<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
of
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended December 29, 1995
Commission File Number 0-10630
SEAGATE TECHNOLOGY, INC.
(Registrant)
Incorporated in the State of Delaware
I.R.S. Employer Identification Number 94-2612933
920 Disc Drive, Scotts Valley, California 95066
Telephone: (408) 438-6550
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
--- ---
On December 29, 1995, 73,103,326 shares of the registrant's common stock were
issued and outstanding.
<PAGE>
INDEX
SEAGATE TECHNOLOGY, INC.
PART I FINANCIAL INFORMATION PAGE NO.
- --------------------------------------------------------------------------------
Item 1. Financial Statements (Unaudited)
Consolidated condensed statements of income--
Three and six months ended December 29, 1995 and
December 30, 1994 3
Consolidated condensed balance sheets--
December 29, 1995 and June 30, 1995 4
Consolidated condensed statements of cash flows--
Six months ended December 29, 1995 and
December 30, 1994 5
Notes to consolidated condensed financial statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
PART II OTHER INFORMATION
- ----------------------------------
Item 1. Legal Proceedings 16
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
2
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SEAGATE TECHNOLOGY, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(In Thousands Except Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
Dec. 29, Dec. 30, Dec. 29, Dec. 30,
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $1,562,964 $1,129,563 $3,016,590 $2,062,709
Cost of sales 1,235,502 903,032 2,397,477 1,638,033
Product development 71,931 53,037 139,607 100,289
Marketing and administrative 76,957 62,084 146,926 118,247
Amortization of goodwill and
other intangibles 7,585 4,868 15,201 9,118
In-process research and development - - - 43,000
---------- ---------- ---------- ----------
Total Operating Expenses 1,391,975 1,023,021 2,699,211 1,908,687
Income from Operations 170,989 106,542 317,379 154,022
Interest income 19,058 14,989 37,098 29,687
Interest expense (7,902) (8,085) (16,770) (16,292)
Other 308 (205) (903) 1,117
---------- ---------- ---------- ----------
Other Income 11,464 6,699 19,425 14,512
---------- ---------- ---------- ----------
Income before income taxes 182,453 113,241 336,804 168,534
Provision for income taxes 54,736 33,972 101,041 66,728
---------- ---------- ---------- ----------
Net Income $ 127,717 $ 79,269 $ 235,763 $ 101,806
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
NET INCOME PER SHARE:
Primary $ 1.69 $ 1.07 $ 3.13 $ 1.37
Fully diluted 1.44 0.93 2.67 1.23
NUMBER OF SHARES USED IN
PER SHARE COMPUTATIONS:
Primary 75,655 74,118 75,372 74,511
Fully diluted 92,249 90,712 92,056 91,108
See notes to consolidated condensed financial statements.
</TABLE>
3
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SEAGATE TECHNOLOGY, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Dec. 29, June 30,
1995 1995(1)
---- -------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 396,959 $ 702,194
Short-term investments 765,105 544,432
Accounts receivable 712,462 567,747
Inventories 462,952 395,838
Deferred income taxes 151,222 127,769
Other current assets 177,867 106,906
------------ ------------
Total Current Assets 2,666,567 2,444,886
Property, equipment and leasehold improvements, net 871,040 615,251
Goodwill and other intangibles, net 175,436 189,328
Other assets 116,689 111,797
------------ ------------
Total Assets $ 3,829,732 $ 3,361,262
------------ ------------
------------ ------------
LIABILITIES
Accounts payable $ 568,538 $ 460,213
Accrued employee compensation 128,334 112,988
Accrued expenses 286,132 251,696
Accrued income taxes 45,986 74,288
Current portion of long-term debt 356 10,561
------------ ------------
Total Current Liabilities 1,029,346 909,746
Deferred income taxes 294,605 244,731
Other liabilities 159,725 125,143
Long-term debt, less current portion 539,408 539,874
------------ ------------
Total Liabilities 2,023,084 1,819,494
------------ ------------
STOCKHOLDERS' EQUITY
Common stock 731 729
Additional paid-in capital 408,015 393,849
Retained earnings 1,398,946 1,171,067
Treasury common stock at cost - (22,839)
Foreign currency translation adjustment (1,044) (1,038)
------------ ------------
Total Stockholders' Equity 1,806,648 1,541,768
------------ ------------
Total Liabilities and Stockholders' Equity $ 3,829,732 $ 3,361,262
------------ ------------
------------ ------------
</TABLE>
See notes to consolidated condensed financial statements.
(1) The information in this column was derived from the Company's audited
consolidated balance sheet as of June 30, 1995.
4
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SEAGATE TECHNOLOGY, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
----------------
Dec. 29, Dec. 30,
1995 1994
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 235,763 $ 101,806
Adjustments to reconcile net income to net
cash from operating activities:
Depreciation and amortization 135,599 94,520
Deferred income taxes 25,451 1,958
In-process research and development - 43,000
Other 258 314
Changes in operating assets and liabilities:
Accounts receivable (144,582) (84,936)
Inventories (75,760) (76,035)
Accounts payable 108,888 102,070
Accrued income taxes (18,553) (36,714)
Other assets and liabilities 16,458 48,150
----------- -----------
Net cash provided by operating activities 283,522 194,133
INVESTING ACTIVITIES:
Acquisition of property, equipment and leasehold
improvements, net (364,387) (132,742)
Purchases of short-term investments (1,136,304) (743,892)
Sales of short-term investments 917,351 669,365
Acquisitions of businesses, net of cash acquired - (91,397)
Equity investments (12,582) (18,550)
Increase in other non-current assets, net (3,169) (1,401)
Other, net (194) 277
----------- -----------
Net cash used in investing activities (599,285) (318,340)
FINANCING ACTIVITIES:
Repayment of long-term debt (10,856) (164)
Sale of common stock 18,702 17,967
Purchase of treasury stock - (74,870)
----------- -----------
Net cash provided by (used in) financing activities 7,846 (57,067)
Effect of exchange rate changes on cash and
cash equivalents 2,682 (277)
----------- -----------
Decrease in cash and cash equivalents (305,235) (181,551)
Cash and cash equivalents at the beginning
of the period 702,194 804,717
----------- -----------
Cash and cash equivalents at the end of the period $ 396,959 $ 623,166
----------- -----------
----------- -----------
</TABLE>
See notes to consolidated condensed financial statements.
