<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 October 3, 1997
Commission File Number 0-10630
SEAGATE TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-2612933
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
920 DISC DRIVE, SCOTTS VALLEY, CALIFORNIA 95066
(Address of principal executive offices) (Zip Code)
TELEPHONE: (408) 438-6550
(Registrant's 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
---- ----
On October 3, 1997, 244,575,518 shares of the registrant's common stock were
issued and outstanding.
1
<PAGE>
INDEX
SEAGATE TECHNOLOGY, INC.
PART I FINANCIAL INFORMATION PAGE NO.
- ------ --------------------- --------
Item 1. Financial Statements (Unaudited)
Consolidated condensed statements of income --
Quarter ended October 3, 1997 and
September 27, 1996 3
Consolidated condensed balance sheets--
October 3, 1997 and June 27, 1997 4
Consolidated condensed statements of cash flows--
Quarter ended October 3, 1997 and
September 27, 1996 5
Notes to consolidated condensed financial statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
PART II OTHER INFORMATION
- -------------------------------
Item 1. Legal Proceedings 17
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
2
<PAGE>
SEAGATE TECHNOLOGY, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(In Thousands Except Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended
-------------
October 3, September 27,
1997 1996
---------- -------------
<S> <C> <C>
Revenue $1,895,507 $2,060,825
Cost of sales 1,600,696 1,668,049
Product development 143,333 106,763
Marketing and administrative 126,241 111,446
Amortization of goodwill and
other intangibles 9,650 10,410
In-process research and development 215,764 -
Restructuring costs - (9,554)
---------- ----------
Total Operating Expenses 2,095,684 1,887,114
Income (Loss) from Operations (200,177) 173,711
Interest income 27,432 16,823
Interest expense (12,880) (9,273)
Other (64,726) (1,593)
---------- ----------
Other Income (Expense), net (50,174) 5,957
---------- ----------
Income (loss) before income taxes (250,351) 179,668
Provision (benefit) for income taxes (10,134) 50,307
---------- ----------
Net Income (Loss) $ (240,217) $ 129,361
========== ==========
NET INCOME (LOSS) PER SHARE:
Primary $ (0.98) $ 0.59
Fully diluted (0.98) 0.53
NUMBER OF SHARES USED IN
PER SHARE COMPUTATIONS:
Primary 244,633 219,396
Fully diluted 244,633 258,666
</TABLE>
See notes to consolidated condensed financial statements.
3
<PAGE>
SEAGATE TECHNOLOGY, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
October 3, June 27,
1997 1997(1)
----------- -----------
ASSETS
- ------
<S> <C> <C>
Cash and cash equivalents $ 811,207 $1,047,335
Short-term investments 899,969 1,236,262
Accounts receivable, net 927,226 1,040,835
Inventories 787,803 808,280
Deferred income taxes 286,968 253,372
Other current assets 141,967 166,223
---------- ----------
Total Current Assets 3,855,140 4,552,307
Property, equipment and leasehold improvements, net 1,855,213 1,786,625
Goodwill and other intangibles, net 203,395 199,061
Other assets 161,737 184,886
---------- ----------
Total Assets $6,075,485 $6,722,879
========== ==========
LIABILITIES
- -----------
Accounts payable $ 619,023 $ 863,141
Accrued employee compensation 182,478 200,360
Accrued expenses 581,618 702,453
Accrued income taxes 4,716 69,275
Current portion of long-term debt 1,276 1,125
---------- ----------
Total Current Liabilities 1,389,111 1,836,354
Deferred income taxes 521,359 478,840
Other liabilities 228,094 230,074
Long-term debt, less current portion 703,119 701,945
---------- ----------
Total Liabilities 2,841,683 3,247,213
---------- ----------
STOCKHOLDERS' EQUITY
- --------------------
Common stock 2,519 2,519
Additional paid-in capital 1,914,408 1,902,824
Retained earnings 1,685,497 1,946,963
Deferred compensation (59,425) (57,439)
Treasury common stock at cost (308,576) (318,617)
Foreign currency translation adjustment (621) (584)
---------- ----------
Total Stockholders' Equity 3,233,802 3,475,666
---------- ----------
Total Liabilities and Stockholders' Equity $6,075,485 $6,722,879
========== ==========
</TABLE>
(1) The information in this column was derived from the Company's audited
consolidated balance sheet as of June 27, 1997.
See notes to consolidated condensed financial statements.
4
<PAGE>
SEAGATE TECHNOLOGY, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended
--------------
October 3, September 27,
1997 1996
----------- ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ (240,217) $ 129,361
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 171,538 118,666
Deferred income taxes 8,391 (12,556)
In-process research and development 215,764 -
Other 11,924 2,987
Changes in operating assets and liabilities:
Accounts receivable 113,609 34,002
Inventories 7,897 94,191
Accounts payable (239,099) 220,006
Accrued income taxes (59,388) 51,787
Accrued expenses (159,002) (54,426)
Other assets and liabilities, net 42,131 30,455
----------- ---------
Net cash provided by (used in) operating activities (126,452) 614,473
INVESTING ACTIVITIES:
Acquisition of property, equipment and leasehold
improvements, net (221,562) (206,674)
Purchases of short-term investments (1,008,834) (491,388)
Maturities and sales of short-term investments 1,345,828 516,314
Acquisition of Quinta Corporation, net of cash acquired (194,147) -
Equity investments (21,663) -
Other, net (222) (7,118)
----------- ---------
Net cash used in investing activities (100,600) (188,866)
FINANCING ACTIVITIES:
Sale of common stock 22,127 21,353
Purchase of treasury stock (34,272) (8,466)
Other, net (65) 1,184
----------- ---------
Net cash provided by (used in) financing activities (12,210) 14,071
Effect of exchange rate changes on cash and cash equivalents 3,134 (335)
----------- ---------
Increase (decrease) in cash and cash equivalents (236,128) 439,343
Cash and cash equivalents at the beginning of the period 1,047,335 503,754
----------- ---------
Cash and cash equivalents at the end of the period $ 811,207 $ 943,097
=========== =========
</TABLE>
See notes to consolidated condensed financial statements.
