<PAGE> 1
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 2, 1998
Commission File Number 001-11403
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: (831) 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 2, 1998, 245,250,840 shares of the registrant's common stock were
issued and outstanding.
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INDEX
SEAGATE TECHNOLOGY, INC.
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE NO.
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Item 1. Financial Statements (Unaudited)
Consolidated condensed statements of operations--
Three months ended October 2, 1998 and
October 3, 1997 3
Consolidated condensed balance sheets--
October 2, 1998 and July 3, 1998 4
Consolidated condensed statements of cash flows--
Three months ended October 2, 1998 and
October 3, 1997 5
Notes to consolidated condensed financial statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
PART II OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 6. Exhibits and Reports on Form 8-K 25
SIGNATURES 26
</TABLE>
2
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SEAGATE TECHNOLOGY, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In Millions, Except Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------- ----------
OCTOBER 2, OCTOBER 3,
1998 1997
---------- ----------
<S> <C> <C>
Revenue $ 1,553 $ 1,896
Cost of sales 1,232 1,601
Product development 141 143
Marketing and administrative 131 126
Amortization of goodwill and
other intangibles 9 10
In-process research and development -- 216
Unusual items 77 --
------- -------
Total Operating Expenses 1,590 2,096
Loss from Operations (37) (200)
Interest income 26 28
Interest expense (13) (13)
Other 3 (65)
------- -------
Other Income (Expense), net 16 (50)
------- -------
Loss before income taxes (21) (250)
Provision (benefit) for income taxes 9 (10)
------- -------
Net Loss $ (30) $ (240)
======= =======
Net loss per share $ (0.12) $ (0.98)
Number of shares used in
per share computations 245.0 244.6
</TABLE>
See notes to consolidated condensed financial statements.
3
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SEAGATE TECHNOLOGY, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In Millions)
(Unaudited)
<TABLE>
<CAPTION>
OCTOBER 2, JULY 3,
1998 1998(1)
------- -------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 431 $ 666
Short-term investments 1,443 1,161
Accounts receivable, net 761 799
Inventories 461 508
Deferred income taxes 232 243
Other current assets 244 238
------- -------
Total Current Assets 3,572 3,615
Property, equipment and leasehold improvements, net 1,665 1,669
Goodwill and other intangibles, net 157 169
Other assets 209 192
------- -------
Total Assets $ 5,603 $ 5,645
======= =======
LIABILITIES
Accounts payable $ 521 $ 577
Accrued employee compensation 182 175
Accrued expenses 650 602
Accrued income taxes 5 20
Current portion of long-term debt 1 1
------- -------
Total Current Liabilities 1,359 1,375
Deferred income taxes 431 435
Other liabilities 182 194
Long-term debt, less current portion 703 704
------- -------
Total Liabilities 2,675 2,708
------- -------
STOCKHOLDERS' EQUITY
Common stock 3 3
Additional paid-in capital 1,933 1,929
Retained earnings 1,247 1,298
Accumulated other comprehensive income 5 --
Deferred compensation (49) (55)
Treasury common stock at cost (211) (238)
------- -------
Total Stockholders' Equity 2,928 2,937
------- -------
Total Liabilities and Stockholders' Equity $ 5,603 $ 5,645
======= =======
</TABLE>
(1) The information in this column was derived from the Company's audited
consolidated balance sheet as of July 3, 1998.
See notes to consolidated condensed financial statements.
4
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SEAGATE TECHNOLOGY, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In Millions)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------
OCTOBER 2, OCTOBER 3,
1998 1997
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (30) $ (240)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 165 171
Deferred income taxes 4 8
In-process research and development -- 216
Other, net 7 12
Changes in operating assets and liabilities:
Accounts receivable 37 114
Inventories 39 8
Accounts payable (72) (239)
Accrued income taxes (12) (59)
Accrued expenses and employee compensation 11 (159)
Other assets and liabilities, net 12 42
------- -------
Net cash provided by (used in) operating activities 161 (126)
INVESTING ACTIVITIES:
Acquisition of property, equipment and leasehold
improvements, net (107) (222)
Purchases of short-term investments (2,209) (1,009)
Maturities and sales of short-term investments 1,937 1,346
Acquisition of Quinta, net of cash acquired -- (194)
Equity investments -- (22)
Other, net (22) --
------- -------
Net cash used in investing activities (401) (101)
FINANCING ACTIVITIES:
Sale of common stock 7 22
Purchase of treasury stock (1) (34)
------- -------
Net cash provided by (used in) financing activities 6 (12)
Effect of exchange rate changes on cash and cash equivalents (1) 3
------- -------
Increase (decrease) in cash and cash equivalents (235) (236)
Cash and cash equivalents at the beginning of the period 666 1,047
------- -------
Cash and cash equivalents at the end of the period $ 431 $ 811
======= =======
</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 July 3, 1998 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.
The results of operations for the three month period ended October 2,
1998 are not necessarily indicative of the results that may be expected
for the entire year ending July 2, 1999.
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 1998 was 53 weeks and ended on July 3, 1998 and fiscal 1999 will
be 52 weeks and will end on July 2, 1999.
2. NET LOSS PER SHARE
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 net loss per share.
6
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<TABLE>
<CAPTION>
(In millions, except per share data) THREE MONTHS ENDED
--------------------------
OCTOBER 2, OCTOBER 3,
1998 1997
---------- ----------
<S> <C> <C>
Net Loss Per Share Computation
Numerator:
Net loss $ (30) $ (240)
------- -------
Denominator:
Weighted average number of
common shares outstanding
during the period 245.0 244.6
------- -------
Net loss per share $ (0.12) $ (0.98)
======= =======
</TABLE>
Incremental common shares attributable to exercise of outstanding
options (assuming proceeds would be used to purchase treasury stock) of
2.7 million and 6.7 million for the three months ended October 2, 1998
and October 3,1997, respectively, were not included in the net loss per
share computation because the effect would be antidilutive.