5
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SEAGATE TECHNOLOGY, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The consolidated condensed financial statements have been prepared by the
Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. The Company
believes the disclosures included in the unaudited consolidated condensed
financial statements, when read in conjunction with the consolidated
financial statements of the Company as of June 30, 1995 are adequate to
make the information presented not misleading.
The consolidated condensed financial statements reflect, in the opinion of
management, all adjustments (which include only normal recurring
adjustments) necessary to summarize fairly the consolidated financial
position, results of operations and cash flows for such periods.
The results of operations for the six months ended December 29, 1995 are
not necessarily indicative of the results that may be expected for the
entire year ending June 28, 1996.
The Company operates and reports financial results on a fiscal year of 52
or 53 weeks ending on the Friday closest to June 30. Accordingly, fiscal
1995 ended on June 30, 1995 and fiscal 1996 will end on June 28, 1996.
2. NET INCOME PER SHARE
Primary net income per share is based on the weighted average number of
shares of common stock and common stock equivalents outstanding during the
period. Fully diluted net income per share further assumes the conversion
of the Company's 5% and 6-3/4% convertible subordinated debentures.
3. BALANCE SHEET INFORMATION
(In thousands)
<TABLE>
<CAPTION>
Dec. 29, June 30,
1995 1995
---- ----
<S> <C> <C>
Accounts Receivable:
Accounts receivable $ 767,464 $ 621,146
Allowance for non-collection (55,002) (53,399)
------------ ------------
$ 712,462 $ 567,747
------------ ------------
------------ ------------
</TABLE>
6
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<TABLE>
<CAPTION>
Dec. 29, June 30,
1995 1995
---- ----
<S> <C> <C>
Inventories:
Components $ 276,969 $ 203,036
Work-in-process 87,881 65,124
Finished goods 98,102 127,678
------------ ------------
$ 462,952 $ 395,838
------------ ------------
------------ ------------
Property, Equipment and Leasehold
Improvements:
Property, equipment and leasehold
improvements $ 1,518,426 $ 1,302,018
Allowance for depreciation and amortization (647,386) (686,767)
------------ ------------
$ 871,040 $ 615,251
------------ ------------
------------ ------------
</TABLE>
4. INCOME TAXES
The estimated tax rate used to compute the provision for income taxes for
the six months ended December 29, 1995 and December 30, 1994 is based on
the Company's estimate of its domestic and foreign operating income for
each respective year. The effective tax rate for the six months ended
December 29, 1995 was 30% compared with 40% for the comparable period last
year. The higher effective tax rate in the comparable period last year was
due to the $43,000,000 write-off of in-process research and development
incurred in connection with the acquisition of Palindrome Corporation that
was not deductible for domestic tax purposes. Excluding the one time
write-off of in-process research and development, the Company's overall
effective tax rate for the comparable period last year would have been 30%.
The Company's overall effective tax rate is less than the domestic
statutory rate because a portion of the foreign operating income is not
subject to foreign income taxes and is considered to be permanently
invested in non-US operations. Accordingly, taxes have not been provided
on such income.
The Company's effective tax rate for the quarter ending March 29, 1996 may
be higher than 30% due to charges expected to be incurred relating to the
merger with Conner which may not be deductible for domestic tax purposes
and the write-off of in-process research and development to be incurred in
connection with the acquisition of the minority interest in Arcada Software
(see Note # 8, "Merger With Conner", below). The overall effective tax
rate for the year should be higher than 30% due to the anticipated higher
effective tax rate in the quarter ending March 29, 1996.
7
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5. STOCKHOLDERS' EQUITY
Shares authorized and outstanding are as follows:
<TABLE>
<CAPTION>
Shares Outstanding
------------------
Dec. 29, June 30,
1995 1995
---- ----
<S> <C> <C>
Preferred stock, par value $.01 per share,
1,000,000 shares authorized - -
Common stock, par value $.01 per share,
200,000,000 shares authorized (shares
outstanding exclude treasury shares of
856,234 at June 30, 1995) 73,103,326 71,990,271
</TABLE>
6. SUPPLEMENTAL CASH FLOW INFORMATION
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended
----------------
Dec. 29, Dec. 30,
1995 1994
---- ----
<S> <C> <C>
Cash paid for interest $ 16,227 $ 16,439
Cash paid for income taxes 93,853 100,602
</TABLE>
7. CERTAIN INVESTMENTS
The Company has classified its entire investment portfolio as available-
for-sale. Available-for-sale securities are stated at fair value with
unrealized gains and losses included in shareholders' equity. The
amortized cost of debt securities is adjusted for amortization of premiums
and accretion of discounts to maturity. Such amortization is included in
interest income. Realized gains and losses are included in other income
(expense). The cost of securities sold is based on the specific
identification method.