5
<PAGE>
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 27, 1997 and notes thereto,
are adequate to make the information presented not misleading.
The consolidated condensed financial statements reflect, in the opinion of
management, all material adjustments necessary to summarize fairly the
consolidated financial position, results of operations and cash flows for
such periods. Such adjustments are of a normal recurring nature, except
for the reversal of certain restructuring costs previously incurred in
connection with the February 1996 merger with Conner Peripherals, Inc.
("Conner") in the quarter ended September 27, 1996.
The results of operations for the quarter ended October 3, 1997 are not
necessarily indicative of the results that may be expected for the entire
year ending July 3, 1998.
In November 1996, the Company effected a two-for-one stock split in the
form of a stock dividend. Prior periods have been restated to reflect the
stock split in the form of a stock dividend. All references to number of
shares and per share amounts are on a post-split basis.
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
1997 was 52 weeks and ended on June 27, 1997 and fiscal 1998 will be 53
weeks and will end on July 3, 1998, with the first fiscal quarter having 14
weeks.
2. NET INCOME (LOSS) PER SHARE
---------------------------
For the period in which the Company had net income, primary net income per
share was based on the weighted average number of shares of common stock
and common stock equivalents outstanding during the period. For the same
period fully diluted net income per share further assumed the conversion of
the Company's convertible subordinated debentures for the period of time
that they were outstanding. For the period in which the Company had a net
loss, the net loss per share was computed using only the weighted average
number of shares of common stock outstanding during the period.
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings per Share, which is required to be adopted in the
Company's fiscal quarter ended January 2, 1998. At that time, the Company
will be required to change the method currently used to compute net income
per share and to restate all prior periods. Under the
6
<PAGE>
new requirements for calculating primary net income per share, the dilutive
effect of stock options will be excluded. If Statement No. 128 had been
effective for the quarters ended September 27, 1996 and October 3, 1997 it
would have resulted in an increase in primary net income per share of $.02
for the quarter ended September 27, 1996 and there would have been no
change in the net loss per share for the quarter ended October 3, 1997. The
impact on fully diluted net income per share for the quarter ended
September 27, 1996 would not have been material.
3. BALANCE SHEET INFORMATION
-------------------------
(In thousands)
<TABLE>
<CAPTION>
October 3, June 27,
1997 1997
----------- -----------
<S> <C> <C>
Accounts Receivable:
Accounts receivable $ 984,409 $ 1,101,248
Allowance for non-collection (57,183) (60,413)
----------- -----------
$ 927,226 $ 1,040,835
=========== ===========
Inventories:
Components $ 348,015 $ 358,667
Work-in-process 84,008 134,198
Finished goods 355,780 315,415
----------- -----------
$ 787,803 $ 808,280
=========== ===========
Property, Equipment and
Leasehold Improvements:
Property, equipment and
leasehold improvements $ 3,208,609 $ 3,058,444
Allowance for depreciation
and amortization (1,353,396) (1,271,819)
----------- -----------
$ 1,855,213 $ 1,786,625
=========== ============
</TABLE>
4. INCOME TAXES
------------
The effective tax rate used to record the benefit for income taxes for the
quarter ended October 3, 1997 was 4% compared with a 28% effective tax rate
used to record the provision for income taxes for the comparable period
last year. The lower effective tax rate used to record the benefit for
income taxes for the quarter ended October 3, 1997 resulted primarily from
non-deductible charges incurred as a result of the acquisition of Quinta
Corporation. Excluding the acquisition of Quinta Corporation, the pro
forma effective tax rate used to record the benefit for income taxes for
the quarter ended October 3, 1997 would have been 28%. The pro forma
effective tax rate of 28% is less than the U.S. statutory rate primarily
because a portion of the Company's anticipated net earnings of foreign
subsidiaries is not subject to foreign income taxes and is considered to be
permanently invested in non-U.S. operations.
7
<PAGE>
5. SUPPLEMENTAL CASH FLOW INFORMATION
----------------------------------
(In thousands)
<TABLE>
<CAPTION>
Quarter Ended
-------------------------
October 3, September 27,
1997 1996
---------- -------------
<S> <C> <C>
Cash paid for interest $26,003 $17,370
Cash paid for income taxes 37,014 3,663
</TABLE>
6. RESTRUCTURING COSTS
-------------------
In 1996, the Company recorded restructuring charges totaling $241,720,000
as a result of the merger with Conner. During the first quarter of 1997,
the Company reversed $9,554,000 of its restructuring reserves as a result
of the completion of certain aspects of the restructuring plan at less than
the originally estimated cost. As of June 27, 1997, the implementation of
the restructure plan was substantially complete.
