<PAGE>
As filed with the Securities and Exchange Commission on September 3, 1999
Registration No. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM S-4
REGISTRATION STATEMENT
Under
The Securities Act of 1933
---------------
SEAGATE TECHNOLOGY, INC.
(Exact name of Registrant as specified in its charter)
---------------
Delaware 3573 94-2612933
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Number) Identification Number)
incorporation or ---------------
organization) 920 Disc Drive
Scotts Valley, California 95067
(831) 438-6550
(Address and telephone number of Registrant's principal executive offices)
---------------
Charles C. Pope Executive Vice President andChief Financial Officer Seagate
Technology, Inc. 920 Disc Drive Scotts Valley, California 95067 (831) 438-6550
(Name, address and telephone number of agent for service of process)
---------------
Copies to:
Thomas F. Mulvaney, Esq. Susan J. Wolfe, Esq. Larry W. Sonsini, Esq.
Senior Vice President,
General Counsel
Vice President of Legal Affairs and
John T. Sheridan, Esq.
Corporate Secretary Julia Reigel, Esq.
and Corporate Secretary Seagate Software, Inc. Wilson Sonsini Goodrich &
Seagate Technology, Inc. 915 Disc Drive Rosati
920 Disc Drive Professional Corporation
Scotts Valley, California 95066
Scotts Valley, California (831) 438-6550 650 Page Mill Road
95067 Palo Alto, CA 94304
(831) 438-6550 (650) 493-9300
---------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable following the effective time of the merger of a wholly-owned
subsidiary of the Registrant with and into Seagate Software, Inc.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
---------------
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Proposed Proposed
Title of Each Class of Amount Maximum Maximum Amount of
Securities to be to be Offering Price Aggregate Registration
Registered Registered Per Share (1) Offering Price Fee
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock $0.01 par
value.................. 12,000,000 $33.219 $398,628,000 $110,819
- -------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
(1) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(c) of the Securities Act of 1933, as
amended, based on the average of the high and low sales price as reported
on the New York Stock Exchange on August 31, 1999.
---------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
Preliminary Copies
Filed September 3, 1999
[SEAGATE SOFTWARE LOGO]
Dear Seagate Software Stockholder:
We have determined that it is in the best interest of Seagate Software to
reorganize its business. Following our recently concluded transaction with
VERITAS Software Corporation, Seagate Software's assets consist of the assets
of the Information Management Group, or IMG, as well as the shares of VERITAS
Common Stock received in the VERITAS transaction. We believe that it is in the
best interests of developing our IMG business to separate the IMG assets and
the VERITAS stock holdings. We believe that this will better focus the
attention of our management and employees on growing the IMG business.
We propose to accomplish the reorganization by merging a newly-formed,
wholly-owned subsidiary of Seagate Technology, named Seagate Daylight Merger
Corp., with and into Seagate Software. Following the merger, Seagate Software
will be a wholly-owned subsidiary of Seagate Technology and will retain the
shares of VERITAS Common Stock. In the merger, Seagate Software's stockholders
and optionees will receive payment in the form of Seagate Technology's Common
Stock in return for their proportionate interest in the entire value of Seagate
Software, including the IMG assets and the VERITAS stock. All outstanding
Seagate Software stock options will be accelerated immediately prior to the
merger.
In connection with the reorganization, Seagate Software has also formed a
wholly-owned subsidiary. Seagate Software will transfer the IMG assets into
this new subsidiary. This new company will be the future operating entity for
the IMG business. A new stock option plan is being put in place for this
subsidiary, and current and future employees of the IMG business will be
eligible to participate in the plan.
The enclosed materials give you detailed information about the merger. We
encourage you to read the enclosed materials in their entirety.
We have scheduled a special meeting of our stockholders at 915 Disc Drive,
Scotts Valley, California 95066 on October , 1999, at a.m., Pacific
time. The stockholders of Seagate Software are being requested to approve the
merger of Seagate Daylight Merger Corp. into Seagate Software at this meeting.
We cordially invite you to attend the special meeting in person. If you
attend, you may vote in person if you wish, even though you have previously
returned your proxy.
We enthusiastically support the merger and join with the Seagate Software
board of directors in unanimously recommending that you vote in favor of the
merger.
Stephen J. Luczo Gregory B. Kerfoot
Chief Executive Officer and President-- President and Chief
Seagate Technology Operating Officer
Chairman of the Board of Directors--Seagate Seagate Software
Software
THE TRANSACTIONS DESCRIBED IN THIS DOCUMENT INVOLVE NUMEROUS RISKS. SEE
"RISK FACTORS" BEGINNING ON PAGE 11.