8
<PAGE>
The following is a summary of available-for-sale securities at December 29,
1995 (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAIN LOSS FAIR VALUE
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Corporate Bonds $ 195,525 $ 947 $ 1 $ 196,471
U.S. Government
Obligations 245,664 970 19 246,615
Commercial Paper 262,829 6 0 262,835
Money Market
Mutual Funds 100,171 768 0 100,939
Municipal Bonds 99,879 33 6 99,906
Taxable Auction Rate
Preferred Stock 61,359 81 21 61,419
--------- --------- --------- ---------
Total $ 965,427 $ 2,805 $ 47 $ 968,185
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
<TABLE>
<S> <C>
Included in short-term investments $ 765,105
Included in cash and cash equivalents 203,080
---------
Total $ 968,185
---------
---------
</TABLE>
The gross realized gains and losses on the sale of available-for-sale
securities were immaterial for the six month periods ended December 29,
1995 and December 30, 1994.
The fair value of the Company's investment in debt securities at December
29, 1995, by contractual maturity, is as follows (in thousands):
<TABLE>
<S> <C>
Due in less than 1 year $ 634,627
Due in 1 to 2-1/2 years 171,200
---------
Total $ 805,827
---------
---------
</TABLE>
8. MERGER WITH CONNER
In October 1995 the Company and Conner Peripherals, Inc. ("Conner") signed
a definitive agreement to merge the two companies. Conner designs,
manufactures and sells information storage products including disc drives,
tape drives and storage management software.
Pursuant to the agreement, the stockholders of Conner will receive 0.442 of
a share of Seagate common stock for each share of Conner common stock and
the Company will issue options to purchase 0.442 of a share of Seagate
Common Stock in exchange for each outstanding option to purchase Conner
Common Stock. The transaction will be accounted for as a pooling of
interests. In addition, Seagate has the option to purchase up to 15% of
Conner common stock outstanding at an exercise price of $17.90 per share.
The option is exercisable in the event a third party acquires a 20% share
ownership of Conner, or commences a tender offer for at least 20% of the
outstanding Conner Common Stock, or
9
<PAGE>
Conner enters into an agreement with a third party in connection with a
merger, consolidation or acquisition or purchase of all or a material
portion of the assets or the equity interest in Conner.
The transaction has been approved by the Boards of Directors of both
companies, but is still subject to normal conditions of closing, including
stockholder approval of both companies. The meetings of the stockholders
of the Company and Conner to approve the merger are scheduled to be held on
February 2, 1996. If stockholder approval is obtained the Company intends
to close the merger as soon as practicable thereafter.
In connection with the merger with Conner, in December 1995 the Company and
Arcada Software, Inc. ("Arcada"), a majority-owned subsidiary of Conner,
signed a definitive agreement for the Company to acquire the minority
interest of Arcada. Conner presently owns approximately 69 percent of
Arcada, assuming exercise of all outstanding options to acquire Arcada
common stock. Pursuant to the definitive agreement, the minority
stockholders of Arcada will receive .1545 of a share of Seagate common
stock for each share of Arcada common stock, and each option to acquire
Arcada common stock will be converted into an option to purchase .1545 of a
share of Seagate common stock. This purchase is contingent upon normal
closing conditions, including the consummation of the merger of Seagate and
Conner and approval by the stockholders of Arcada at a meeting scheduled to
be held on February 16, 1996.
This transaction will be accounted for as a purchase. Based on a
preliminary purchase price allocation and assuming consummation of the
transaction in the quarter ending March 29, 1996, the Company estimates it
will incur a charge to operations of approximately $35 million to $40
million in that quarter in connection with the write-off of in-process
research and development.
The Company also expects to incur certain expenses in connection with the
merger, including nonrecurring expenses associated with consolidating the
two companies' operations and the fees of financial advisors, attorneys and
accountants. Such expenses will adversely impact the Company's results of
operations in the quarter in which the merger is consummated. Although the
Company has not yet finalized the estimated level of such expenses, it
currently anticipates that it will incur a charge to operations, prior to
the effect of any tax benefits, of between $140 million and $180 million.
Furthermore, the Company expects the merger with Conner to result in a
dilutive effect on net income per share in the near term.
The estimates reflected above are based upon assumptions of the number of
employees and the facilities that will be required by the combined
operations, the amount of severance and other benefits that will be paid to
terminated employees and preliminary appraisals of Arcada's tangible and
intangible assets and in-process research and development as well as the
assumption that the Company will not face any unforeseen difficulties in
combining the operations of the two companies. Any of the assumptions
could prove inaccurate and therefore there can be no assurance that the
forward-looking financial information will prove to be accurate.
9. LITIGATION
See Part II, Item 1 of this Form 10-Q for a description of legal
proceedings.
10
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SEAGATE TECHNOLOGY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS:
Net sales for the quarter ended December 29, 1995 were $1,562,964,000 as
compared with $1,129,563,000 for the comparable year-ago quarter, and
$1,453,626,000 for the immediately preceding quarter ended September 29, 1995.
Net sales for the six months ended December 29, 1995 were $3,016,590,000 as
compared with $2,062,709,000 for the comparable year-ago period. The increase
in net sales from the comparable year-ago quarter, the immediately preceding
quarter and the comparable six month period last year was primarily due to a
higher level of unit shipments and a shift in mix to the Company's higher priced
products partially offset by a continuing decline in the average unit sales
prices of the Company's products as a result of competitive market conditions.
The rigid disc drive industry in which the Company operates is characterized by
declining unit sales prices over the life of a product and the Company believes
this characteristic will continue.