7. ACQUISITION OF QUINTA
---------------------
In August 1997, the Company completed the acquisition of Quinta Corporation
("Quinta"), a developer of ultra-high capacity disc drive technologies,
including a new optically-assisted Winchester (OAW) technology. Pursuant
to the purchase agreement, the shareholders of Quinta, other than Seagate,
received cash payments aggregating $230 million upon closing of the
transaction and will be eligible to receive, upon achievement of certain
product development and early production milestones, additional payments
aggregating $95 million. In April and June 1997, Seagate had invested an
aggregate of $20 million acquiring approximately ten percent (10%) of
Quinta's stock. As a result of this acquisition, the Company incurred a
one-time write-off of in-process research and development of approximately
$214 million in the quarter ended October 3, 1997. Intangibles arising
from the acquisition are being amortized on a straight-line basis over two
years. This acquisition was accounted for as a purchase and, accordingly,
the results of operations of Quinta have been included in the consolidated
condensed financial statements from the date of acquisition.
8. FOREIGN CURRENCY DERIVATIVES
----------------------------
The Company enters into foreign currency forward exchange and option
contracts to manage exposure related to certain foreign currency
commitments and anticipated foreign currency denominated expenditures
primarily in Singapore, Thailand and Malaysia. The goal of the Company's
hedging program is to economically guarantee or lock in the exchange rates
on a portion of the Company's local currency cash flows and not to
eliminate all short-term earnings volatility. Because not all economic
hedges qualify as accounting hedges, unrealized gains and losses may be
recognized in advance of the actual foreign currency cash flows. This
mismatch of accounting gains and losses and foreign currency cash flows was
especially pronounced for the quarter ending October 3, 1997 because of
declines in the value of the Thai Baht and Malaysian Ringgit relative to
the U.S. Dollar. Accordingly, the Company's results for the quarter ending
October 3, 1997 include other expenses of approximately $63 million for
unrealized losses on foreign currency forward exchange contracts.
8
<PAGE>
9. LITIGATION
----------
See Part II, Item 1 of this Form 10-Q for a description of legal
proceedings.
9
<PAGE>
SEAGATE TECHNOLOGY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CERTAIN FORWARD-LOOKING INFORMATION:
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. These statements include the statements
relating to restructuring charges in the seventh paragraph under "Results of
Operations," the statements relating to the effective tax rate in the last
paragraph under "Results of Operations," the statements regarding capital
expenditures in the third paragraph under "Liquidity and Capital Resources,"
the statements below under "Factors Affecting Future Operating Results" and the
statements under "Part II Other Information - Item 1. Legal Proceedings," among
others. These forward-looking statements are based on current expectations and
entail various risks and uncertainties that could cause actual results to differ
materially from those projected in the forward-looking statements. Such risks
and uncertainties are set forth below under "Factors Affecting Future Operating
Results."
RESULTS OF OPERATIONS:
Revenue for the quarter ended October 3, 1997 was $1,895,507,000 as compared
with $2,060,825,000 for the comparable year-ago quarter, and $1,977,218,000 for
the immediately preceding quarter ended June 27, 1997. The decrease in revenue
from the comparable year-ago quarter and the immediately preceding quarter was
primarily due to a continuing decline in the average unit sales prices of the
Company's products as a result of intensely competitive market conditions and a
shift in mix to the Company's lower priced products partially offset by a higher
level of unit shipments. The quarter ended October 3, 1997 was characterized by
severe pricing pressure as well as weakness in demand for the Company's high
performance products.
Gross margin as a percentage of revenue was 15.6% for the quarter ended October
3, 1997, compared with 19.1% for the comparable year-ago quarter and 23.1% for
the immediately preceding quarter. The decrease in gross margin as a percentage
of revenue from the comparable year-ago quarter and the immediately preceding
quarter was primarily due to a continuing decline in the average unit sales
prices of the Company's products as a result of intensely competitive market
conditions and a shift in mix away from the Company's higher capacity disc
drives, partially offset by a reduction in material costs per unit.
Product development expenses for the quarter ended October 3, 1997 were
$143,333,000, an increase of $36,570,000 when compared with the comparable year-
ago quarter and an increase of $23,361,000 when compared with the immediately
preceding quarter ended June 27, 1997. These expenses represented 7.6% of
revenue for the quarter ended October 3, 1997 compared with 5.2% for the
comparable year-ago quarter and 6.1% for the immediately preceding quarter. The
increase in expenses from the comparable year-ago period and the immediately
preceding quarter was primarily due to increases in allocated occupancy costs,
salaries and related costs, and an overall increase in the Company's product
development efforts, such as its efforts to develop ultra-high capacity disc
drive technologies, including a new optically-assisted Winchester (OAW)
technology. This OAW technology is being developed by Quinta Corporation, a
wholly-owned subsidiary of the Company acquired in August 1997.
