<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 January 2, 1998
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 January 2, 1998, 242,274,528 shares of the registrant's common stock were
issued and outstanding.
1
<PAGE>
INDEX
SEAGATE TECHNOLOGY, INC.
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE NO.
- --------------------------------------------------------------------------
<S> <C>
Item 1. Financial Statements (Unaudited)
Consolidated condensed statements of income--
Three and six months ended January 2, 1998 and
December 27, 1996 3
Consolidated condensed balance sheets--
January 2, 1998 and June 27, 1997 4
Consolidated condensed statements of cash flows--
Six months ended January 2, 1998 and
December 27, 1996 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 19
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 22
</TABLE>
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
------------------ ----------------
January 2, December 27, January 2, December 27,
1998 1996 1998 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue $1,673,327 $2,400,156 $3,568,834 $4,460,981
Cost of sales 1,481,745 1,858,657 3,082,441 3,526,706
Product development 144,289 113,630 287,622 220,393
Marketing and administrative 129,047 125,880 255,288 237,326
Amortization of goodwill and
other intangibles 11,979 12,516 21,629 22,926
In-process research and development - - 215,764 -
Restructuring costs 205,465 - 205,465 (9,554)
Unusual items (21,969) - (21,969) -
---------- ---------- ---------- ----------
Total Operating Expenses 1,950,556 2,110,683 4,046,240 3,997,797
Income (Loss) from Operations (277,229) 289,473 (477,406) 463,184
Interest income 24,058 19,248 51,490 36,071
Interest expense (12,760) (8,741) (25,640) (18,014)
Other (17,095) (4,702) (81,821) (6,295)
---------- ---------- ---------- ----------
Other Income (Expense), net (5,797) 5,805 (55,971) 11,762
---------- ---------- ---------- ----------
Income (loss) before income taxes (283,026) 295,278 (533,377) 474,946
Provision (benefit) for income taxes (99,854) 82,678 (109,988) 132,985
---------- ---------- ---------- ----------
Net Income (Loss) $ (183,172) $ 212,600 $ (423,389) $ 341,961
========== ========== ========== ==========
NET INCOME (LOSS) PER SHARE:
Basic $(0.75) $0.94 $(1.74) $1.55
Diluted (0.75) 0.84 (1.74) 1.38
NUMBER OF SHARES USED IN
PER SHARE COMPUTATIONS:
Basic 243,054 226,388 243,844 220,058
Diluted 243,054 263,429 243,844 260,612
</TABLE>
See notes to consolidated condensed financial statements.
3
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SEAGATE TECHNOLOGY, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
January 2, June 27,
1998 1997 (1)
----------- -----------
<S> <C> <C>
ASSETS
- ------
Cash and cash equivalents $ 559,348 $1,047,335
Short-term investments 1,091,038 1,236,262
Accounts receivable, net 877,885 1,040,835
Inventories 760,940 808,280
Deferred income taxes 367,391 253,372
Other current assets 156,608 166,223
---------- ----------
Total Current Assets 3,813,210 4,552,307
Property, equipment and leasehold improvements, net 1,752,885 1,786,625
Goodwill and other intangibles, net 188,479 199,061
Other assets 178,541 184,886
---------- ----------
Total Assets $5,933,115 $6,722,879
========== ==========
LIABILITIES
- -----------
Accounts payable $ 638,329 $ 863,141
Accrued employee compensation 192,247 200,360
Accrued expenses 655,613 702,453
Accrued income taxes - 69,275
Current portion of long-term debt 2,810 1,125
---------- ----------
Total Current Liabilities 1,488,999 1,836,354
Deferred income taxes 537,099 478,840
Other liabilities 218,507 230,074
Long-term debt, less current portion 702,994 701,945
---------- ----------
Total Liabilities 2,947,599 3,247,213
---------- ----------
STOCKHOLDERS' EQUITY
- --------------------
Common stock 2,519 2,519
Additional paid-in capital 1,915,918 1,902,824
Retained earnings 1,481,445 1,946,963
Deferred compensation (57,419) (57,439)
Treasury common stock at cost (356,106) (318,617)
Foreign currency translation adjustment (841) (584)
---------- ----------
Total Stockholders' Equity 2,985,516 3,475,666
---------- ----------
Total Liabilities and Stockholders' Equity $5,933,115 $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
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SEAGATE TECHNOLOGY, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
-----------------
January 2, December 27,
1998 1996
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ (423,389) $ 341,961
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 333,491 258,175
Deferred income taxes (55,565) 15,279
In-process research and development 215,764 -
Non-cash portion of restructuring charge 146,069 -
Other, net 17,256 27,870
Changes in operating assets and liabilities:
Accounts receivable 162,950 (143,542)
Inventories 4,374 86,470