This document also relates to the issuance of shares of Seagate Technology
common stock in connection with the merger described inside this document. We
estimate that the number of Seagate Technology shares to be issued will be
approximately 8 million shares, but the exact number of shares will not be
determined until shortly before the merger. The exchange ratio will be
calculated as set forth more fully in the enclosed materials. This stock will
be traded on the New York Stock Exchange under the symbol "SEG."
THE DATE OF THIS DISCLOSURE DOCUMENT IS SEPTEMBER 3, 1999.
<PAGE>
Preliminary Copies
Filed September 3, 1999
[SEAGATE SOFTWARE LOGO]
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
To Our Stockholders:
We will hold a special meeting of stockholders of Seagate Software, Inc., a
Delaware corporation, on October , 1999, at 915 Disc Drive, Scotts Valley,
California 95066, at a.m., Pacific time, to consider and vote on the
following proposals:
. To approve the merger of Seagate Daylight Merger Corp., a wholly owned
subsidiary of Seagate Technology, Inc., with and into Seagate Software,
Inc. in accordance with the terms of the Agreement and Plan of
Reorganization dated September 2, 1999 among Seagate Technology, Seagate
Daylight Merger Corp. and Seagate Software. As a result of the merger,
Seagate Software will become a wholly-owned subsidiary of Seagate
Technology.
. To transact such other business as may properly come before the meeting.
The merger of Seagate Software and the related transactions are more fully
described in the materials accompanying this notice. Stockholders of record at
the close of business on September , 1999, are entitled to notice of and to
vote at the special meeting and any adjournment or postponement thereof.
_____________________________________
Susan J. Wolfe
Vice President of Legal Affairs
and Corporate Secretary
Scotts Valley, California
September , 1999
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE COMPLETE, SIGN AND
DATE YOUR PROXY CARD AND RETURN IT AS PROMPTLY AS POSSIBLE IN THE ENCLOSED
POSTAGE-PREPAID ENVELOPE. IF YOU ATTEND THE MEETING, YOU MAY VOTE IN PERSON IF
YOU WISH, EVEN IF YOU HAVE PREVIOUSLY RETURNED YOUR PROXY CARD.
OUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR THE MERGER.
<PAGE>
PROXY STATEMENT-PROSPECTUS
Subject to Completion dated September 3, 1999
The information in this proxy statement-prospectus is not complete and may be
changed. We may not sell these securities until the registration statement
filed with the Securities and Exchange Commission is effective. This proxy
statement-prospectus is not an offer to sell these securities and is not
soliciting an offer to buy these securities in any state where the offer or
sale is not permitted.
PROXY STATEMENT
of
SEAGATE SOFTWARE , INC.
Preliminary Materials
Filed September 3, 1999
PROSPECTUS
of
SEAGATE TECHNOLOGY, INC.
The board of directors of Seagate Software, Inc. and the board of directors
of Seagate Technology, Inc., have approved an Agreement and Plan of
Reorganization that would merge a subsidiary of Seagate Technology with and
into Seagate Software. If the merger is completed, it would result in Seagate
Software becoming a wholly-owned subsidiary of Seagate Technology and
stockholders and optionholders of Seagate Software becoming Seagate Technology
stockholders.
In contemplation of and contingent upon the merger, all outstanding stock
options to purchase shares of Seagate Software are being accelerated. Seagate
Software stockholders and optionholders will receive in the merger a purchase
price based on the value of Seagate Software immediately prior to the merger.
The value of Seagate Software will include the VERITAS stock held by Seagate
Software, as well as the IMG assets. The method which will be used to determine
the value of Seagate Software is discussed in the enclosed materials. Seagate
Software stockholders and optionees will be entitled to receive, for each share
or option held, the total value of Seagate Software divided by the total number
of shares and options of Seagate Software outstanding, with preferred stock
treated on an as converted basis, at the effective time of the merger. The
purchase price will be paid in shares of Seagate Technology common stock on the
closing date of the merger. The total number of shares of Seagate Technology
common stock that will be issued to the Seagate Software stockholders will be
equal to the value of Seagate Software immediately prior to the merger divided
by the value of a share of Seagate Technology common stock prior to the merger.
The Seagate Technology common stock at the closing of the merger will be valued
at the average closing price per share of the stock on the New York Stock
Exchange over the five consecutive trading days ending on and including the
second trading day preceding the date of closing.