Gross margin as a percentage of net sales was 21.0% and 20.5% for the three and
six months ended December 29, 1995, respectively, compared with 20.1% and 20.6%
for the comparable periods last year and 20.1% for the immediately preceding
quarter. The increase in gross margin as a percentage of net sales from the
comparable year-ago quarter and the immediately preceding quarter was primarily
due to a shift in mix to the Company's newer, higher capacity disc drives and a
reduction in material costs per unit partially offset by a decline in average
unit sales prices of the Company's products as a result of competitive market
conditions.
Effective January 1, 1995, the European Union ("EU") established a new General
System of Preferences ("GSP"). Under this revised code certain products which
had been exempt from customs duties under the previous GSP rules, including hard
disc drives imported into the EU from Singapore, again became subject to such
duties (although at a rate lower than Most Favored Nation (MFN) duties). In
addition, during calendar 1995 Singapore progressively lost its status as a
beneficiary country under GSP. As a result, hard disc drives produced in
Singapore and imported into the EU will realize no reduction from full MFN
customs duties after December 31, 1995. The imposition of such customs duties
could negatively impact revenues or increase costs and adversely impact gross
margins depending upon the extent to which such duties are absorbed by the
Company.
Product development expenses for the three and six months ended December 29,
1995 were $71,931,000 and $139,607,000 respectively, an increase of $18,894,000
and $39,318,000 when compared with the comparable periods last year and an
increase of $4,255,000 when compared with the immediately preceding quarter
ended September 29, 1995. These expenses represented 4.6% of net sales for both
the three and six months ended December 29, 1995 compared with 4.7% and 4.9%,
respectively, for the comparable year-ago periods and 4.7% for the immediately
preceding quarter. The increase in expenses from the comparable year-ago
periods and the immediately preceding quarter was primarily due to increases in
salaries and related costs and, with respect to the comparable year-ago periods,
ongoing product development expenses of the
11
<PAGE>
Company's recently acquired businesses, as well as an overall increase in the
Company's product development efforts.
Marketing and administrative expenses for the three and six months ended
December 29, 1995 were $76,957,000 and $146,926,000 respectively, an increase of
$14,873,000 and $28,679,000 respectively, when compared with the comparable
year-ago periods and an increase of $6,988,000 when compared with the
immediately preceding quarter ended September 29, 1995. These expenses
represented 4.9% of net sales for both the three and six months ended December
29, 1995, compared with 5.5% and 5.7% for the comparable year-ago periods, and
4.8% for the immediately preceding quarter. The increase in expenses from the
comparable year-ago quarter was primarily due to increases in salaries and
related costs, ongoing marketing and administrative expenses of the Company's
recently acquired businesses and increases in outside services and legal
expenses partially offset by decreases in advertising expenses. The increase in
expenses from the comparable six month period last year was primarily due to
ongoing marketing and administrative expenses of the Company's recently acquired
businesses and increases in salaries and related costs, outside services, and
travel and entertainment expenses partially offset by decreases in advertising
expenses and the provision for bad debts. The increase in expenses from the
immediately preceding quarter was primarily due to increases in salaries and
related costs and legal expenses.
Amortization of goodwill and other intangibles increased by $2,717,000 and
$6,083,000 for the three and six months ended December 29, 1995, when compared
with the comparable year-ago periods, primarily due to additional goodwill and
other intangibles arising from various investments in and acquisitions of
businesses during fiscal 1995.
Net other income increased by $4,765,000 and $4,913,000 for the three and six
months ended December 29, 1995 when compared with the comparable year-ago
periods and increased by $3,503,000 from the immediately preceding quarter ended
September 29, 1995. The increase in net other income from the comparable year-
ago quarter was primarily due to higher interest income from higher levels of
average invested cash and higher interest rates. The increase in net other
income from the comparable six month period last year was primarily due to
higher interest income from higher levels of average invested cash and higher
interest rates, partially offset by losses on foreign currency translation. The
increase in net other income from the immediately preceding quarter was
primarily due to higher interest income from higher interest rates on the
Company's invested cash and reduced losses on foreign exchange contracts.
The effective tax rate for the six months ended December 29, 1995 was 30%
compared with 40% for the comparable period last year. The higher effective tax
rate in the comparable period last year was due to the $43,000,000 write-off of
in-process research and development incurred in connection with the acquisition
of Palindrome Corporation that was not deductible for domestic tax purposes.
Excluding the one time write-off of in-process research and development, the
Company's overall effective tax rate for the comparable period last year would
have been 30%.
The Company's overall effective tax rate is less than the domestic statutory
rate because a portion of the foreign operating income is not subject to foreign
income taxes and is considered to be permanently invested in non-US operations.
Accordingly, taxes have not been provided on such income.
The Company's effective tax rate for the quarter ending March 29, 1996 may be
higher than 30% due to charges expected to be incurred relating to the merger
with Conner which may not be
12
<PAGE>
deductible for domestic tax purposes and the write-off of in-process research
and development to be incurred in connection with the acquisition of the
minority interest in Arcada Software, Inc. (see Note #8, "Merger With Conner",
to Notes to Consolidated Condensed Financial Statements). The overall effective
tax rate for the year should be higher than 30% due to the anticipated higher
rate in the third quarter.
ACQUISITION OF CONNER PERIPHERALS, INC.:
In October 1995, the Company and Conner Peripherals, Inc. ("Conner") entered
into a definitive agreement to merge the two companies (the "Conner Merger").