3. BALANCE SHEET INFORMATION
(In millions)
<TABLE>
<CAPTION>
OCTOBER 2, JULY 3,
1998 1998
---------- --------
<S> <C> <C>
Accounts Receivable:
Accounts receivable $ 815 $ 853
Allowance for non-collection (54) (54)
------- -------
$ 761 $ 799
======= =======
Inventories:
Components $ 195 $ 172
Work-in-process 58 87
Finished goods 208 249
------- -------
$ 461 $ 508
======= =======
Property, Equipment and Leasehold Improvements:
Property, equipment and leasehold improvements $ 3,327 $ 3,242
Allowance for depreciation and amortization (1,662) (1,573)
------- -------
$ 1,665 $ 1,669
======= =======
</TABLE>
4. INCOME TAXES
The effective tax rate used to record the provision for income taxes for
the three months ended October 2, 1998 was 43% compared with a 4%
effective tax rate used to record the benefit from income taxes for the
comparable period last year. The higher effective
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tax rate used to record the provision for income taxes for the three
months ended October 2, 1998 resulted primarily from additional
non-deductible charges associated with the acquisition of Quinta
Corporation ("Quinta"). See note 7 of Notes to Consolidated Condensed
Financial Statements. The lower effective tax rate used to record the
benefit from income taxes for the three months ended October 3, 1997
resulted primarily from non-deductible charges incurred as a result of
the acquisition of Quinta. Excluding the non-deductible charges from the
Quinta acquisition, the pro forma effective tax rate used to record the
provision for income taxes for the three months ended October 2, 1998
would have been 28%. The pro forma effective tax rate of 28% is less
than the statutory rate because a portion of the Company's anticipated
foreign operating income is not subject to foreign income taxes and is
considered to be permanently reinvested in non-U.S. operations.
5. SUPPLEMENTAL CASH FLOW INFORMATION
(In millions)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------
OCTOBER 2, OCTOBER 3,
1998 1997
---------- ----------
<S> <C> <C>
Cash Transactions:
Cash paid for interest $26 $26
Cash paid for income taxes 15 37
</TABLE>
6. RESTRUCTURING COSTS
During fiscal 1998, the Company recorded restructuring charges
aggregating $347 million. 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 $57 million for
reduction of personnel due to closure or consolidation of certain
operations, $78 million for closure of excess facilities, $148 million
to write off or write down equipment, intangibles and other assets whose
value had become permanently impaired, and $64 million for contract
cancellations and other expenses.
In connection with this restructuring the Company currently expects a
workforce reduction of approximately 15,000 employees. Of the 15,000
employees, 8,144 are involuntary terminations of regular, full-time
employees, 1,528 are contract laborers, primarily engaged through
temporary employment agencies, and the remainder represents attrition.
Approximately 14,200 of the 15,000 employees, including 7,988 of the
8,144 involuntary terminations of regular, full-time employees, had been
terminated as of October 2, 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 three months ended October 2,
1998 (in millions):
<TABLE>
<CAPTION>
CONTRACT
EQUIPMENT, CANCELLATIONS
SEVERANCES EXCESS INTANGIBLES AND OTHER
AND BENEFITS FACILITIES AND OTHER ASSETS EXPENSES TOTAL
------------ ---------- ---------------- ------------- -----
<S> <C> <C> <C> <C> <C>
Reserve balances,
July 3, 1998 $ 9 $ 20 $ -- $ 15 $ 44
Cash charges (3) (4) -- -- (7)
---- ---- --------- ---- ----
Reserve balances,
October 2, 1998 $ 6 $ 16 $ -- $ 15 $ 37
---- ---- --------- ---- ----
</TABLE>
8
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7. ACQUISITION OF QUINTA
In April and June 1997, the Company invested an aggregate of $20 million
to acquire approximately ten percent (10%) of the outstanding stock of
Quinta, a developer of ultra-high capacity disc drive technologies,
including a new optically-assisted Winchester (OAW) technology. In
August 1997, the Company completed the acquisition of Quinta. Pursuant
to the purchase agreement with Quinta, the shareholders of Quinta, other
than Seagate, received cash payments aggregating $230 million upon the
closing of the acquisition and were eligible to receive additional cash
payments aggregating $96 million upon the achievement of certain product
development and early production milestones. Of the $96 million, $19
million was paid or accrued in fiscal 1998. In July 1998, the Company
and Quinta amended the purchase agreement to eliminate the product
development and early production milestones and provide that the former
shareholders of Quinta will be eligible to receive the remaining $77
million and the $14 million that had been accrued but unpaid in fiscal
1998 in equal quarterly installments beginning September 30, 1998 and
ending March 31, 2000. In the quarter ended October 2, 1998, the Company
recorded a charge to operations for the remaining $77 million.
8. FOREIGN CURRENCY DERIVATIVES
The Company may enter 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 first and second quarters of fiscal
1998 as a result of the declines in the value of the Thai baht and
Malaysian ringgit relative to the U.S. dollar. Accordingly, the
Company's results for the three months ended October 3, 1997 include
other expenses of approximately $63 million for unrealized losses on
foreign currency forward exchange contracts. Based on uncertainty in the
Southeast Asian 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. COMPREHENSIVE INCOME
As of July 4, 1998 the Company adopted Statement of Financial Accounting
Standards No. 130 ("SFAS 130"), Reporting Comprehensive Income. SFAS 130
establishes new rules for the reporting and display of comprehensive
income and its components; however, the adoption of SFAS 130 had no
impact on the Company's net income or stockholders' equity. SFAS 130
requires unrealized gains or losses on the Company's available-for-sale
securities and foreign currency translation adjustments, which prior to
adoption were reported separately in stockholders' equity to be included
in other comprehensive income.