We estimate that, as of August 25, 1999, the shares of Seagate Technology
common stock to be issued to Seagate Software stockholders and optionholders
will represent approximately 3.5% of the outstanding Seagate Technology common
stock after the reorganization. The exact number of shares to be issued will
not be determined until shortly before the closing. The exchange ratio will be
fixed as set forth more fully in the enclosed materials.
Seagate Software has scheduled a special meeting for Seagate Software
stockholders to vote on the merger. Whether or not you plan to attend the
Seagate Software special meeting, please take the time to vote by completing
and mailing the enclosed proxy card to Seagate Software. If you sign, date and
mail your proxy card without indicating how you want to vote, your proxy will
count as a vote in favor of the proposals.
You may vote at the Seagate Software special meeting if you own shares of
Seagate Software common stock as of the close of business on September ,
1999. The date, time and place of the Seagate Software special meeting is as
follows:
October , 1999 a.m., Pacific time
915 Disc Drive
Scotts Valley, California 95066
This proxy statement-prospectus provides you with detailed information about
the proposed merger. Seagate Technology provided the information concerning
Seagate Technology. Seagate Software provided the information concerning
Seagate Software. Please see "Where You Can Find More Information" on page 21
for additional information about Seagate Technology.
Seagate Technology Common stock trades on the New York Stock Exchange under
the symbol "SEG".
We strongly urge you to read and consider carefully this proxy statement-
prospectus in its entirety, including the matters referred to under "Risk
Factors" beginning at page 11.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this proxy statement-prospectus is accurate or complete. Any representation
to the contrary is a criminal offense.
We are first mailing this proxy statement-prospectus and the form of proxy
on or about , 1999.
<PAGE>
PROXY STATEMENT/PROSPECTUS
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
QUESTIONS AND ANSWERS ABOUT THE SEAGATE SOFTWARE REORGANIZATION........... 1
SUMMARY OF THE PROXY STATEMENT/PROSPECTUS................................. 7
THE COMPANIES........................................................... 7
SUMMARY OF THE TRANSACTION ............................................. 7
Accounting Treatment of the Merger...................................... 10
RISK FACTORS.............................................................. 12
Risks Relating To the Proposed Merger................................... 12
Risk Factors Applicable To Seagate Technology........................... 12
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS......................... 21
WHERE YOU CAN FIND MORE INFORMATION....................................... 22
Seagate Technology...................................................... 22
Seagate Software........................................................ 22
How To Obtain These Documents........................................... 23
THE SEAGATE SOFTWARE MEETING.............................................. 24
When and where the meeting will be held................................. 24
What will be voted upon................................................. 24
Only stockholders on September , 1999 will be entitled to vote........ 24
Vote required to approve the proposal................................... 24
Shares held by directors, executive officers and their affiliates....... 24
Votes needed for a quorum............................................... 24
Effect of abstentions and broker non-votes.............................. 24
Adjourning the meeting.................................................. 25
Seagate Software will pay the expenses of proxy solicitation............ 25
How proxies will be voted............................................... 25
How you can revoke your proxy........................................... 25
You do not have dissenters' or appraisal rights for the merger.......... 25
THE MERGER................................................................ 26
Background of the Merger................................................ 27
General Information about the Merger.................................... 27
Effective Time.......................................................... 27
Purchase Price and Exchange of Shares................................... 27
The Merger Agreement.................................................... 28
Restrictions on the Transfer of Seagate Technology Common Stock to be
Received by Affiliates of Seagate Software............................. 30
Reasons for the Merger.................................................. 30
Recommendation of the Seagate Software Board of Directors............... 31
Interests of Certain Persons in the Merger.............................. 31
Material Income Tax Consequences of the Merger.......................... 31
Accounting Treatment of the Merger...................................... 37
Regulatory Filings and Approvals Required to Complete the Merger........ 37
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
RELATED AGREEMENTS....................................................... 38
Affiliate Agreements................................................... 38
PRICE RANGE OF SEAGATE TECHNOLOGY COMMON STOCK........................... 39
DESCRIPTION OF SEAGATE TECHNOLOGY CAPITAL STOCK.......................... 40
COMPARISON OF RIGHTS OF HOLDERS OF SEAGATE SOFTWARE COMMON STOCK AND
SEAGATE TECHNOLOGY COMMON STOCK......................................... 41
Directors.............................................................. 41
Special Meetings....................................................... 41
Indemnification........................................................ 41
BUSINESS OF SEAGATE TECHNOLOGY........................................... 43
SHARE OWNERSHIP BY PRINCIPAL STOCKHOLDERS, MANAGEMENT AND DIRECTORS OF
SEAGATE TECHNOLOGY...................................................... 57
Security Ownership by Principal Stockholders and Management ...........