Marketing and administrative expenses for the quarter ended October 3, 1997 were
$126,241,000, an increase of $14,795,000 when compared with the comparable year-
ago quarter
10
<PAGE>
and an increase of $1,151,000 when compared with the immediately preceding
quarter ended June 27, 1997. These expenses represented 6.7% of revenue for the
quarter ended October 3, 1997 compared with 5.4% for the comparable year-ago
quarter and 6.3% 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, increased marketing and administrative expenses related to
the Company's software products and services, particularly those of the
Information Management Group, and advertising and promotion, partially offset by
decreases in allocated occupancy costs and legal expenses, and the absence of
employee profit sharing and executive bonuses in the quarter ended October 3,
1997. The increase in expenses from the immediately preceding quarter was
primarily due to increases in salaries and related costs and advertising and
promotion, substantially offset by a reduction in allocated occupancy costs and
the absence of employee profit sharing and executive bonuses in the quarter
ended October 3, 1997.
Amortization of goodwill and other intangibles decreased by $760,000 for the
quarter ended October 3, 1997 when compared with the comparable year-ago quarter
and increased by $588,000 when compared with the immediately preceding quarter
ended June 27, 1997. The decrease in amortization from the year-ago quarter was
primarily due to the write-down of goodwill and the write-offs and write-downs
of certain intangible assets related to past acquisitions of software companies
whose value had become impaired, in the quarters ended December 27, 1996 and
March 28, 1997, partially offset by additional amortization related to goodwill
and intangibles arising from the acquisition of Quinta Corporation and the
additional investment in Dragon Systems, Inc. The increase in amortization from
the immediately preceding quarter was primarily due to additional amortization
related to goodwill and intangibles arising from the acquisition of Quinta
Corporation and the additional investment in Dragon Systems, Inc.
The $215,764,000 charge for the write-off of in-process research and development
in the quarter ended October 3, 1997 was primarily a result of the August 1997
acquisition of Quinta Corporation. See note 7, Acquisition of Quinta, to
consolidated condensed financial statements.
During the quarter ended September 27, 1996, the Company reversed $9,554,000 of
its restructuring reserves as a result of the completion of certain aspects of
the restructuring plan at less than the originally estimated cost. The Company
is currently reviewing its operations worldwide and is contemplating actions
which, if determined to be necessary, would result in restructuring and other
one-time charges in, or subsequent to, the Company's second quarter of fiscal
1998 ending January 2, 1998. Although the consideration of any such actions has
not been finalized and several are in a preliminary stage, any such charges, if
required, could range from approximately $50 million to approximately $100
million.
Amstrad PLC ("Amstrad") initiated a lawsuit against the Company in 1992
concerning the Company's sale of allegedly defective disc drives to Amstrad. On
November 6, 1997, the Company and Amstrad settled all of the outstanding
disputes. The settlement will result in approximately a $22,000,000 reduction
against the $153,000,000 charge recorded in June 1997. This reduction in the
settlement cost will be reflected in the Company's results for the quarter
ending January 2, 1998. See "Part II Other Information - Item 1. Legal
Proceedings Business Litigation."
Net other income decreased by $56,131,000 for the quarter ended October 3, 1997
when compared with the comparable year-ago quarter and decreased by $62,322,000
from the immediately preceding quarter ended June 27, 1997. The decrease in net
other income from the comparable year-ago quarter and the immediately preceding
quarter was primarily due to mark-
11
<PAGE>
to-market adjustments of $62,819,000 on certain of the Company's foreign
currency forward exchange contracts for the Thai Baht and the Malaysian Ringgit.
See "Foreign Currency Risk". Increased interest income, primarily due to higher
average invested cash, partially offset this charge with respect to the
comparable year-ago quarter.
The effective tax rate used to record the benefit for income taxes for the
quarter ended October 3, 1997 was 4% compared with a 28% effective tax rate used
to record the provision for income taxes for the comparable period last year.
The lower effective tax rate used to record the benefit for income taxes for the
quarter ended October 3, 1997 resulted primarily from non-deductible charges
incurred as a result of the acquisition of Quinta Corporation. Excluding the
acquisition of Quinta Corporation, the pro forma effective tax rate used to
record the benefit for income taxes for the quarter ended October 3, 1997 would
have been 28%. The pro forma effective tax rate of 28% is less than the U.S.
statutory rate primarily because a portion of the Company's anticipated net
earnings of foreign subsidiaries is not subject to foreign income taxes and is
considered to be permanently invested in non-U.S. operations. The Company
expects its effective tax rate on operating income for the remaining quarters of
fiscal 1998 to approximate 28%. However, the actual effective tax rate may vary
from 28% if, for example, the Company incurs charges in connection with future
acquisitions.
FOREIGN CURRENCY RISK:
The Company transacts business in various foreign currencies, primarily in
emerging market countries in Asia and in certain European countries. The
Company has established a foreign currency hedging program utilizing foreign
currency forward exchange contracts and purchased currency options to hedge
local currency cash flows for payroll, inventory, other operating expenditures
and fixed asset purchases in Singapore, Thailand and Malaysia. Under this
program, increases or decreases in the Company's local currency operating
expenses and other cash outflows are partially offset by realized gains and
losses on the hedging instruments. The goal of this hedging program is to
economically guarantee or lock in the exchange rates on the Company's foreign
currency cash outflows rather than to eliminate the possibility of short-term
earnings volatility. The Company does not use foreign currency forward exchange
contracts or purchased currency options for trading purposes.