9
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The components of comprehensive income, net of related tax, for the
quarters ended October 2, 1998 and October 3, 1997 were as follows (in
millions):
<TABLE>
<CAPTION>
OCTOBER 2, OCTOBER 3,
1998 1997
---------- ----------
<S> <C> <C>
Net loss $ (30) $(240)
Unrealized gains on securities 5 1
----- -----
Comprehensive income $ (25) $(239)
===== =====
</TABLE>
The components of accumulated other comprehensive income, net of related
tax, at October 2, 1998 and July 3, 1998 were as follows (in millions):
<TABLE>
<CAPTION>
OCTOBER 2, JULY 3,
1998 1998
---------- -------
<S> <C> <C>
Unrealized gains on securities $ 6 $ 1
Foreign currency translation adjustments (1) (1)
--- ---
Accumulated other comprehensive income $ 5 $--
=== ===
</TABLE>
10. SUBSEQUENT EVENT
The Company, its majority-owned subsidiary, Seagate Software, Inc.
("SSI") and SSI's Network & Storage Management Group, Inc. ("NSMG")
subsidiary announced on October 5, 1998 that they had entered into an
Agreement and Plan of Reorganization (the "Plan") as of such date with
Veritas Holding Corporation ("Newco") and Veritas Software Corporation
("VERITAS"). VERITAS provides end-to-end storage management software
solutions. The Plan provides for the contribution by the Company, SSI
and certain of their respective subsidiaries to Newco of (a) the
outstanding stock of NSMG and certain other subsidiaries of SSI, and (b)
those assets used primarily in the network storage management business
of SSI (the "NSMG Business"), in consideration for the issuance of
shares of Common Stock of Newco to SSI and the offer by Newco to grant
options to purchase Common Stock of Newco to certain of SSI's employees
who become employees of Newco or its subsidiaries. As part of the Plan,
Newco will also assume certain liabilities of the NSMG Business. The
Plan is structured to qualify as a tax-free exchange. The merger will be
accounted for as a non-monetary transaction using the fair value of the
assets exchanged.
Upon consummation of the merger, Newco shall issue shares of Common
Stock to SSI equal to approximately 40% of the fully diluted Common
Stock equivalent equity interests in Newco (assuming conversion of all
convertible securities, including the VERITAS convertible debentures,
and exercise of all assumed options and warrants) less that number of
shares of Newco Common Stock issuable upon exercise of Newco options
issued to the SSI employees who surrender their outstanding options to
purchase shares of SSI's Common Stock. Upon consummation of the merger,
the former security holders of VERITAS will be issued Newco securities
representing approximately 60% of the fully diluted Common Stock
equivalent equity interests in Newco.
The merger is subject to a number of conditions, including but not
limited to the
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effectiveness of a Registration Statement on Form S-4 to be filed by
Newco with the Securities and Exchange Commission, approval by the
stockholders of VERITAS and SSI, the expiration or termination of the
waiting period (and any extension thereof) under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, and other customary
closing conditions.
SSI anticipates recording a substantial gain and certain expenses in
connection with the merger. The gain will be recorded in fiscal 1999.
The expenses will include a substantial one-time write-off of in-process
research and development during fiscal 1999 as well as amortization of
goodwill and intangibles over periods up to five years following the
merger. The magnitude of the gain and expenses will depend on several
factors, including the average stock price of Veritas around the date of
the merger, the number of shares of stock exchanged and an independent
valuation of Veritas' business. SSI will account for its investment in
Veritas using the equity method and currently anticipates the merger
will be consummated in the third quarter of fiscal 1999.
NSMG historically has had higher gross margins as a percent of sales
than the Company. Therefore, if the exchange with Veritas is
consummated, it could result in lower gross margins for the Company. The
Company's gross margins for the quarter ended October 2, 1998 and the
year ended July 3, 1998 were 20.7% and 14.5% respectively. Without NSMG,
such gross margins would have been 18.4% and 12.6% respectively.
11. LITIGATION
See Part II, Item 1 of this Form 10-Q for a description of legal
proceedings.
11
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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 the effective tax rate in the sixth paragraph under "Results of
Operations," the statements relating to the merger between Veritas and NSMG in
the seventh paragraph under "Results of Operations," the statement concerning a
possible charge to operations for the discontinuation of the operations of
Seagate Microelectronics Limited 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 2, 1998 was $1.553 billion, as compared
with $1.896 billion for the comparable year-ago quarter, and $1.575 billion for
the immediately preceding quarter ended July 3, 1998. The decrease in revenue
from the comparable year-ago 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 a shift in mix away from the Company's higher priced products. The decrease
in revenue from 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 and a shift in mix away from
the Company's higher priced products partially offset by a higher level of unit
shipments. 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 20.7% for the three months ended
October 2, 1998, compared with 15.6% for the comparable period last year and
18.9% for the immediately preceding quarter ended July 3, 1998. The increase in
gross margin as a percentage of revenue from both prior periods was primarily
due to cost savings as a result of the Company's restructuring activities and an
intensive program of cost reduction. Reductions in costs from both prior periods
included lower overhead costs per unit, a reduction in material costs per unit,
reduced scrap and rework and lower warranty costs. These cost reductions were
partially offset by the 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.
Marketing and administrative expenses for the three months ended October 2, 1998
were $131 million an increase of $5 million when compared with the comparable
period last year and an
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increase of $3 million when compared with the immediately preceding quarter
ended July 3, 1998. These expenses represented 8.4% of revenue for the three
months ended October 2, 1998 compared with 6.7% for the comparable period last
year and 8.1% for the immediately preceding quarter. The increase in expenses
from the comparable year-ago quarter was primarily due to a $7 million charge in
the quarter ended October 2, 1998 in connection with the separation agreement
with the Company's former Chief Executive Officer partially offset by decreases
in other expenses.
The $77 million charge to unusual items in the quarter ended October 2, 1998 was
in connection with an amendment to the purchase agreement for the August 1997
acquisition of Quinta. See Note 7 to the consolidated condensed financial
statements.