Accounts payable (231,090) 117,880
Accrued income taxes (64,619) 69,762
Accrued expenses (114,190) (37,754)
Other assets and liabilities, net 60,495 68,034
----------- -----------
Net cash provided by operating activities 51,546 804,135
INVESTING ACTIVITIES:
Acquisition of property, equipment and leasehold
improvements, net (410,277) (425,301)
Purchases of short-term investments (2,234,593) (1,370,036)
Maturities and sales of short-term investments 2,381,703 1,292,926
Additional payments for acquisition of Quinta, net of cash acquired (194,147) -
Equity investments (21,663) -
Other, net 6,876 41,020
----------- -----------
Net cash used in investing activities (472,101) (461,391)
FINANCING ACTIVITIES:
Sale of common stock 25,421 42,255
Purchase of treasury stock (105,334) (151,217)
Other, net (2,296) (8,099)
----------- -----------
Net cash used in financing activities (82,209) (117,061)
Effect of exchange rate changes on cash and cash equivalents 14,777 (116)
----------- -----------
Increase (decrease) in cash and cash equivalents (487,987) 225,567
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 $ 559,348 $ 729,321
=========== ===========
</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 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 three and six month periods ended January
2, 1998 are not necessarily indicative of the results that may be expected
for the entire year ending July 3, 1998.
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.
2. NET INCOME (LOSS) PER SHARE
---------------------------
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings per Share." Statement No. 128 replaced the previously
reported primary and fully diluted earnings per share with basic and diluted
earnings per share. Unlike primary earnings per share, basic earnings per
share excludes any dilutive effects of options and convertible securities.
Diluted earnings per share is very similar to the previously reported fully
diluted earnings per share. All earnings per share amounts for all periods
have been presented, and where necessary, restated to conform to the
Statement No. 128 requirements.
For the periods in which the Company had net income, basic net income per
share was based on the weighted average number of shares of common stock
outstanding during the period. For the same periods diluted net income per
share further included the effect of stock options outstanding during the
period and assumed the conversion of the Company's convertible subordinated
debentures for the period of time that they were outstanding. For the
periods 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. The following table sets forth the
computation of basic and diluted net income (loss) per share.
6
<PAGE>
<TABLE>
<CAPTION>
(In Thousands Except Three Months Ended Six Months Ended
Per Share Data) -------------------------- --------------------------
January 2, December 27, January 2, December 27,
1998 1996 1998 1996
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Basic Net Income (Loss) Per
- ---------------------------
Share Computation
- -----------------
Numerator:
Net income (loss) $(183,172) $212,600 $(423,389) $341,961
---------- ------------ ---------- ------------
Denominator:
Weighted average number of
common shares outstanding
during the period 243,054 226,388 243,844 220,058
---------- ------------ ---------- ------------
Basic net income (loss)
per share $(0.75) $ 0.94 $(1.74) $1.55
========== ============ ========== ============
Diluted Net Income (Loss) Per
-----------------------------
Share Computation
-----------------
Numerator:
Net income (loss) $(183,172) $212,600 $(423,389) $341,961
Add convertible subordinated
debentures interest, net of
income tax effect - 8,255 - 16,504
--------- -------- --------- --------
Total $(183,172) $220,855 $(423,389) $358,465
--------- -------- --------- --------
Denominator:
Weighted average number of
common shares outstanding
during the period 243,054 226,388 243,844 220,058
Incremental common shares
attributable to exercise of
outstanding options (assuming
proceeds would be used to
purchase treasury stock) - 7,878 - 6,773
Incremental common shares
attributable to conversion of
convertible subordinated
debentures - 29,163 - 33,781
--------- -------- ---------- ---------
Total 243,054 263,429 243,844 260,612
--------- -------- ---------- ---------
Diluted net income (loss)
per share $(0.75) $0.84 $(1.74) $1.38
========= ======== ========== =========
</TABLE>
Incremental common shares attributable to exercise of outstanding options
(assuming
7
<PAGE>
proceeds would be used to purchase treasury stock) of 3,773,000 and
5,249,000 for the three and six months ended January 2, 1998, respectively,
were not included in the diluted net income per share computation because
the effect would be antidilutive.