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OF SEAGATE TECHNOLOGY..................................... 59
Overview............................................................... 59
BUSINESS OF SEAGATE SOFTWARE............................................. 73
Overview............................................................... 73
Sales and Marketing.................................................... 74
Technical Support ad Maintenance....................................... 74
Competition............................................................ 75
Patents and Intellectual Property Rights............................... 76
Employees.............................................................. 76
Facilities.............................................................
Legal Proceedings......................................................
Security Ownership of Certain Beneficial Owners and Management of
Seagate Software...................................................... 77
Executive Officers and Management...................................... 79
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OF SEAGATE SOFTWARE....................................... 81
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................... 104
Private Placements ....................................................
Other .................................................................
LEGAL OPINION............................................................ 106
EXPERTS.................................................................. 106
INDEX TO FINANCIAL STATEMENTS............................................ F-1
ANNEX A--AGREEMENT AND PLAN OF REORGANIZATION............................ A-1
</TABLE>
ii
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE
SEAGATE SOFTWARE MERGER AND REORGANIZATION
General Questions About The Reorganization and the Merger
Q:What are the reasons for the reorganization?
A: As noted in the cover letter which accompanies this document, the
management of Seagate Software believes that the reorganization will
provide a clearer incentive for the employees to focus on the future
development of the IMG business. The VERITAS stock Seagate Software
received in the recently completed transaction for the contribution of
the Network Storage & Management Group business represents over 95% of
the total assets held by Seagate Software. The management of Seagate
Software believes that it is in the best interests of the IMG business
to eliminate this component from the value of Seagate Software.
For a more complete description of the reorganization, see the section
entitled "The Merger-- Reasons for the Merger" beginning on page 29.
Q:What steps are involved in the reorganization?
A: The reorganization will require two major steps. The first step is the
merger of a wholly owned subsidiary of Seagate Technology with and into
Seagate Software. This step requires the approval of the Seagate
Software stockholders that is being requested of you in this proxy
statement/prospectus. Following the merger, Seagate Software will be a
wholly-owned subsidiary of Seagate Technology
The second step is the formation of a new subsidiary of Seagate
Software which will hold the IMG assets and will become the operating
entity for the IMG business. The transfer of the IMG assets to the
subsidiary will be completed shortly after the merger. Your vote is not
required or being solicited in this proxy statement/prospectus to form
this subsidiary.
A diagram of the steps involved in the merger and reorganization is set
forth below:
[FLOW CHART OF DIAGRAM OF STEPS INVOLVED IN THE MERGER AND REORGANIZATION]
1
<PAGE>
Q:What will Seagate Software stockholders and optionees receive in the merger?
A: In the merger, Seagate Software stockholders and optionholders will
receive a purchase price for all outstanding Seagate Software options
and shares based on the value of Seagate Software prior to the merger.
This value will include the value of the IMG business and the VERITAS
stock that Seagate Software holds. The purchase price will be paid by
Seagate Technology with its common stock that may be resold on the New
York Stock Exchange. The number of Seagate Technology shares to be
issued will be based on the market prices of the of Seagate Technology
stock and VERITAS stock prior to the merger. Please see the series of
questions below under "Questions about the exchange ratio" for a
description of how the values of Seagate Software and Seagate Technology
shares will be calculated, as well as an example of how the calculation
will be made.
Q:How will the Seagate Software stock options be handled in the merger?
A: All outstanding unvested options to purchase shares of Seagate Software
common stock will be fully accelerated and vested shortly before the
merger. The acceleration of vesting is contingent upon the close of the
merger. Optionees who have terminated employment prior to the merger
will not have any of their options accelerated. Optionees may either:
. exercise their options and have their shares of Seagate Software
exchanged for shares of Seagate Technology in the merger; or
. have their options cancelled in the merger in exchange for Seagate
Technology shares.
These choices are more fully explained in the section entitled "The
Merger--Purchase Price and Exchange Rate" on page 26.
Q: Will I receive future grants of stock options after the IMG assets are
transferred to the new subsidiary?
A: Yes. A new stock option plan will be put in place for this subsidiary
and current and future employees of the IMG business will be eligible to
participate in the plan.
Q: If the merger is approved, can I continue to hold my shares of Seagate
Software common stock or options?