The negotiation and implementation of the Conner Merger will result in an
aggregate pre-tax restructuring charge of approximately $140 million to $180
million. The restructuring charge, before estimated tax benefits, primarily
relates to costs associated with combining the operations of the two companies
and includes employee severance benefits of $87 million, closure of duplicate
and excess facilities of $53 million and fees of financial advisors, attorneys
and accountants of $20 million. The Company has not yet finalized the amount of
the restructuring charge or components thereof, and therefore these amounts are
preliminary estimates, subject to change based upon a final analysis after the
Merger closes. There can be no assurance that the Company's estimate is
correct, that the costs of negotiating and implementing the Merger will not
exceed the aforementioned range or that unanticipated contingencies will not
occur that will substantially increase the costs of combining the operations of
the two companies. In any event, costs associated with the Conner Merger will
negatively impact the Company's results of operations in the quarter ending
March 29, 1996. The transaction has been approved by the Boards of Directors of
both companies and is still subject to normal conditions of closing, including
stockholder approval of both companies. The meetings of the stockholders of the
Company and Conner to approve the Conner Merger are scheduled to be held on
February 2, 1996. If stockholder approval is obtained at such meetings, the
Company intends to close the Conner Merger as soon as practicable thereafter.
See also Note #8 to Notes to Consolidated Condensed Financial Statements.
In connection with the Conner Merger, the Company has also agreed to acquire the
outstanding minority interests in Arcada Holdings, Inc. ("Arcada"), a majority-
owned subsidiary of Conner. The acquisition of the minority interests in Arcada
will be accounted for as a purchase, and accordingly, the acquired assets and
liabilities pertaining to the minority interests will be recorded at estimated
fair values at the date of the acquisition. Based upon a preliminary purchase
price allocation, the Company estimates that it will capitalize goodwill and
other intangibles of approximately $64.2 million in connection with the
acquisition of the minority interests in Arcada. The amortization of such
goodwill and other intangibles will negatively impact the Company's results of
operations in future periods. In addition, in connection with the acquisition
of the minority interests in Arcada, the Company estimates that it will incur a
charge to operations of approximately $35 million to $40 million in the quarter
ending March 29, 1996, in connection with the write-off of in-process research
and development. The Company has not yet finalized the estimated level of the
write-off of in-process research and development or the purchase price
allocation to goodwill and other intangibles and therefore these amounts are
preliminary estimates, subject to change based upon completion of the final
purchase price allocation. There can be no assurance that the Company's
estimate is correct or that unanticipated contingencies will not occur that will
substantially increase or decrease the amount of the write-off of in-process
research and development or the amount of goodwill and other intangibles
capitalized. The transaction has been approved by the Boards of Directors of
both companies and is still subject to normal conditions of closing, including
stockholder approval by
13
<PAGE>
the stockholders of Arcada. The meeting of the stockholders of Arcada to
approve the transaction is scheduled to be held on February 16, 1996. If
stockholder approval is obtained at such meeting, the Company intends to close
the transaction as soon as practicable thereafter. See also Note #8 to Notes to
Consolidated Condensed Financial Statements.
The statements contained in the preceding two paragraphs regarding estimates of
the restructuring charge in connection with the Conner Merger and estimates of
the amount of goodwill and other intangibles to be capitalized and the amount of
the write-off of in-process research and development in connection with the
acquisition of the minority interests in Arcada constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and
are subject to the safe harbors created thereby. These estimates are based upon
assumptions of the number of employees and the facilities that will be required
by the combined operations, the amount of severance and other benefits that will
be paid to terminated employees and preliminary appraisals of Arcada's tangible
and intangible assets and in-process research and development as well as the
assumption that the Company will not face any unforeseen difficulties in
combining the operations of the two companies. Any of the assumptions could
prove inaccurate and therefore there can be no assurance that the forward-
looking financial information will prove to be accurate. As further disclosed
under "Factors Affecting Future Operating Results", the business and operations
of the Company are subject to substantial risks. These risks also increase the
uncertainty inherent in such estimates.
FACTORS AFFECTING FUTURE OPERATING RESULTS:
The rigid disc drive industry in which the Company competes is subject to a
number of risks, each of which could impact the Company's future operating
results. The demand for rigid disc drive products depends principally on demand
for computer systems and storage upgrades to computer systems, which has
historically been volatile. Changes in demand for computer systems often have
an exaggerated effect on the demand for rigid disc drive products in any given
period, and unexpected slowdowns in demand for computer systems generally cause
sharp declines in demand for rigid disc drive products. The rigid disc drive
industry has been characterized by periodic situations in which the supply of
rigid disc drives exceeds demand, resulting in higher than anticipated inventory
levels and strong price competition. Even during periods of consistent demand,
the industry is characterized by intense competition and ongoing price erosion
over the life of a given rigid disc drive product. The Company expects that
competitors will offer new and existing products at prices necessary to gain or
retain market share and customers. The Company expects that price erosion in
the rigid disc drive industry will continue for the foreseeable future. This
competition and continuing price erosion could adversely affect the Company's
results of operations in any given quarter and such adverse effect often cannot
be anticipated until late in any given quarter. In addition, the demand of
rigid disc drive customers for new generations of products has led to short
product life cycles that require the Company to constantly develop and introduce
new rigid disc drive products on a cost effective and timely basis. In
addition, the Company's future success will require, in part, that the market
for computer systems, storage upgrades to computer systems and multimedia
applications, such as digital video and video on demand, and hence the market
for rigid disc drives, remain strong. In addition, the Company's operating
results may be subject to significant quarterly fluctuations as a result of a
number of other factors, including the timing of orders from and shipment of
products to major customers, product mix, variations in product cost and
pricing, delays in product development, introduction and production, increased
competition and general economic and industry fluctuations.