3. BALANCE SHEET INFORMATION
-------------------------
(In thousands)
<TABLE>
<CAPTION>
January 2, June 27,
1998 1997
---- ----
<S> <C> <C>
Accounts Receivable:
Accounts receivable $935,400 $1,101,248
Allowance for non-collection (57,515) (60,413)
-------- ----------
$877,885 $1,040,835
======== ==========
Inventories:
Components $313,203 $358,667
Work-in-process 67,227 134,198
Finished goods 380,510 315,415
-------- --------
$760,940 $808,280
======== ========
Property, Equipment and Leasehold Improvements:
Property, equipment and leasehold improvements $ 3,214,110 $ 3,058,444
Allowance for depreciation and amortization (1,461,225) (1,271,819)
----------- -----------
$ 1,752,885 $ 1,786,625
=========== ===========
</TABLE>
4. INCOME TAXES
------------
The effective tax rate used to record the benefit for income taxes for the
six months ended January 2, 1998 was 21% 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 six months ended January 2, 1998 resulted
primarily from non-deductible charges incurred as a result of the
acquisition of Quinta Corporation. Excluding the acquisition of Quinta
Corporation, certain non-recurring restructuring costs and the reversal of
certain Amstrad litigation charges, the pro forma effective tax rate used
to record the benefit for income taxes for the six months ended January 2,
1998 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.
5. SUPPLEMENTAL CASH FLOW INFORMATION
----------------------------------
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended
----------------
January 2, December 27,
1998 1996
---- ----
<S> <C> <C>
Cash Transactions:
Cash paid for interest $26,134 $24,074
Cash paid for income taxes 45,618 40,386
</TABLE>
8
<PAGE>
<TABLE>
<S> <C> <C>
Non-Cash Transactions:
Conversion of debentures - 788,020
</TABLE>
6. RESTRUCTURING COSTS
-------------------
In the quarter ended January 2, 1998, the Company recorded restructuring
charges totaling $205,465,000. These charges reflect steps the Company is
taking to align worldwide operations with current market conditions and to
improve the productivity of its operations and the efficiency of its
development efforts. The restructuring charges comprised $5,542,000 for
reduction of personnel due to closure or consolidation of certain
operations, $43,271,000 for closure of excess facilities, $125,063,000 to
write off or write down equipment, intangibles and other assets, and
$31,589,000 for contract cancellations and other expenses. In connection
with the restructuring charges taken in the quarter ended January 2, 1998,
the Company currently expects a workforce reduction of approximately 1,092
employees. Of that number, no employees had been terminated as of January
2, 1998. Additional restructuring costs which could not be accrued in the
quarter ended January 2, 1998 will be taken as a charge in the Company's
third fiscal quarter ending April 3, 1998. The Company anticipates that the
implementation of the restructuring plan will be substantially complete by
the end of December 1998. The following table summarizes the Company's
restructuring activity for the six months ended January 2, 1998 (in
thousands):
<TABLE>
<CAPTION>
CONTRACT
EQUIPMENT, CANCELLATIONS
SEVERANCES EXCESS INTANGIBLES AND OTHER
AND BENEFITS FACILITIES AND OTHER ASSETS EXPENSES TOTAL
------------ ---------- ---------------- ------------ -----
<S> <C> <C> <C> <C> <C>
Restructuring charges $5,542 $ 43,271 $ 125,063 $31,589 $ 205,465
Cash charges - - - (4,146) (4,146)
Non-cash charges - (24,823) (121,246) - (146,069)
------ -------- --------- ------- ---------
Reserve balances,
January 2, 1998 $5,542 $ 18,448 $ 3,817 $27,443 $ 55,250
------ -------- --------- ------- ---------
</TABLE>
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
such restructuring 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 to acquire approximately ten percent (10%) of
Quinta's outstanding 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 of Quinta are being amortized on a
straight-line basis over two years. This acquisition was accounted for as
a purchase and,
9
<PAGE>
accordingly, the results of operations of Quinta have been included in the
Company's 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 six months ending January 2, 1998 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 six months
ending January 2, 1998 include other expenses of approximately $76 million
for unrealized losses on foreign currency forward exchange contracts.