Gains and losses related to qualified hedges of firm commitments and anticipated
transactions are deferred and are recognized in income or as adjustments of
carrying amounts when the hedged transaction occurs. All other forward exchange
and option contracts are marked-to-market and unrealized gains and losses are
included in current period net income. Because not all economic hedges qualify
as accounting hedges, unrealized gains and losses may be recognized in income in
advance of the actual foreign currency cash flows. This mismatch of accounting
gains and losses and foreign currency cash flows was especially pronounced
during the first quarter of fiscal 1998 as a result of the declines in value of
the Thai Baht and Malaysian Ringgit, relative to the U.S. Dollar. This resulted
in an unrealized pre-tax charge of $62,819,000 recorded in Other Income
(Expense) for the quarter ended October 3, 1997.
The table below provides information about the Company's derivative financial
instruments, comprised of foreign currency forward exchange contracts and
purchased currency options. The table presents the notional amounts in U.S.
Dollars (at the contract exchange rates) and the weighted average contractual
foreign currency exchange rates in local currency per U.S. Dollar. All
instruments mature within twelve months.
12
<PAGE>
<TABLE>
<CAPTION>
October 3, 1997
--------------------------------------
Notional Average Estimated
In thousands, except average contract rate Amount Contract Rate Fair Value(1)
- ------------------------------------------ -------- ------------- -----------
<S> <C> <C> <C>
Foreign currency forward exchange contracts:
Malaysian Ringgit $230,000 2.56 $ (57,601)
Singapore Dollar 234,000 1.40 (19,122)
Thai Baht 321,000 26.68 (86,160)
-------- ---------
$785,000 $(162,883)(2)
Purchased currency options:
Malaysian Ringgit $ 68,000 2.53 $ 41
Singapore Dollar 170,000 1.39 74
-------- ---------
$238,000 $ 115
</TABLE>
(1) Equivalent to the unrealized net gain (loss) on existing contracts.
(2) $62,819 of the total $162,883 unrealized loss on foreign currency
forward exchange contracts was recorded as a loss in the first quarter
of fiscal 1998.
LIQUIDITY AND CAPITAL RESOURCES:
At October 3, 1997, the Company's cash, cash equivalents and short-term
investments totaled $1.711 billion, a decrease of $572 million from the June 27,
1997 balance. This decrease was primarily a result of the payment of $230
million in connection with the acquisition of Quinta Corporation, the payment
into an escrow account of $145 million in connection with the adverse judgement
in the Amstrad PLC litigation and additions to property, equipment and leasehold
improvements. Until required for other purposes, the Company's cash and cash
equivalents are maintained in highly liquid investments with remaining
maturities of 90 days or less at the time of purchase, while its short-term
investments consist of readily marketable debt securities with remaining
maturities of more than 90 days at the time of purchase.
As of October 3, 1997, the Company had committed lines of credit of $76 million
which can be used for standby letters of credit and bankers' guarantees. At
October 3, 1997, approximately $73 million had been utilized.
The Company expects investments in property and equipment in the current fiscal
year to approximate $900 million, of which approximately $216 million had been
incurred as of October 3, 1997. The Company plans to finance these investments
from existing cash balances and cash flows from operations. The $216 million
comprised $85 million for manufacturing facilities and equipment for the thin-
film head operations in the United States, Malaysia, Northern Ireland and the
Philippines; $63 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; $61 million for expansion of the
Company's thin-film media operations in California, Singapore and Northern
Ireland; and $7 million for other purposes.
During the quarter ended October 3, 1997 the Company acquired approximately 1
million shares of its common stock for approximately $34 million. The repurchase
of a portion of these shares completed a stock repurchase program announced in
September 1996 in which up to 14 million shares of the Company's common stock
were authorized to be acquired in the open market. The repurchase of the
remainder of these shares was primarily in connection with a new stock
repurchase program announced in June 1997 in which up to $600 million worth of
the Company's common stock were authorized to be acquired in the open market.
13
<PAGE>
FACTORS AFFECTING FUTURE OPERATING RESULTS:
The data storage industry in which the Company competes is subject to a number
of risks, each of which has affected the Company's operating results in the past
and could impact the Company's future operating results. The demand for disc
drive and tape 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 disc drive and tape drive products in any given period, and
unexpected slowdowns in demand for computer systems generally cause sharp
declines in demand for such products. 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 disc drives, remain strong. The data storage
industry has been characterized by periodic situations in which the supply of
drives exceeds demand, resulting in higher than anticipated inventory levels and
intense price competition. Even during periods of consistent demand, this
industry is characterized by intense competition and ongoing price erosion over
the life of a given 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 data storage
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 drive
customers for new generations of products has led to short product life cycles
that require the Company to constantly develop and introduce new drive products
on a cost-effective and timely basis. The demand of drive customers for products
with ever increasing storage capacity and more advanced technology has resulted
in increased dependence by the Company on sales of high capacity disc drives.