14
<PAGE>
The Company's future operating results will also be impacted by its ability to
combine successfully the operations of Seagate and Conner after the Conner
Merger. The transition to a combined Company will require substantial attention
from the Company's management. The diversion of the attention of management and
any difficulties encountered in the transition process could have an adverse
impact on the revenues and operating results of the Company. The combination of
the Company and Conner will also require integration of the companies' product
offerings and the coordination of their research and development and sales and
marketing efforts. The difficulties of assimilation may be increased by the
necessity of coordinating geographically separated organizations, integrating
personnel with disparate business backgrounds and combining two different
corporate cultures. In addition, the process of combining the two organizations
could cause the interruption of, or loss of momentum in, the activities of
either or both of the companies' businesses, which could have a material adverse
effect on the Company. There can be no assurance that either company will
retain its technical personnel, that the engineering teams of the Company and
Conner will successfully cooperate and realize any of the technological benefits
or that the Company will realize any of the other potential benefits of the
Conner Merger.
LIQUIDITY AND CAPITAL RESOURCES:
At December 29, 1995, the Company's cash, cash equivalents and short-term
investments totaled $1,162,064,000, a decrease of $84,562,000 from the June 30,
1995 balance. This decrease was primarily a result of the Company's additions
to property, equipment and leasehold improvements partially offset by cash
provided by operating activities. The Company's cash, cash equivalents and
short-term investments are being maintained in short-term liquid investments
until required for other purposes.
As of December 29, 1995, the Company had a domestic credit facility consisting
of a $50 million line of credit. There were no borrowings under this line of
credit at December 29, 1995 although approximately $8 million had been utilized
for letters of credit. Additionally, the Company had approximately $32 million
of non-domestic lines of credit which can be used for borrowings as well as
letters of credit, bankers' guarantees, and overdraft facilities. Although
there were no borrowings under these lines at December 29, 1995, approximately
$3 million had been utilized for bankers' guarantees. The Company also had
approximately $26 million of lines of credit worldwide which can be used for
letters of credit and bankers' guarantees, but not borrowings. Of the $26
million, approximately $7 million had been utilized at December 29, 1995.
The Company expects investments in property and equipment in the current fiscal
year, before giving effect to the impact of the merger (see Note #8 to Notes to
Consolidated Condensed Financial Statements), to approximate $950 million, of
which approximately $364 million had been incurred as of December 29, 1995. The
Company plans to finance these investments from existing cash balances and cash
flows from operations. The $364 million comprised $181 million for
manufacturing facilities and equipment related to the Company's subassembly and
disc drive final assembly and test facilities in the United States, Far East and
Ireland, $110 million for manufacturing facilities and equipment for the thin-
film head operations in the United States, Malaysia and Northern Ireland, $60
million for expansion of the Company's thin-film media operations in California
and Singapore and $13 million for other purposes.
15
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
SECURITIES LITIGATION
The Company and certain of its officers and certain directors are defendants in
a series of securities class action lawsuits filed in 1988 in the United States
District Court for the Northern District of California by a group of plaintiffs
purporting to represent a class of investors that purchased Seagate Common Stock
or 6 3/4% Convertible Subordinated Debentures of Seagate between September 23,
1987 and October 8, 1988. The plaintiffs in this series of lawsuits have filed
a consolidated amended complaint, consolidating all of the lawsuits into a
single complaint. The complaint alleges violations of Sections 10(b) and 20(a)
of the Exchange Act and Rule 10b-5 promulgated thereunder. The complaint seeks
unspecified damages and reimbursement of costs of the suit. On February 8,
1995, the court granted defendants' motion for summary judgment completely
dismissing all claims against the Company and the other defendants. On Mach 31,
1995, the court also denied plaintiffs' motion for reconsideration of the
summary judgment decision. Plaintiffs have appealed this judgment to the United
States Court of Appeals for the Ninth Circuit, which appeal is pending. While
the Company cannot predict the ultimate outcome of this litigation, based upon
its review of the allegations and upon the district court's dismissal of the
claims, the Company believes that the outcome of this matter will not have a
material adverse effect on the Company's financial condition or results of
operations.
The Company, certain of its officers, directors and other employees, certain
underwriters retained by the Company in connection with a public offering
completed in February 1991 and other parties are defendants in a series of
securities class action lawsuits filed in 1991 in the United States District
Court for the Northern District of California by a group of plaintiffs
purporting to represent a class of investors that purchased Seagate Common Stock
between October 11, 1990 and June 26, 1991. The plaintiffs in this series of
lawsuits have filed a consolidated amended complaint, consolidating all of the
lawsuits into a single complaint. The complaint alleges violations of Sections
10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder. The
complaint seeks unspecified damages, equitable relief and reimbursement of costs
of the suit. The case is currently in discovery and a trial date has been set
for February 1997. While the Company cannot predict the ultimate outcome of
this litigation, based upon its review of the allegations and the discovery
completed to date, the Company believes that the outcome of this matter will not
have a material adverse effect on the Company's financial condition and results
of operations.
ENVIRONMENTAL MATTERS
The United States Environmental Protection Agency (EPA) and/or similar state
agencies have identified the Company as a potentially responsible party with
respect to environmental conditions at several different sites to which
hazardous wastes had been shipped or from which they were released. These sites
were acquired by the Company from Ceridian Corporation ("Ceridian") (formerly
Control Data Corporation) in fiscal 1990. Other parties have also been
identified at certain of these sites as potentially responsible parties. Many
of these parties either have shared or likely will share in the costs associated
with the sites. Investigative and/or remedial activities are ongoing at such
sites.