Based on recent volatility in the Far East foreign currency markets, the
Company has temporarily suspended purchasing foreign currency forward
exchange and option contracts for the Thai baht, Malaysian ringgit and
Singapore dollar.
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
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" and Note 6 to the consolidated condensed
financial statements, 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 January 2, 1998 was $1,673,327,000, as compared
with $2,400,156,000 for the comparable year-ago quarter, and $1,895,507,000 for
the immediately preceding quarter ended October 3, 1997. Revenue for the six
months ended January 2, 1998 was $3,568,834,000 as compared with $4,460,981,000
for the comparable year-ago period. The decrease in revenue from the comparable
year-ago periods and the immediately preceding quarter was due primarily to a
continuing decline in the average unit sales prices of the Company's products as
a result of intensely competitive market conditions, a lower level of unit
shipments reflecting continuing weakness in demand for the Company's disc drive
products and, with respect to the comparable year-ago quarter, a shift in mix
away from the Company's higher priced products. 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.
Gross margin as a percentage of revenue was 11.4% and 13.6% for the three and
six months ended January 2, 1998, compared with 22.6% and 20.9% for the
comparable periods last year and 15.6% for the immediately preceding quarter
ended October 3, 1997. Without certain special charges of $58,700,000 recorded
in the quarter ended January 2, 1998 primarily for inventory write-offs and
vendor liabilities related to the Company's restructuring plan, pro forma gross
margin as a percentage of revenue would have been 15.0% and 15.3%, respectively,
for the three and six months ended January 2, 1998. The decrease in pro forma
gross margin as a percentage of revenue from the comparable year-ago periods 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, lower revenue and, with respect to the comparable
year-ago periods, 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 three and six months ended January 2, 1998
were $144,289,000 and $287,622,000, respectively, an increase of $30,659,000 and
$67,229,000 when compared with the comparable periods last year and an increase
of $956,000 when compared
11
<PAGE>
with the immediately preceding quarter ended October 3, 1997. These expenses
represented 8.6% and 8.1%, respectively, of revenue for the three and six months
ended January 2, 1998 compared with 4.7% and 4.9%, respectively, for the
comparable periods last year and 7.6% of revenue for the immediately preceding
quarter. The increase in expenses from the comparable year-ago periods 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 being developed
by Quinta Corporation ("Quinta"), a wholly-owned subsidiary of the Company
acquired in August 1997. These increases in expenses were partially offset by
the absence of employee profit sharing and executive bonuses in the three and
six months ended January 2, 1998.
Marketing and administrative expenses for the three and six months ended January
2, 1998 were $129,047,000 and $255,288,000, respectively, an increase of
$3,167,000 and $17,962,000 when compared with the comparable periods last year
and an increase of $2,806,000 when compared with the immediately preceding
quarter ended October 3, 1997. These expenses represented 7.7% and 7.2%,
respectively, of revenue for the three and six months ended January 2, 1998
compared with 5.2% and 5.3% for the comparable periods last year and 6.7% of
revenue for the immediately preceding quarter. The increase in expenses from
the comparable year-ago periods 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 increased 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 three and six months ended
January 2, 1998. The increase in expenses from the immediately preceding
quarter was primarily due to increased marketing and administrative expenses
related to the Company's software products and services and increased
advertising and promotion expenses, substantially offset by a reduction in
salaries and related costs and outside services in the quarter ended January 2,
1998.