Net other income increased by $66 million for the three months ended October 2,
1998 when compared with the comparable period last year and decreased by $2
million from the immediately preceding quarter ended July 3, 1998. The increase
in net other income from the comparable year-ago quarter was primarily due to
charges for mark-to-market adjustments in the quarter ended October 3, 1997 of
$63 million on certain of the Company's foreign currency forward exchange
contracts for the Thai baht and the Malaysian ringgit. The decrease from the
immediately preceding quarter was primarily due to a decrease in the charge for
minority interest in the Company's majority-owned subsidiary in Shenzhen, China.
The effective tax rate used to record the provision for income taxes for the
three months ended October 2, 1998 was 43% compared with a 4% effective tax rate
used to record the benefit from income taxes for the comparable period last
year. The higher effective tax rate used to record the provision for income
taxes for the three months ended October 2, 1998 resulted primarily from
additional non-deductible charges associated with the acquisition of Quinta. The
lower effective tax rate used to record the benefit from income taxes for the
three months ended October 3, 1997 resulted primarily from non-deductible
charges incurred as a result of the acquisition of Quinta. Excluding the
non-deductible charges from the Quinta acquisition, the pro forma effective tax
rate used to record the provision for income taxes for the three months ended
October 2, 1998 would have been 28%. The pro forma effective tax rate of 28% is
less than the statutory rate because a portion of the Company's anticipated
foreign operating income is not subject to foreign income taxes and is
considered to be permanently reinvested in non-U.S. operations. The Company
expects its effective tax rate on operating income for the remaining quarters of
fiscal 1999 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.
The Company, its majority-owned subsidiary, Seagate Software, Inc. ("SSI") and
SSI's Network & Storage Management Group, Inc. ("NSMG") subsidiary announced on
October 5, 1998 that they had entered into an Agreement and Plan of
Reorganization (the "Plan") as of such date with Veritas Holding Corporation
("Newco") and Veritas Software Corporation ("VERITAS"). VERITAS provides
end-to-end storage management software solutions. The Plan provides for the
contribution by the Company, SSI and certain of their respective subsidiaries to
Newco of (a) the outstanding stock of NSMG and certain other subsidiaries of
SSI, and (b) those assets used primarily in the network storage management
business of SSI (the "NSMG Business"), in consideration for the issuance of
shares of Common Stock of Newco to SSI and the offer by Newco to grant options
to purchase Common Stock of Newco to certain of SSI's employees who become
employees of Newco or its subsidiaries. As part of the Plan, Newco will also
assume certain liabilities of the NSMG Business. The Plan is structured to
qualify as a tax-free exchange. The merger will be accounted for as a
non-monetary transaction using the fair value of the assets exchanged. Upon
consummation of the merger, Newco shall issue shares of Common
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Stock to SSI equal to approximately 40% of the fully diluted Common Stock
equivalent equity interests in Newco (assuming conversion of all convertible
securities, including the VERITAS convertible debentures, and exercise of all
assumed options and warrants) less that number of shares of Newco Common Stock
issuable upon exercise of Newco options issued to the SSI employees who
surrender their outstanding options to purchase shares of SSI's Common Stock.
Upon consummation of the merger, the former security holders of VERITAS will be
issued Newco securities representing approximately 60% of the fully diluted
Common Stock equivalent equity interests in Newco. The merger is subject to a
number of conditions, including but not limited to the effectiveness of a
Registration Statement on Form S-4 to be filed by Newco with the Securities and
Exchange Commission, approval by the stockholders of VERITAS and SSI, the
expiration or termination of the waiting period (and any extension thereof)
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and
other customary closing conditions. SSI anticipates recording a substantial gain
and certain expenses in connection with the merger. The gain will be recorded in
fiscal 1999. The expenses will include a substantial one-time write-off of
in-process research and development during fiscal 1999 as well as amortization
of goodwill and intangibles over periods up to five years following the merger.
The magnitude of the gain and expenses will depend on several factors, including
the average stock price of Veritas around the date of the merger, the number of
shares of stock exchanged and an independent valuation of Veritas' business. SSI
will account for its investment in Veritas using the equity method and currently
anticipates the merger will be consummated in the third quarter of fiscal 1999.
NSMG historically has had higher gross margins as a percent of sales than the
Company. Therefore, if the exchange with Veritas is consummated, it could result
in lower gross margins for the Company. The Company's gross margins for the
quarter ended October 2, 1998 and the year ended July 3, 1998 were 20.7% and
14.5% respectively. Without NSMG, such gross margins would have been 18.4% and
12.6% respectively.
The Company is discontinuing the manufacture of microchips used in its disc
drive products and therefore is seeking a buyer for its Seagate Microelectronics
Limited subsidiary in Livingston, Scotland. Depending upon its ability to
identify a qualified buyer as well as other factors, the Company may be required
to take a charge to operations related to this facility in its fiscal quarter
ending January 1, 1999.
LIQUIDITY AND CAPITAL RESOURCES:
At October 2, 1998, the Company's cash, cash equivalents and short-term
investments totaled $1.874 billion, an increase of $47 million from the July 3,
1998 balance. This increase was primarily a result of net cash provided by
operating activities, partially offset by expenditures for 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 primarily consist of readily marketable debt securities
with remaining maturities of more than 90 days at the time of purchase.
As of October 2, 1998, the Company had committed lines of credit of $63 million
which can be used for standby letters of credit and bankers' guarantees. At
October 2, 1998, these lines of credit were fully utilized.
The Company expects investments in property and equipment in the current fiscal
year to approximate $700 million, of which approximately $123 million had been
incurred as of October 2, 1998. The Company plans to finance these investments
from existing cash balances and cash flows from operations. The $123 million
year-to-date investment comprised $59 million for
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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
the United Kingdom; $51 million for manufacturing facilities and equipment for
the recording head operations in the United States, Northern Ireland and
Malaysia; $9 million for expansion of the Company's thin-film media operations
in California, Singapore, Northern Ireland and Mexico; and $4 million for other
purposes.