16
<PAGE>
The Company's portion of the estimated cost of investigation and remediation of
known contamination at the sites to be incurred after June 30, 1995 was
approximately $14,900,000. Through June 30, 1995 the Company had recovered
approximately $2,500,000 from Ceridian through its indemnification and cost
sharing agreements with Ceridian and, in addition, expects to recover
approximately $9,800,000 from Ceridian over the next 30 years. After deducting
the expected recoveries from Ceridian, the expected aggregate undiscounted
liability was approximately $5,100,000 at June 30, 1995 with expected payments
by the Company of approximately $600,000 in 1999, $304,000 in 2000 and the
remainder thereafter.
Approximately $14,000,000 of the $14,900,000 total estimated costs described
above is attributable to one site in Omaha, Nebraska. In 1994 the Company sold
the Omaha property; however, the Company has indemnified the buyer with respect
to all environmental contamination existing on the site at the time of sale. IT
Corporation, a nationally known environmental consulting firm, has provided
consulting services to Ceridian and the Company for the Omaha site for several
years and has assisted the Company in estimating the liability related to the
cost of remediation. This liability is based on a plan of investigation and
remediation developed by IT Corporation pursuant to a Consent Order entered into
by the Company and the EPA in 1990. The extent of contamination in the
groundwater has been investigated and generally defined. According to the plan,
the likely technology for remediation of groundwater at the facility will be
pumping and treatment, while remediation of soils will most likely be
accomplished by soil vapor extraction. A substantial portion of the Omaha
liability was discounted by applying a risk free rate of 6% to the expected
payments to be made by the Company over the next 30 years. None of the
liabilities for any of the other sites has been discounted. The total liability
for all sites recorded by the Company after considering the estimated effects of
inflation, reimbursements by Ceridian and discounting was approximately
$3,000,000 at June 30, 1995.
The Company believes that the indemnification and cost sharing agreements
entered into with Ceridian and the reserves that the Company has established
with respect to its future environmental costs are such that, based on present
information available to it, future environmental costs related to currently
known contamination will not have a material adverse effect on its financial
condition or results of operations.
PATENT LITIGATION
In November 1992, Rodime, PLC ("Rodime") filed a complaint in Federal Court for
the Central District of California, alleging infringement of U.S. Patent No. B1
4,638,383 and various state law unfair competition claims. No trial date has
been scheduled. It is the opinion of the Company's patent counsel that the
Company's products do not infringe any valid claims of the Rodime patent in suit
and thus the Company refused Rodime's offer of a license for its patents.
However, many other companies, such as IBM, Conner Peripherals, Hewlett-Packard
and a number of Japanese companies have reportedly made payments to and taken
licenses from Rodime. In 1995 the Court granted the Company's motions for
summary judgment holding that (1) certain claims of the Rodime patent were
invalid, and (2) certain accused products did not infringe as a matter of law,
except that fact issues remain to be decided regarding the ST157, a product no
longer in production. Although the Court denied the Company's summary judgment
on the state law causes of action, the Company has moved for reconsideration in
light of a recent California Supreme Court case which the Company believes is
controlling in this case. The hearing on pending motions and the pretrial
conference have been taken off calendar pending possible reassignment to another
judge. Based upon its review of the patent and the allegedly infringing product
in question, it is the opinion of
17
<PAGE>
Seagate's patent counsel that the product did not and does not infringe any
valid claims of the Rodime patent. Therefore, while the Company cannot predict
the ultimate outcome of this litigation, it believes the outcome of this matter
will not have a material adverse effect on the Company's financial condition and
results of operations.
On October 5, 1994 a patent infringement action was filed against the Company by
an individual James M. White in the U.S. District Court for the Northern
District of California for alleged infringement of U.S. Patent Nos. 4,673,996
and 4,870,519. Both patents relate to air bearing sliders. Prior to the filing
of the lawsuit, the Company filed a Petition for Reexamination of U.S. Patent
No. 4,673,996 with the United States Patent and Trademark Office ("PTO") and
this Petition was granted shortly after the lawsuit was filed. Subsequently,
the Company filed a Petition for Reexamination of U.S. Patent No. 4,870,519.
This second petition has also been granted by the PTO. The District Court
stayed the action pending the outcome of the reexaminations. Based upon its
review of the patents, it is the opinion of the Company's patent counsel that
the claims of the two White patents are invalid. Two other parties have filed
Petitions for Reexamination of the White Patents and the Reexaminations have
been consolidated.
TAX DEFICIENCY
The Company has received a Notice of Deficiency (the "Notice") from the Internal
Revenue Service for fiscal years 1988 through 1990. The majority of the
proposed adjustments to income in those fiscal years related to the allocation
of income between the Company and its foreign subsidiaries. Proposed
adjustments to income and tax credits in the Notice resulted in proposed tax
deficiencies of approximately $66,000,000 plus penalties and interest of
approximately $62,300,000 as of December 29, 1995. The proposed income
adjustments would also eliminate tax net operating loss and tax credit
carryovers that have been used to offset taxable income and tax liabilities in
other fiscal years. The impact on tax net operating losses and tax credit
carryovers from the adjustments proposed in the Notice would result in
additional taxes of approximately $22,000,000 for the three years ended July 2,
1993 plus interest of approximately $6,700,000 as of December 29, 1995. The
Company filed a Petition with the United States Tax Court in June 1994
contesting the proposed deficiencies and related penalties. In addition, the
Company's federal income tax returns for the fiscal years 1991 through 1993 are
presently under examination by the Internal Revenue Service.