Amortization of goodwill and other intangibles decreased by $537,000 and
$1,297,000 for the three and six months ended January 2, 1998, when compared
with the comparable periods last year and increased by $2,329,000 when compared
with the immediately preceding quarter ended October 3, 1997. The decrease in
amortization from the comparable periods last year was primarily due to reduced
amortization subsequent to the write-down of goodwill and the write-offs and
write-downs, in the quarters ended December 27, 1996 and March 28, 1997, of
certain intangible assets related to past acquisitions of software companies
whose value had become impaired, partially offset by additional amortization
related to goodwill and intangibles arising from the additional investment in
Dragon Systems, Inc. ("Dragon") and the acquisition of Quinta. The increase in
amortization from the immediately preceding quarter was primarily due to the
write-downs of goodwill and the write-offs and write-downs, in the quarter ended
January 2, 1998, of certain intangible assets related to past acquisitions of
software companies whose value had become impaired, and a full quarter of
amortization in the quarter ended January 2, 1998 related to goodwill and
intangibles arising from the additional investment in Dragon and the acquisition
of Quinta as compared with a partial quarter of amortization in the immediately
preceding quarter.
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. See note 7, Acquisition of Quinta, to consolidated
condensed financial statements.
In the quarter ended January 2, 1998, the Company recorded restructuring charges
of
12
<PAGE>
$205,465,000. These charges reflect steps the Company is taking to align
worldwide operations with current market conditions and to improve the
productivity of its operations and the efficiency of its development efforts.
The restructuring charges comprised $5,542,000 for reduction of personnel due to
closure or consolidation of certain operations, $43,271,000 for closure of
excess facilities, $125,063,000 to write off or write down equipment,
intangibles and other assets, and $31,589,000 for contract cancellations and
other expenses. Additional restructuring and other special charges estimated to
be a minimum of $75,000,000 which could not be accrued in the quarter ended
January 2, 1998 will be taken as a charge in the Company's third fiscal quarter
ending April 3, 1998.
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 resulted in a $21,969,000 reduction against the
$153,000,000 charge recorded in June 1997. The $21,969,000 reduction is shown
as unusual items in the Consolidated Condensed Statements of Income for the
periods ended January 2, 1998. See "Part II Other Information - Item 1. Legal
Proceedings Business Litigation."
Net other income decreased by $11,602,000 and $67,733,000, respectively, for the
three and six months ended January 2, 1998 when compared with the comparable
periods last year and increased by $44,377,000 from the immediately preceding
quarter ended October 3, 1997. The decrease in net other income from the
comparable year-ago periods was primarily due to charges for mark-to-market
adjustments of $12,844,000 and $75,663,000, respectively, for the three and six
months ended January 2, 1998 on certain of the Company's foreign currency
forward exchange contracts for the Thai baht and the Malaysian ringgit as well
as increased interest expense due to higher average levels of long-term debt
outstanding and higher interest rates. Increased interest income, primarily due
to higher average invested cash, partially offset these charges with respect to
the comparable year-ago periods. The increase in net other income from the
immediately preceding quarter was primarily due to a decrease in charges for
mark-to-market adjustments on certain of the Company's foreign currency forward
exchange contracts. See "Foreign Currency Risk."
The effective tax rate used to record the benefit for income taxes for the six
months ended January 2, 1998 was 21% 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
six months ended January 2, 1998 resulted primarily from non-deductible charges
incurred as a result of the acquisition of Quinta. Excluding the acquisition of
Quinta, certain non-recurring restructuring costs and the reversal of certain
Amstrad litigation charges, the pro forma effective tax rate used to record the
benefit for income taxes for the six months ended January 2, 1998 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, if any, 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
13
<PAGE>
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 foreign currency
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 and second quarters 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
$75,663,000 recorded in Other Income (Expense) for the six months ended January
2, 1998. Based on recent volatility in the Far East foreign currency markets,
the Company has temporarily suspended purchasing foreign currency forward
exchange and option contracts for the Thai baht, Malaysian ringgit and Singapore
dollar.
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.
