile or otherwise hazardous chemicals used in their manufacturing process. The failure by the Company's subcontractors to comply with present or future environmental regulations could result in fines, suspension of production or cessation of operations. Such regulations could also require the subcontractors to acquire equipment or to incur substantial other expenses to comply with environmental regulations. If substantial additional expenses were incurred by the Company's subcontractors, product costs could significantly increase, thus materially adversely affecting the Company's results of operations. Additionally, the Company is subject to a variety of government regulations relating to its operations, such as environmental, labor and export control regulations. While the Company believes it has all permits necessary to conduct its business, the failure to comply with present or future regulations could result in fines being imposed on the Company or suspension or cessation of operations. Any failure by the Company or its subcontractors to control the use of, or adequately restrict the discharge of hazardous substances could subject it to future liabilities, and could have a material adverse effect on the Company. ATTRACTION AND RETENTION OF KEY PERSONNEL The Company's future success is dependent upon its ability to hire and retain qualified technical and management personnel, particularly highly skilled design engineers involved in new product development. The competition for such personnel is intense and there can be no assurance that the Company will be able to attract and retain skilled and experienced personnel in the future. Any failure to attract or retain such personnel could adversely affect the Company's future prospects and profitability. VOLATILITY OF STOCK PRICE The Company's Common Stock has experienced substantial price volatility and such volatility may occur in the future, particularly as a result of quarter to quarter variations in the actual or anticipated financial results of, or announcements by, the Company, its competitors, its customers, and other companies in the semiconductor industry. In addition, the stock market has experienced extreme price and volume fluctuations which have affected the market price of many technology companies in particular and 16 17 which have often been unrelated to the operating performance of these companies. Broad market fluctuations, as well as general economic and political conditions, may adversely affect the market price of the Common Stock. 17 18 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Not applicable. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. ITEM 5. OTHER INFORMATION Not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 27.1 Financial Data Schedule (b) No reports on Form 8-K were filed for the period for which this report is being filed. 18 19 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized. SEEQ TECHNOLOGY INCORPORATED (Registrant) Dated: February 10, 1999 By: /s/ Phillip J. Salsbury ------------------------------------- Phillip J. Salsbury President and Chief Executive Officer Dated: February 10, 1999 By: /s/ Gary R. Fish ------------------------------------- Gary R. Fish Vice President, Finance, Chief Financial Officer and Secretary 19 20 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 27.1 Financial Data Schedule
EX-27.1 2 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS SEP-30-1999 OCT-01-1998 DEC-31-1998 10,226 0 3,568 0 3,333 17,518 16,696 10,553 23,808 5,453 4,017 0 0 322 14,016 23,808 5,633 5,633 4,213 4,213 2,689 0 102 (1,256) 0 (1,256) 0 0 0 (1,256) (0.04) (0.04)
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