FACTORS AFFECTING FUTURE OPERATING RESULTS
We compete in the data storage industry, and there are a number of factors that
in the past have affected all of the companies in our industry including us.
Many of these factors may also impact our business in the future.
DATA STORAGE INDUSTRY RISKS
Our products are components in computer systems. The demand for computer systems
has been volatile in the past and often has had an exaggerated effect on the
demand for disc drive and tape drive products such as ours in any given period.
In the past, unexpected slowdowns in demand for computer systems have generally
caused sharp declines in demand for disc drives and tape drive products. We
expect that this situation will occur again in the future. In our industry, the
supply of drives periodically exceeds demand. When this occurs the oversupply of
available products causes higher than anticipated inventory levels and intense
price competition.
FLUCTUATIONS IN QUARTERLY RESULTS
We often experience a high volume of sales at the end of the quarter, so we may
not be able to determine that our fixed costs are too high relative to sales
until late in any given quarter. Since this happens late in the quarter, we do
not have enough time to reduce these costs. As a result, we would not be as
profitable or may even incur a loss. In addition, Seagate Technology'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:
o the timing of orders from and shipment of products to major
customers,
o our product mix,
o changes in the prices of our products,
o manufacturing delays or interruptions,
o acceptance by customers of competing technologies in lieu of our
products,
o variations in the cost of components for our products,
o limited access to components that we obtain from a single or a
limited number of suppliers,
o our inability to reduce our fixed costs to match revenues in any
quarter because of our vertical manufacturing strategy,
o the impact of changes in foreign currency exchange rates on the
cost of our products and the effective price of such products to
foreign consumers
o competition and consolidation in the data storage industry and
o general economic conditions.
For example, revenue decreased to $1.553 billion in the first quarter of fiscal
1999 from $1.896 billion in the first quarter of fiscal 1998 as a result of
increased competition which resulted in significant price decreases and
continuing weakness in demand for Seagate Technology's disc drive products. Our
future operating results may also be adversely affected if Seagate Technology
receives an adverse judgment or settlement in any of the legal proceedings to
which we are a party.
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COMPETITION
Even during periods when demand is stable, the data storage industry is
intensely competitive and vendors experience price erosion over the life of a
product. We expect that our competitors will offer new and existing products at
lower prices if necessary to gain or retain market share and customers. We also
expect that price erosion in our industry will continue for the foreseeable
future. Because we may need to reduce our prices to retain our market share, the
competition could adversely affect our results of operations in any given
quarter. We have experienced and expect to continue to experience intense
competition from a number of domestic and foreign companies including the other
leading independent disc drive manufacturers, as well as large integrated
multinational manufacturers such as:
o Fujitsu Limited
o International Business Machines Corporation
o NEC Corporation
o Samsung Electronics Co. Ltd. and
o Toshiba Corporation.
We also face indirect competition from present and potential customers,
including several of the computer manufacturers listed above, that continuously
evaluate whether to manufacture their own drives or purchase them from outside
sources. If our customers decide to manufacture their own drives, it could have
a material adverse effect on our business, results of operations and financial
condition.
We also compete with manufacturers of products that use alternative data storage
and retrieval technologies. Products based upon such alternative technologies,
including optical recording technology and semiconductor memory (flash memory,
SRAM and DRAM), may compete with our products.
There can be no assurance that we will be able to compete successfully against
current or future competitors. If we fail to compete successfully, our business,
operating results and financial condition may be materially adversely affected.
RISKS ASSOCIATED WITH NEW PRODUCT DEVELOPMENT
Our products are used in combination with other hardware, such as
microprocessors, and other software. We had research and development expenses of
$420 million, $459 million and $585 million in fiscal 1996, 1997 and 1998,
respectively. Customers have demanded new generations of drive products as
advances in other hardware components and software have created the need for
improved storage products with features such as increased storage capacity or
more advanced technology. As a result, the life cycles of our products have been
shortened, and we have been required to constantly develop and introduce new
drive products on a cost-effective and timely basis.
When we develop new disc and tape drive products with higher capacity and more
advanced technology, our operating results may decline because the increased
difficulty and complexity associated with producing such disc drives increases
the likelihood of reliability, quality or operability problems. If our products
suffer increases in failures, are of low quality or are not reliable, customers
may reduce their purchases of our products and our manufacturing rework and
scrap costs and service and warranty costs may increase. In addition, a decline
in the reliability of our products may make us less competitive as compared with
other disc and tape drive manufacturers.
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Our future success will also require strong demand by consumers and businesses
for computer systems, storage upgrades to computer systems and multimedia
applications, such as digital video and video-on-demand. If delivery of our new
products or those computer systems into which our products are integrated is
delayed, consumers and businesses may purchase comparable products from our
competitors or wait to make their purchases if they want to buy the new product.
If customers hold back in anticipation of a new product, or buy from a
competitor instead, our operating results may be significantly adversely
impacted.
Consumers have shown that they want to purchase personal computers costing less
than $1000. We are developing low cost disc drives to meet the demand for disc
drives that are components of low cost personal computers. However, we may not
be able to produce disc drives that meet our quality and performance standards
at a cost low enough to yield gross margins comparable to those of our current
overall product mix.
We discontinued production of disc drives that use smaller media than 3.5 inches
in January 1998. We are continuing research and development of smaller drives,
because we believe that to compete successfully to supply components for mobile,
laptop, notebook and ultraportable computers, we must supply a smaller product.
We intend to re-enter this market with a durable, low power application in the
future.
RISKS FROM VERTICAL INTEGRATION OF MANUFACTURING OPERATIONS
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. Our strategy of vertical integration has allowed us to internally
manufacture many of the critical components used in our products. We have
pursued a strategy of vertical integration of our manufacturing processes in
order to reduce costs, control quality and assure availability and quality of
certain components.