<TABLE>
<CAPTION>
January 2, 1998
----------------
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 $181,827 2.68 $(60,198)
Singapore dollar 216,605 1.44 (34,877)
Thai baht 213,822 26.84 (96,240)
-------- -------------
$612,254 $(191,315)(2)
Purchased currency options:
Malaysian ringgit $ 40,920 2.53 $ -
Singapore dollar 97,121 1.40 -
-------- -------------
$138,041 $ -
</TABLE>
(1) Equivalent to the unrealized net gain (loss) on existing contracts.
(2) $75,663 of the total $191,315 unrealized loss on foreign currency forward
exchange contracts was recorded as a loss in the six months ended January 2,
1998.
LIQUIDITY AND CAPITAL RESOURCES:
- --------------------------------
At January 2, 1998, the Company's cash, cash equivalents and short-term
investments totaled $1.650 billion, a decrease of $633 million from the June 27,
1997 balance. This decrease was primarily a result of expenditures of $410
million for property, equipment and leasehold
14
<PAGE>
improvements, the payment of $194 million in connection with the acquisition of
Quinta, net of cash acquired, the net payment of $123 million in connection with
the adverse judgement in the Amstrad PLC litigation and the repurchase of
approximately 4 million shares of the Company's common stock for $105 million,
partially offset by net cash provided by operating activities. 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 primarily consist of readily
marketable debt securities with remaining maturities of more than 90 days at the
time of purchase.
As of January 2, 1998, the Company had committed lines of credit of $71 million
which can be used for standby letters of credit and bankers' guarantees. At
January 2, 1998, approximately $70 million had been utilized.
The Company expects investments in property and equipment in the current fiscal
year to approximate $875 million, of which approximately $404 million had been
incurred as of January 2, 1998. The Company plans to finance these investments
from existing cash balances and cash flows from operations. The $404 million
year-to-date investment comprised $141 million for manufacturing facilities and
equipment for the recording head operations in the United States, Malaysia,
Northern Ireland and the Philippines; $135 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; $114 million for
expansion of the Company's thin-film media operations in California, Singapore
and Northern Ireland; and $14 million for other purposes.
During the six months ended January 2, 1998 the Company acquired approximately 4
million shares of its common stock for approximately $105 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.
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
15
<PAGE>
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 $1,673,327,000 in the second
quarter of fiscal 1998 from $2,400,156,000 in the second quarter of fiscal 1997
as a result of increased competition resulting in significant price decreases
and continuing weakness in demand for the Company's disc drive products. The
decreased shipments, together with increased price erosion, adversely impacted
the Company's gross margins and results of operations for the second quarter of
fiscal 1998 and these adverse factors are continuing into the third quarter of
fiscal 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 manufacturers such as Fujitsu Limited, International
Business Machines Corporation, NEC Corporation, Toshiba Corporation and Hyundai
Electronics America (Maxtor 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
16
<PAGE>
production, such as the Company is now experiencing, 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. In the second quarter of fiscal 1998,
the Company implemented a restructuring plan to reduce capacity to levels more
in line with customer demand for its products. Additional restructuring charges
will be taken and additional restructuring activities will be implemented in the
third quarter of fiscal 1998.
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. In addition, because
the Company's products are priced in U.S. dollars, the currency instability in
the Asian financial markets may have the effect of making the Company's
products more expensive to computer manufacturers and other users than those
of other disc drive manufacturers whose products may be priced in one of the
affected Asian currencies, and, therefore, those customers may reduce future
purchases of the Company's disc drive products. The Company anticipates that
the recent turmoil in Asian financial markets and the recent deterioration of
the underlying economic conditions in certain Asian countries may have an
impact on its sales to customers located in or whose end-user customers are
located in those countries due to the impact of currency fluctuations on the
relative price of the Company's products and restrictions on government
spending imposed by the International Monetary Fund (the "IMF") on those
countries receiving the IMF's assistance. In addition, customers in those
countries may face reduced access to working capital to fund purchases of disc
drive components or software, such as the Company's products, due to higher
interest rates, reduced bank lending due to contractions in the money supply
or the deterioration in the customer's or its bank's financial condition or
the inability to access other financing.
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.