18
<PAGE>
BUSINESS LITIGATION
Amstrad PLC ("Amstrad") initiated a lawsuit against the Company in London,
England on December 11, 1992 concerning the Company's sale of allegedly
defective disc drives to Amstrad. The Company replied to the allegations made
against it by Amstrad by denying all material points of Amstrad's claim and
asserted many affirmative defenses. Factual discovery is almost complete, fact
witness statements have been exchanged and supplemented and the parties are in
the process of exchanging expert witness reports and rebuttals. As part of the
expert report exchange, Amstrad has been required to give further details of its
damages claim and of its liability claim. The trial date in London is set for
April 16, 1996. Although the Company believes that the outcome of the Amstrad
litigation will not have a material adverse effect on its financial condition or
results of operations, the Company cannot predict the ultimate outcome and
therefore, there can be no assurance that an adverse judgment in this matter
will not have an adverse effect on the Company's results of operations and
financial condition.
Although the Company believes that the outcome of each of the matters described
above will not have a material adverse effect on its financial condition or
results of operations, the Company cannot predict the ultimate outcome and
therefore, there can be no assurance that an adverse judgment in one or more of
these legal disputes will not have a material adverse effect on the Company's
results of operations and financial condition.
The Company is also involved in a number of other judicial and administrative
proceedings incidental to its business. Although occasional adverse decisions
(or settlements) may occur, the Company believes that the final disposition of
such additional matters will not have a material adverse effect on the Company's
financial position or results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are included herein:
11.1 Computation of Net Income per Share
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K have been filed with the Securities and Exchange
Commission during the three months ended December 29, 1995.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SEAGATE TECHNOLOGY, INC.
(Registrant)
DATE: February 1, 1996 BY: /s/ Donald L. Waite
_______________________
DONALD L. WAITE
Executive Vice President,
Chief Administrative Officer
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
DATE: February 1, 1996 BY: /s/ Alan F. Shugart
_______________________
ALAN F. SHUGART
Chairman of the Board,
President and Chief Executive
Officer (Principal Executive
Officer and Director)
20
<PAGE>
EXHIBIT 11.1
SEAGATE TECHNOLOGY, INC.
COMPUTATION OF NET INCOME PER SHARE
(In thousands except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
Dec. 29, Dec. 30, Dec. 29, Dec. 30,
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
PRIMARY
Weighted average number of common
shares outstanding during the period 73,010 72,235 72,742 72,504
Incremental common shares attributable
to exercise of outstanding options
(assuming proceeds would be used to
purchase treasury stock) 2,645 1,883 2,630 2,007
--------- --------- --------- ---------
Total shares 75,655 74,118 75,372 74,511
--------- --------- --------- ---------
--------- --------- --------- ---------
Net Income:
Amount $ 127,717 $ 79,269 $ 235,763 $ 101,806
Per share $ 1.69 $ 1.07 $ 3.13 $ 1.37
FULLY DILUTED
Weighted average number of common
shares outstanding during the period 73,010 72,235 72,742 72,504
Incremental common shares attributable
to exercise of outstanding options
(assuming proceeds would be used to
purchase treasury stock) and conversion
of 6-3/4% and 5% convertible
subordinated debentures 19,239 18,477 19,314 18,604
--------- --------- --------- ---------
Total shares 92,249 90,712 92,056 91,108
--------- --------- --------- ---------
--------- --------- --------- ---------
Net Income:
Amount $ 127,717 $ 79,269 $ 235,763 $ 101,806
Add 6-3/4% convertible subordinated
debentures interest, net of income tax
effect 2,734 2,810 5,470 5,620
Add 5% convertible subordinated
debentures interest, net of income
tax effect 2,057 2,112 4,113 4,224
--------- --------- --------- ---------
Total $ 132,508 $ 84,191 $ 245,346 $ 111,650
--------- --------- --------- ---------
--------- --------- --------- ---------
Per share $ 1.44 $ 0.93 $ 2.67 $ 1.23
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
21
<PAGE>
SEAGATE TECHNOLOGY, INC.
INDEX TO EXHIBITS
EXHIBIT
NUMBER
_______
11.1 Computation of Net Income per Share (see page 21)
27 Financial Data Schedule
22
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED CONDENSED BALANCE SHEET AS OF DECEMBER 29, 1995 AND THE
CONSOLIDATED CONDENSED STATEMENT OF INCOME FOR THE SIX MONTHS ENDED DECEMBER 29,
1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-28-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> DEC-29-1995
<CASH> 396,959
<SECURITIES> 765,105
<RECEIVABLES> 767,464
<ALLOWANCES> 55,002
<INVENTORY> 462,952
<CURRENT-ASSETS> 2,666,567
<PP&E> 1,518,426
<DEPRECIATION> 647,386
<TOTAL-ASSETS> 3,829,732
<CURRENT-LIABILITIES> 1,029,346
<BONDS> 539,408
0
0
<COMMON> 731
<OTHER-SE> 1,805,917
<TOTAL-LIABILITY-AND-EQUITY> 3,829,732
<SALES> 3,016,590
<TOTAL-REVENUES> 3,016,590
<CGS> 2,397,477
<TOTAL-COSTS> 2,397,477
<OTHER-EXPENSES> 302,637
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,770
<INCOME-PRETAX> 336,804
<INCOME-TAX> 101,041
<INCOME-CONTINUING> 235,763
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 235,763
<EPS-PRIMARY> 3.13
<EPS-DILUTED> 2.67
</TABLE>