The increased difficulty and complexity associated with production of higher
capacity disc drives increases the likelihood of reliability, quality or
operability problems that could result in reduced bookings, increased
manufacturing rework and scrap costs, increased service and warranty costs and a
decline in the Company's competitive position. In addition, the Company's
operating results have been and may in the future 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,
pricing, delays in the development, introduction and production of new products,
delays or interruptions in the production of existing products, competing
technologies, variations in product cost, component availability due to single
or limited sources of supply, high fixed costs resulting from the Company's
vertical integration strategy, the Company's ability to attract and retain key
technical employees, foreign currency exchange fluctuations (see "Foreign
Currency Risk"), increased competition and general economic and industry
fluctuations. For example, revenue decreased to $1,895,507,000 in the first
quarter of 1998 from $1,977,218,000 in the fourth quarter of 1997 as a result of
intense pricing pressure and weakness in customer demand for the Company's
higher performance products, the latter condition resulting in a loss of market
share by the Company in this market segment. The decreased sales, together with
increased price erosion, adversely impacted the Company's gross margins and
results of operations for the first quarter of 1998. The Company's future
operating results may also be adversely affected by an adverse judgment or
settlement in the legal proceedings in which the Company is currently involved.
See Part II, Item 1, Legal Proceedings of this Form 10-Q.
The Company has experienced and expects to continue to experience intense
competition from a number of domestic and foreign companies. These companies
include the other leading independent disc drive manufacturers as well as large
integrated multinational computer manufacturers such as Fujitsu Limited,
International Business Machines Corporation, NEC
14
<PAGE>
Corporation and Toshiba Corporation. Such competition could
materially adversely affect the Company's business, operating results and
financial condition. There can be no assurance that the Company will be able to
compete successfully against current or future competitors or that competitive
pressures faced by the Company will not materially adversely affect its
business, operating results and financial condition.
The cost, quality and availability of certain components, including heads,
media, application specific integrated circuits, motors, printed circuit boards
and custom semiconductors are critical to the successful production of disc
drives. The Company's strategy of vertical integration has allowed it to
internally manufacture many of the critical components used in its products.
The Company also relies on independent suppliers for certain components used in
its products. The Company has in the past experienced production delays when
unable to obtain sufficient quantities of certain components. Any prolonged
interruption or reduction in the supply of any key components could have a
material adverse effect on the Company's business, operating results and
financial condition. The Company has pursued a strategy of vertical integration
of its manufacturing process in order to reduce costs, control quality and
assure availability and quality of certain components. A strategy of vertical
integration entails a high level of fixed costs and requires a high volume of
production and sales to be successful. During periods of decreased production,
these high fixed costs have had, and could in the future have, a material
adverse effect on the Company's operating results and financial condition.
The Company has significant offshore operations. Offshore operations are
subject to certain inherent risks, including delays in transportation, changes
in governmental policies, tariffs and import/export regulations, political
unrest, fluctuations in currency exchange rates and geographic limitations on
management controls and reporting. There can be no assurance that the inherent
risks of offshore operations will not adversely affect the Company's business,
operating results and financial condition in the future.
The Company has incorporated its software acquisitions into a single entity
called Seagate Software, Inc. ("SSI") and is offering employees of SSI and
selected employees of the Company an opportunity to acquire an equity interest
in SSI. The Company intends to continue its expansion into software and other
complementary data technology businesses through internal growth as well as
acquisitions. Acquisitions involve numerous risks, including difficulties in
the assimilation of the operations and products of the acquired businesses and
the potential loss of key employees or customers of the acquired businesses.
The Company expects that it will continue to incur charges as it acquires
businesses, including charges for the write-off of in-process research and
development. The timing of such write-offs has in the past and may in the
future lead to fluctuations in the Company's operating results on a quarterly
and annual basis. For example, the Company incurred a charge to operations in
the first quarter of fiscal 1998 of approximately $216 million for the write-off
of in-process research and development, $214 million of which was in connection
with the acquisition of Quinta Corporation.
The Company's operations are dependent on its ability to protect its computer
equipment and the information stored in its databases against damage by fire,
natural disaster, power loss, telecommunications failures, unauthorized
intrusion and other catastrophic events. The Company believes it has taken
prudent measures to reduce the risk of interruption in its operations. However,
there can be no assurance that these measures are sufficient. Any damage or
failure that causes interruptions in the Company's operations could have a
material adverse effect on its business, results of operations and financial
condition.
The Company is currently in the process of transitioning to new computer
software for its
15
<PAGE>
financial, accounting, inventory control, order processing and
other management information systems. The successful implementation of these
new systems is crucial to the efficient operation of the Company's business.
There can be no assurance that the Company will implement its new systems in an
efficient and timely manner or that the new systems will be adequate to support
the Company's operations. Problems with installation or initial operation of
the new systems could cause substantial management difficulties in operations
planning, financial reporting and management and thus could have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company's stock price, like that of other technology companies, is subject
to significant volatility. The announcement of new products, services or
technological innovations by the Company or its competitors, quarterly
variations in the Company's results of operations, changes in revenue or
earnings estimates by the investment community and speculation in the press or
investment community are among the factors affecting the Company's stock price.
In addition, the stock price may be affected by general market conditions and
domestic and international macroeconomic factors unrelated to the Company's
performance. Because of the foregoing reasons, recent trends should not be
considered reliable indicators of future stock prices or financial results.
16
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
-----------------
The following discussion contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These statements relate to the Company's legal
proceedings described below. Litigation is inherently uncertain and may result
in adverse rulings or decisions. Additionally, the Company may enter into
settlements or be subject to judgments which may, individually or in the
aggregate, have a material adverse effect on the Company's results of
operations. Accordingly, actual results could differ materially from those
projected in the forward-looking statements.