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, such as we are now experiencing, these high fixed costs have had,
and could in the future have, a material adverse effect on Seagate Technology's
operating results and financial condition. In addition, a strategy of vertical
integration has in the past and could continue to delay Seagate Technology's
ability to introduce products containing market-leading technology.
We also rely on independent suppliers for certain components. In the past we
have experienced production delays when we were 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 Seagate
Technology's business, operating results and financial condition. Seagate
Technology relies on single or limited source suppliers for certain components
used in our products. We may not be able to obtain components that meet our
specifications and quality standards at prices that enable us to earn a profit
on the finished products. In the past, shortages have occurred in the market for
certain components, including heads, media, application specific integrated
circuits and motors. As a result, certain suppliers substantially increased the
price of such components, and Seagate is currently incurring increased costs for
certain of these components as a result of supply shortages. If we experience
any extended interruption or reduction in the supply of any key components, our
business, results of operations and financial condition could be materially
adversely affected.
CUSTOMER REQUIREMENTS AND CONCENTRATION
The data storage industry has been characterized by large volume OEM purchase
agreements and
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<PAGE> 18
large distributor orders. Typically, Seagate's OEM purchase agreements permit
customers to cancel orders and reschedule delivery dates without significant
penalties. In the past, orders from many of Seagate's OEM customers were
canceled or delivery schedules were delayed as a result of changes in customer
requirements. These delays have had a material adverse effect on Seagate's
results of operations in the past, and may again in the future. Distributors
typically furnish Seagate with non-binding indications of their near-term
requirements, with product deliveries based on weekly confirmations. To the
extent actual orders from distributors decrease from their non-binding
forecasts, such variances could have a material adverse effect on Seagate's
business, results of operations and financial condition.
RISKS FROM INTERNATIONAL OPERATIONS
We have significant offshore operations including manufacturing facilities,
sales personnel and customer support operations. We have manufacturing
facilities in Singapore, Thailand, the People's Republic of China, Scotland,
Ireland, and Malyasia in addition to those in the United States. Our offshore
operations are subject to certain inherent risks including:
o fluctuations in currency exchange rates, such as the $76 million
charge to income we incurred in fiscal 1998 from marking our
hedge positions to market
o longer payment cycles for sales in foreign countries
o difficulties in staffing and managing international
manufacturing operations
o seasonal reductions in business activity in the summer months in
Europe and certain other countries
o increases in tariffs and duties, price controls, restrictions on
foreign currencies and trade barriers imposed by foreign
countries and
o political unrest, particularly in areas in which we have
manufacturing facilities.
These factors could have a material adverse effect on our business, operating
results and financial condition in the future.
Our products are priced in U.S. dollars even when sold to customers who are
located abroad. The currency instability in the Asian and other financial
markets may make our products more expensive than products sold by other
manufacturers that are priced in one of the affected currencies. Therefore,
foreign customers may reduce purchases of our products. We anticipate that the
recent turmoil in financial markets and the recent deterioration of the
underlying economic conditions in certain countries, including those in Asia,
may have an impact on our sales to customers located in or whose end-user
customers are located in those countries due to:
o the impact of currency fluctuations on the relative price of our
products
o restrictions on government spending imposed by the International
Monetary Fund (the "IMF") in those countries receiving the IMF's
assistance
o customers' reduced access to working capital to fund purchases
of disc drive components or software, such as our products, due
to
o higher interest rates
o reduced bank lending due to contractions in the money
supply or the deterioration in the customer's or its
bank's financial condition or
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o the inability to access other financing
RISKS FROM THE SPIN-OFF OF THE NETWORK & STORAGE MANAGEMENT GROUP
We consolidated our software businesses into a single entity called Seagate
Software in 1996. Seagate Software's business consists of two primary divisions,
the Network & Storage Management Group ("NSMG") and the Information Management
Group ("IMG"). We announced on October 5, 1998 that we will contribute NSMG to a
newly formed company that will also include Veritas Software Corporation. Our
Seagate Software subsidiary and the employees of NSMG who hold stock options in
Seagate Software will receive 40% of the fully diluted equity in the new
company.
We face a number of risks prior to and after the closing of the spin-off of the
Network & Storage Management Group including:
o our management resources may be distracted from the day
to day operations by the transaction
o employees of the Network & Storage Management Group may
not want to become employees of the new company
o employees of the Information Management Group may be
distracted by concerns about whether we continue to
operate that business or spin it off
o the Network & Storage Management Group's customers may
delay or cancel orders due to uncertainty about the
spin-off
o the ongoing OEM relationship with the Network & Storage
Management Group and our tape drive operations may be
disrupted
o we have agreed not to compete in certain storage
management software businesses for a specified period of
time after the closing and may not be able to benefit
from future opportunities in that market
o we will not have control over the management of the new
company, although initially we will have two
representatives on its board of directors and
o we will be limited from liquidating our interest in the
new company for a certain period of time. Thereafter, if
we choose to do so, we will be required to sell our
interest in the new company in small increments to
comply with certain Securities and Exchange Commission
rules or to bear the expense of filing a registration
statement.
ACQUISITIONS
We intend to continue our expansion into 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. We expect that the Company will continue
to incur substantial expenses as we acquire other businesses including charges
for the write-off of in-process research and development. Our operating results
have fluctuated in the past and may fluctuate in the future because of the
timing of such write-offs. For example, we incurred a charge to operations in
the first quarter of fiscal 1998 of approximately $214 million for the write-off
of in-process research and development related to our acquisition of Quinta
Corporation and we anticipate a substantial charge to operations later in fiscal
1999 for the write-off of in-process research and development related to the
merger of NSMG with Veritas.