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
17
<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 Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Computer programs that
have date-sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. The Company considers a product to be in "Year 2000
compliance" if the product's performance and functionality are unaffected by
processing of dates prior to, during and after the year 2000, but only if all
products (for example hardware, software and firmware) used with the product
properly exchange accurate date data with it. Although the Company believes
its disc and tape drive products and certain of its software products are in
Year 2000 compliance, the Company has determined that certain of its software
products are not and will not be Year 2000 compliant, and is taking measures
to inform its customers of that fact. The Company anticipates that substantial
litigation may be brought against vendors, including the Company, of all
component products of systems that are unable to properly manage data related
to the Year 2000. The Company's agreements with customers typically contain
provisions designed to limit the Company's liability for such claims. It is
possible, however, that these measures will not provide protection from
liability claims, as a result of existing or future federal, state or local
laws or ordinances or unfavorable judicial decisions. Any such claims, with or
without merit, could result in a material adverse affect on the Company's
business, financial condition and results of operations, including increased
warranty costs, customer satisfaction issues and potential lawsuits.
The Company is identifying Year 2000 dependencies in its internal systems and is
implementing changes to such systems to make them Year 2000 compliant. The
Company has also initiated formal communications with all of its significant
suppliers and financial institutions, and is in the process of communicating
with its large customers to determine the extent to which the Company is
vulnerable to those third parties' failure to remedy their own Year 2000 Issue.
The Company anticipates that its systems will be substantially Year 2000
compliant by December 31, 1998. The cost of bringing the Company's systems into
Year 2000 compliance has not yet been defined, however it is not expected to
have a material effect on the Company's financial condition or results of
operations. While the Company currently expects that the Year 2000 Issue will
not pose significant operational problems, delays in the implementation of new
information systems, or a failure to fully identify all Year 2000 dependencies
in the Company's systems and in the systems of its vendors, customers and
financial institutions could have material adverse consequences, including
delays in the delivery or sale of products.
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 or major restructurings 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.
18
<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 Company and Amstrad subsequently 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.
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 were withdrawn and the
litigation ended. The settlement resulted in a $21,969,000 reduction against
the $153,000,000 charge recorded in June 1997. This reduction in the settlement
cost was reflected in the Company's results for the quarter ended 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. On December
10, 1997 the Court of Appeals for the Ninth Circuit dismissed the appeal. The
settlement is now final. The final settlement of this series of lawsuits did
not have a material adverse effect on the Company's
19
<PAGE>
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, 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
20
<PAGE>
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. ("Conner") 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,
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.
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 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits
The following exhibits are included herein:
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 January 2, 1998.
21
<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 11, 1998 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 11, 1998 BY: /s/ Alan F. Shugart
_______________________
ALAN F. SHUGART
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer
and Director)
22
<PAGE>
SEAGATE TECHNOLOGY, INC.
INDEX TO EXHIBITS
EXHIBIT
NUMBER
_______
27 Financial Data Schedule
23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED CONDENSED BALANCE SHEET AS OF JANUARY 2, 1998 AND THE CONSOLIDATED
CONDENSED STATEMENT OF INCOME FOR THE SIX MONTHS ENDED JANUARY 2, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUL-03-1998
<PERIOD-START> JUN-28-1997
<PERIOD-END> JAN-02-1998
<CASH> 559,348
<SECURITIES> 1,091,038
<RECEIVABLES> 935,400
<ALLOWANCES> 57,515
<INVENTORY> 760,940
<CURRENT-ASSETS> 3,813,210
<PP&E> 3,214,110
<DEPRECIATION> 1,461,225
<TOTAL-ASSETS> 5,933,115
<CURRENT-LIABILITIES> 1,488,999
<BONDS> 702,994
0
0
<COMMON> 2,519
<OTHER-SE> 2,982,997
<TOTAL-LIABILITY-AND-EQUITY> 5,933,115
<SALES> 3,568,834
<TOTAL-REVENUES> 3,568,834
<CGS> 3,082,441
<TOTAL-COSTS> 3,082,441
<OTHER-EXPENSES> 708,511
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 25,640
<INCOME-PRETAX> (533,377)
<INCOME-TAX> (109,988)
<INCOME-CONTINUING> (423,389)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (423,389)
<EPS-PRIMARY> (1.74)
<EPS-DILUTED> (1.74)
</TABLE>