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 affirmative defenses. Trial began April 16, 1996 and concluded on July
31, 1996. The Court issued a final judgment on July 9, 1997 and awarded Amstrad
approximately $144,000,000 in damages plus costs, including Amstrad's legal
fees, the amount of which will be determined by the Court at a later date. The
Company and Amstrad have appealed the judge's decision. In June 1997, the
Company accrued the damages of $144,000,000 plus estimated additional costs of
$9,000,000 for a total amount of $153,000,000 in Accrued Expenses.
Approximately $145,000,000 was paid in July 1997 and is currently held in escrow
pending the Court's final decision.
Prior to initiating its case against the Company in London, England, Amstrad had
previously filed an action against the Company in the Superior Court of Santa
Cruz County, California, in September 1991. That Santa Cruz County Superior
Court action was dismissed with prejudice and judgment of dismissal was entered
on July 24, 1997. Amstrad filed an objection to this judgment and filed a
motion seeking to set aside the judgment in order to pursue a claim for
additional damages against the Company. That motion was heard by the Superior
Court on September 19, 1997 and the Court denied Amstrad's motion.
On November 6, 1997, the Company and Amstrad settled all of the outstanding
disputes. As a result of the settlement all appeals will be withdrawn and
litigation ended. The settlement will result in approximately a $22,000,000
reduction against the $153,000,000 charge recorded in June 1997. This reduction
in the settlement cost will be reflected in the Company's results for the
quarter ending January 2, 1998.
SECURITIES LITIGATION
- ---------------------
In 1991, a series of lawsuits was filed in Federal Court for the Northern
District of California against the Company, alleging violations of the federal
securities laws on behalf of a class of purchasers of the Company's securities.
The parties agreed to settle this series of lawsuits and the settlement was
approved by the U.S. District Court on June 24, 1997. One member of the
plaintiff class appealed from the order approving the settlement. This appeal is
currently
17
<PAGE>
pending in the United States Court of Appeals for the
Ninth Circuit. Because of this appeal, the settlement is not yet final. The
Company believes that the final settlement of this series of lawsuits will not
have a material adverse effect on the Company's financial condition or results
of operations.
In 1993, a series of lawsuits was filed in Federal Court for the Northern
District of California against Conner Peripherals, Inc. As a result of the
merger with Conner, the Company assumed the defense of this litigation. These
class action lawsuits alleged violations of the federal securities laws and
sought damages on behalf of a class of purchasers of Conner's securities. The
parties agreed to settle this series of lawsuits and the settlement received
approval from the District Court during the last fiscal quarter of 1997. One
member of the plaintiff class appealed from the order approving the settlement,
but has voluntarily dropped the appeal. Accordingly, the settlement is now
final. The final settlement of this series of lawsuits did not have a material
adverse effect on the Company's 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. It was 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. Other companies, however, such as IBM,
Hewlett-Packard and a number of Japanese companies have reportedly made payments
to and taken licenses from Rodime. On October 24, 1997 the Court entered a
Final Judgment against Rodime and in favor of Seagate. Rodime has appealed from
the final judgment. The Company intends to vigorously defend itself in any
appeals which may be brought by Rodime.
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 was also granted by the PTO. The District Court stayed the
action pending the outcome of the Reexaminations. Both patents have completed
reexamination and the stay of the action has been lifted. Mr. White's lawyers
filed a motion seeking a preliminary injunction to stop the sale of certain of
the Company's products. The Court denied the motion on July 1, 1997. It is the
opinion of the Company's patent counsel that the Company's products do not
infringe any valid or enforceable claims of the patents involved in the suit.
The Company intends to vigorously defend itself against any and all charges of
infringement of these patents.
On December 16, 1996, a patent infringement action was filed against the Company
by an individual, Virgle Hedgcoth, in the U.S. District Court for the Northern
District of California, San Jose Division, for alleged infringement of U.S.
Patent Nos. 4,735,840; 5,082,747; and 5,316,864. These patents relate to
sputtered magnetic thin-film recording discs for computers and their
manufacture. The Company answered the complaint denying infringement, alleging
that the patents are invalid and unenforceable, and counterclaiming for
declaratory judgment that a fourth Hedgcoth patent, No. 4,894,133, is invalid,
unenforceable and not infringed. Additionally, on July 1, 1997, Mr. Hedgcoth
filed a patent infringement action against the Company in the same Court for
alleged infringement of a fifth patent, U.S. Patent No. 5,262,970,
18
<PAGE>
issued May 6, 1997. It is the opinion of the Company's patent counsel that the
Company's products do not infringe any valid or enforceable claims of the
patents in the two actions, and that the claims of the patents in the two
actions are invalid or unenforceable. The Company intends to vigorously defend
itself against any and all charges of infringement of Mr. Hedgcoth's patents.
Papst Licensing, GmbH, has given the Company notice that it believes certain
former Conner Peripherals, Inc. disc drives infringe several of its patents
covering the use of spindle motors in disc drives. It is the opinion of the
Company's patent counsel that the former Conner disc drives do not infringe any
claims of the patents and that the asserted claims of the patents are invalid.
The Company also believes that subsequent to the merger with Conner Peripherals,
the Company's earlier paid-up license under Papst's patents extinguishes any
ongoing liability. The Company also believes it enjoys the benefit of a license
under Papst's patents since Papst Licensing had granted a license to motor
vendors of Conner Peripherals.