RISKS OF SYSTEMS FAILURES
Our operations are dependent on our ability to protect Seagate Technology's
computer
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equipment and the information stored in its databases from damage by fire,
natural disaster, power loss, telecommunications failures, unauthorized
intrusion and other catastrophic events. We believe that we have taken prudent
measures to reduce the risk of interruption in our operations. However, we
cannot be sure that these measures are sufficient. Any damage or failure that
causes interruptions in our operations could have a material adverse effect on
Seagate Technology's business, results of operations and financial condition.
YEAR 2000 RISKS
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. We consider a product to be in "Year 2000 compliance"
if
o the product's performance and functionality are unaffected by
processing of dates prior to, during and after the year 2000,
and
o all products (for example hardware, software and firmware) used
with the product properly exchange accurate date data with it.
Seagate's Products
We are assessing the capability of our products to determine whether or not they
are in Year 2000 compliance. Although we believe our disc and tape drive
products and certain of its software products are in Year 2000 compliance, we
have determined that certain of our software products are not and will not be
Year 2000 compliant. We are taking measures to inform our customers that those
products are not and will not be Year 2000 compliant. To assist our customers in
evaluating their Year 2000 issues, our Seagate Software subsidiary has developed
a list that indicates those products that are Year 2000 compliant as stand-alone
products. The list is located on Seagate Software's World Wide Web page and is
periodically updated when assessment of the Year 2000 compliance of additional
products is completed. To date, the costs we have incurred related to these
programs have been immaterial.
However, the assessment of whether a complete system will operate correctly
depends on the BIOS capability and software design and integration, and for many
end-users this will include BIOS, software and components provided by companies
other than Seagate Technology or Seagate Software. We consider a disc drive or
tape product to be Year 2000 capable if when used properly and in conformity
with the product information provided by Seagate Technology, our product will
accurately store, display, process, provide and/or receive data from, into and
between 1999 and 2000, including leap year calculations if all other technology
used in combination with the Seagate disc drive or tape product properly
exchanges date data with the Seagate product.
We do not believe Seagate Technology is legally responsible for costs incurred
by customers related to ensuring such customers' or end-users' Year 2000
capability. Nevertheless, we are incurring various costs to provide customer
support and customer satisfaction services regarding Year 2000 issues and
anticipates that these expenditures will continue in fiscal 1999 and thereafter.
In addition, we have contacted our major customers to determine whether their
products into which Seagate Technology's products have been and will be
integrated are Year 2000 compliant. We have received assurances of Year 2000
compliance from a number of those customers. Many other customers have not
responded and are under no contractual obligation to provide us with Year 2000
compliance information. We are taking steps with respect to new customer
agreements to ensure that the customers' products and internal systems are Year
2000 compliant.
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We anticipate that substantial litigation may be brought against vendors,
including Seagate Technology, of all component products of systems that are
unable to properly manage data related to the Year 2000. Our customer agreements
typically contain provisions designed to limit our 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. If any such claims are brought
against Seagate Technology, regardless of their merit, our business, financial
condition and results of operations could be materially adversely affected from
factors that include increased warranty costs, customer satisfaction issues and
the costs of potential lawsuits.
Seagate's Systems
We have also initiated a comprehensive program to address Year 2000 readiness in
our internal systems and with our customers and suppliers. Our program has been
designed to address our most critical internal systems first and to gather
information regarding the Year 2000 compliance of products supplied to Seagate
Technology and into which our products are integrated. Assessment and
remediation are proceeding in tandem, and we intend to have our critical
internal systems in Year 2000 compliance by July 3, 1999, the first day of
Seagate Technology's fiscal year 2000. These activities are intended to
encompass all major categories of systems in use by Seagate Technology,
including manufacturing, engineering, sales, finance and human resources. To
date, we have not incurred material costs related to assessment and remediation
of Year 2000 readiness. We currently expect that the total cost of our Year 2000
readiness programs, excluding redeployed resources, will not exceed $10 million
over the next fiscal year. This total cost estimate does not include potential
costs related to any customer or other claims or the costs of internal software
or hardware replaced in the normal course of business. The total cost estimate
is based on the current assessment of Seagate Technology's Year 2000 readiness
needs and is subject to change as the projects proceed.
We are installing and testing new computer software for Seagate Technology's
financial, accounting, inventory control, order processing and other management
information systems. In the course of these upgrades we are identifying Year
2000 dependencies in such systems and are implementing changes to such systems
to make them Year 2000 compliant. The successful implementation of these new
systems is crucial to the efficient operation of Seagate Technology's business.
We cannot provide any assurance that we will implement Seagate Technology's new
systems in an efficient and timely manner or that the new systems will be
adequate to support Seagate Technology'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 Seagate Technology's business, financial
condition and results of operations. We do not expect the cost of bringing our
systems into Year 2000 compliance to have a material effect on our financial
condition or results of operations.
We have also initiated formal communications with our significant suppliers and
financial institutions to determine the extent to which Seagate Technology is
vulnerable to those third parties' failure to remedy their own Year 2000 issues.
To date we have contacted our significant suppliers and financial institutions
and have received assurances of Year 2000 compliance from a number of those
contacted. However, most of our suppliers are under no contractual obligation to
provide such information to us. We are taking steps with respect to new supplier
agreements to ensure that the suppliers' products and internal systems are Year
2000 compliant. While we currently expect that the Year 2000 issues will not
pose significant operational problems, we could experience material adverse
effects on our business if the implementation of new systems
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is delayed. We could also experience material adverse effects on our business if
we fail to fully identify all Year 2000 dependencies in Seagate Technology's
systems and in the systems of our suppliers, customers and financial
institutions. Those material adverse effects could include delays in the
delivery or sale of our products. Therefore, we are developing contingency plans
for continuing operations in the event such problems arise.
IMPACTS OF VOLATILE STOCK PRICE
Our stock price has varied greatly as has the volume of shares of Seagate
Technology's Common Stock that are traded. We expect these fluctuations to
continue due to factors such as:
o announcements of new products, services or technological
innovations by us or our competitors
o announcements of major restructurings by us or our competitors
o quarterly variations in our results of operations,
o changes in revenue or earnings estimates by the investment
community and speculation in the press or investment community
o general conditions in the data storage industry or the personal
computer industry o changes in our revenue growth rates or the
growth rates of our competitors o sales of large blocks of our
stock
The stock market may from time to time experience extreme price and volume
fluctuations. Many technology companies have experienced such fluctuations. In
addition, our stock price may be affected by general market conditions and
domestic and international macroeconomic factors unrelated to Seagate
Technology's performance. Often such fluctuations have been unrelated to the
operating performance of the specific companies. The market price of our common
stock may experience significant fluctuations in the future.
RISKS FROM CONVERSION TO SINGLE EUROPEAN CURRENCY
On January 1, 1999, certain member states of the European Economic Community
will fix their respective currencies to a new currency, the Single European
Currency ("Euro"). On that day the Euro will become a functional legal currency
within these countries. During the three years beginning on January 1, 1999,
business in these countries will be conducted both in the existing national
currency, such as the French Franc or the Deutsche Mark, as well as the Euro.
Companies operating in or conducting business in these countries will need to
ensure that their financial and other software systems are capable of processing
transactions and properly handling the existing currencies and the Euro. We are
still assessing the impact that the introduction and use of the Euro will have
on our internal systems. We will take corrective actions based on such
assessment but do not presently expect that introduction and use of the Euro
will materially affect our foreign exchange and hedging activities or use of
derivative instruments or will result in any material increase in our costs.
While we will continue to evaluate the impact of the Euro introduction over
time, based on currently available information, we do not believe that the
introduction of the Euro will have a material adverse impact on Seagate
Technology's financial condition or overall trends in results of operations.
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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.
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 appealed from the final
judgment, and arguments on appeal were heard by the Court of Appeals for the
Federal Circuit on September 3, 1998. The Company intends to vigorously defend
itself in the appeal 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. On April
27, 1998, the Court entered an order establishing a construction of the claims
in Mr. White's patents which is broader than the construction which the Company
advocated, and on June 25, 1998, the Court denied reconsideration of the April
27 order. The Court has set March 8, 1999 as the date for commencement of the
trial in this action. 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
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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. Mr. Hedgcoth passed away on April 8, 1998, and the Court subsequently
substituted Susan Ann Alexander Hedgcoth as a party Plaintiff in place of Mr.
Hedgcoth. The Court has set a trial date of March 29, 1999 for determining the
dates of invention for Mr. Hedgcoth's patents-in-suit, and a trial date of
November 1, 1999 for trial of all remaining issues. 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. ("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.
OTHER MATTERS
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 1998 Annual Meeting of Stockholders was held on October 29, 1998.
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 or until their successors are elected:
<TABLE>
<CAPTION>
FOR WITHHELD
----------- ---------
<S> <C> <C>
Stephen J. Luczo 203,350,055 1,637,292
Gary B. Filler 203,753,942 1,233,405
Kenneth E. Haughton 203,756,185 1,231,162
Robert A. Kleist 203,915,865 1,071,482
Lawrence Perlman 203,179,358 1,807,989
Thomas P. Stafford 203,858,431 1,128,916
Laurel L. Wilkening 203,935,327 1,052,020
</TABLE>
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(b) The stockholders approved an amendment to the Seagate Technology,
Inc. Employee Stock Purchase Plan to increase the number of shares of
Common Stock reserved for issuance thereunder by 6,000,000.
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
- ----------- ---------- -------
<S> <C> <C>
188,389,184 16,034,006 564,157
</TABLE>
(c) The stockholders ratified the appointment of Ernst & Young LLP as
independent auditors of the Company for the fiscal year ending July
2, 1999.
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
- ----------- ---------- -------
<S> <C> <C>
204,090,460 578,966 317,921
</TABLE>
(d) The stockholders turned down a stockholder proposal regarding
employment practices and policies in Northern Ireland.
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN BROKER NON-VOTES
- ---------- ----------- --------- ----------------
<S> <C> <C> <C>
30,151,139 112,824,047 9,745,868 52,266,293
</TABLE>
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 October 2, 1998.
25
<PAGE> 26
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 16, 1998 BY: /s/ CHARLES C. POPE
-----------------------
CHARLES C. POPE
Senior Vice President, Finance
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
DATE: November 16, 1998 BY: /s/ STEPHEN J. LUCZO
-----------------------
STEPHEN J. LUCZO
Chief Executive Officer
and President (Principal Executive
Officer and Director)
26
<PAGE> 27
SEAGATE TECHNOLOGY, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED CONDENSED BALANCE SHEET AS OF OCTOBER 2, 1998 AND THE CONSOLIDATED
CONDENSED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED OCTOBER 2, 1998 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-02-1999
<PERIOD-START> JUL-04-1998
<PERIOD-END> OCT-02-1998
<CASH> 431
<SECURITIES> 1,443
<RECEIVABLES> 815
<ALLOWANCES> 54
<INVENTORY> 461
<CURRENT-ASSETS> 3,572
<PP&E> 3,327
<DEPRECIATION> 1,662
<TOTAL-ASSETS> 5,603
<CURRENT-LIABILITIES> 1,359
<BONDS> 703
0
0
<COMMON> 3
<OTHER-SE> 2,925
<TOTAL-LIABILITY-AND-EQUITY> 5,603
<SALES> 1,553
<TOTAL-REVENUES> 1,553
<CGS> 1,232
<TOTAL-COSTS> 1,232
<OTHER-EXPENSES> 227
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13
<INCOME-PRETAX> (21)
<INCOME-TAX> 9
<INCOME-CONTINUING> (30)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (30)
<EPS-PRIMARY> (0.12)
<EPS-DILUTED> (0.12)
</TABLE>