In the normal course of business, the Company receives and makes inquiry with
regard to other possible intellectual property matters including alleged patent
infringement. Where deemed advisable, the Company may seek or extend licenses
or negotiate settlements.
The Company is 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 matters will not have a material adverse effect on the Company's financial
position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
The Company's 1997 Annual Meeting of Stockholders was held on October 30, 1997.
The following is a brief description of each matter voted upon at the meeting
and a statement of the number of votes cast for, against or withheld and the
number of abstentions and broker non-votes with respect to each matter.
(a) The stockholders elected the following directors to serve for the ensuing
year and until their successors are elected:
<TABLE>
<CAPTION>
FOR WITHHELD
--- --------
<S> <C> <C>
Alan F. Shugart 219,392,293 773,621
Gary B. Filler 213,940,257 995,278
Kenneth E. Haughton 213,977,749 957,786
Robert A. Kleist 213,975,478 960,057
Lawrence Perlman 213,860,620 1,074,915
Thomas P. Stafford 213,835,162 1,100,373
Laurel L. Wilkening 214,048,474 887,061
</TABLE>
(b) The stockholders approved an amendment to the 1991 Incentive Stock Option
Plan to increase the number of shares of Common Stock reserved for issuance
thereunder by 15,000,000.
FOR AGAINST ABSTAIN BROKER NON-VOTES
--- ------- ------- ----------------
114,935,582 47,768,120 3,632,048 49,346,982
19
<PAGE>
(c) The stockholders ratified the appointment of Ernst & Young LLP as
independent auditors of the Company for the fiscal year ending July 3,
1998.
FOR AGAINST ABSTAIN
--- ------- -------
215,028,084 262,478 392,170
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits
The following exhibits are included herein:
11.1 Computation of Net Income (Loss) 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 October 3, 1997.
20
<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: November 12, 1997 BY: /s/ Donald L. Waite
--------------------------
DONALD L. WAITE
Executive Vice President,
Chief Administrative Officer
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
DATE: November 12, 1997 BY: /s/ Alan F. Shugart
--------------------------
ALAN F. SHUGART
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer
and Director)
21
<PAGE>
SEAGATE TECHNOLOGY, INC.
INDEX TO EXHIBITS
EXHIBIT
NUMBER
- -------
11.1 Computation of Net Income (Loss) per Share
27 Financial Data Schedule
22
<PAGE>
EXHIBIT 11.1
SEAGATE TECHNOLOGY, INC.
COMPUTATION OF NET INCOME (LOSS) PER SHARE
(In thousands except per share data)
<TABLE>
<CAPTION>
Quarter Ended
-------------
October 3, September 27,
1997 1996
---------- -------------
<S> <C> <C>
PRIMARY
- -------
Weighted average number of common
shares outstanding during the period 244,633 213,728
Incremental common shares attributable
to exercise of outstanding options
(assuming proceeds would be used to
purchase treasury stock) - 5,668
---------- ---------
Total shares 244,633 219,396
========== =========
Net income (loss):
Amount $(240,217) $129,361
Per share $ (0.98) $ 0.59
FULLY DILUTED
- -------------
Weighted average number of common
shares outstanding during the period 244,633 213,728
Incremental common shares attributable
to exercise of outstanding options
(assuming proceeds would be used to
purchase treasury stock) and conversion
of convertible subordinated debentures - 44,938
--------- --------
Total shares 244,633 258,666
========= ========
Net income (loss):
Amount $(240,217) $129,361
Add 5% convertible subordinated
debentures interest, net of income
tax effect - 2,057
Add 6-1/2% convertible subordinated
debentures interest, net of income tax
effect - 3,054
Add 6-3/4% convertible subordinated
debentures interest, net of income tax
effect - 2,145
--------- --------
Total $(240,217) $136,617
========= ========
Per share $ (0.98) $ 0.53
========= ========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED CONDENSED BALANCE SHEET AS OF OCTOBER 3, 1997 AND THE CONSOLIDATED
CONDENSED STATEMENT OF INCOME FOR THE QUARTER ENDED OCTOBER 3, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-03-1998
<PERIOD-START> JUN-28-1997
<PERIOD-END> OCT-03-1997
<CASH> 811,207
<SECURITIES> 899,969
<RECEIVABLES> 984,409
<ALLOWANCES> 57,183
<INVENTORY> 787,803
<CURRENT-ASSETS> 3,855,140
<PP&E> 3,208,609
<DEPRECIATION> 1,353,396
<TOTAL-ASSETS> 6,075,485
<CURRENT-LIABILITIES> 1,389,111
<BONDS> 703,119
2,519
0
<COMMON> 0
<OTHER-SE> 3,231,283
<TOTAL-LIABILITY-AND-EQUITY> 6,075,485
<SALES> 1,895,507
<TOTAL-REVENUES> 1,895,507
<CGS> 1,600,696
<TOTAL-COSTS> 1,600,696
<OTHER-EXPENSES> 368,747
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,880
<INCOME-PRETAX> (250,351)
<INCOME-TAX> (10,134)
<INCOME-CONTINUING> (240,217)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (240,217)
<EPS-PRIMARY> (0.98)
<EPS-DILUTED> (0.98)
</TABLE>