A: No. All shares of Seagate Software common stock will be exchanged and
Seagate Software options will be cancelled for Seagate Technology common
stock.
Q: If I hold Seagate Software stock certificates, should I send in my Seagate
Software stock certificates now?
A: No. After the merger is completed, we will send you written instructions
describing how you can exchange your Seagate Software stock certificates
for Seagate Technology stock certificates.
Q:When do you expect the merger to be completed?
A: We are working to complete the merger as soon as possible after the
Seagate Software special meeting, which is currently scheduled for
October , 1999.
For a more complete description of the conditions to the merger, see
the section entitled "The Merger--The Merger Agreement--Conditions to
the Merger" on page 27.
2
<PAGE>
Questions About the Exchange Rate
Q: How will the number of shares of Seagate Technology common stock I receive
in exchange for my shares or options be determined?
A: An exchange rate will be used to determine the number of Seagate
Technology shares you will receive. The exchange rate will be determined
by dividing the value per share of Seagate Software by the value per
share of Seagate Technology as described below.
Q: How will the value of a Seagate Technology share be determined?
A: The value of a Seagate Technology share will be equal to the average of
the closing prices of Seagate Technology common stock as reflected on
the New York Stock Exchange over the five consecutive trading days
ending on and including the second trading day preceding the date of
closing.
Q: How will the value of a Seagate Software share and option be determined?
A: Because Seagate Software is not a publicly traded company, determining
its per share value is more complicated than determining the value per
share of Seagate Technology common stock. The value is based on the
various components that make up Seagate Software. The formula looks like
this:
<TABLE>
<S> <C>
Value of IMG business +
The value of VERITAS stock Seagate Software owns +
Per share value of The after tax proceeds of the VERITAS shares sold by Seagate Software to date +
Seagate =
Software Option proceeds
-------------------------------------------------------------------------------
Total Seagate Software shares and options outstanding
</TABLE>
The various components of this formula are discussed below.
Q: How will the value of the IMG business be determined?
A: Seagate Software's board of directors will determine the value of the
IMG business prior to the closing of the merger. Seagate Software
currently estimates that the value of IMG will be $375 million and does
not expect that this valuation will change substantially prior to the
closing.
Q: How will the value of the VERITAS shares be determined?
A: The VERITAS shares owned by Seagate Software will be valued at the
average closing price per share of the stock as reported on the Nasdaq
National Market over the five consecutive trading days ending on and
including the second trading day preceding the date of closing.
Q: What is meant by "option proceeds"?
A: This is the amount of money that Seagate Software would receive if all
outstanding options were exercised.
Q: What are the after tax proceeds that Seagate has received for the VERITAS
shares it has sold to date?
A: Approximately $250 million.
3
<PAGE>
Q: Can you give me an example of how the exchange rate is calculated?
A: For the purposes of this example, we are using estimates of the values
at the time this document was filed, as set forth below;
<TABLE>
<S> <C>
Value of Seagate Technology per share...................... $32.00
Value of the IMG business.................................. $375 million
Value of the VERITAS shares Seagate Software owns (at an
assumed price of $61.89 per share)........................ $3.77 billion
After tax proceeds of the 8.2 million VERITAS shares sold
to date................................................... $250 million
Proceeds from the exercise of all outstanding stock
options................................................... $73 million
Total Seagate Software shares and options outstanding...... 62,000,000
</TABLE>
Substituting the applicable numbers into the formula outlined earlier for
determining the Seagate Software per share value results in a value of
$72.06 per share of Seagate Software. As a result, you would receive 2.2512
($72.06/$32) shares of Seagate Technology common stock for every
share/option of Seagate Software that you hold.
Please note that for options cancelled in exchange for Seagate Technology
shares in the merger, the number of shares of Seagate Technology common
stock you will receive will be reduced by the total exercise price of your
cancelled options and any taxes which must be withheld under applicable
law.
Questions about Taxes
Q:What taxes will I owe if I own Seagate Software stock?
A: Whether or not you will owe taxes may depend on your country of
residence.
. Our tax advisor, Ernst & Young, is of the opinion that the receipt of
Seagate Technology stock in the merger by residents of the United
States will more likely than not be tax free in which case no gain or
loss will be recognized. However, the rules are not entirely clear
and there is some risk that the Internal Revenue Service could
disagree. If the Internal Revenue Service successfully asserted the
merger was taxable to you, you would be treated in the same manner as
if you had sold your Seagate Software stock for cash in an amount
equal to the fair market value, on the date the merger closes, of the
Seagate Technology stock you receive. Thus, you would recognize gain
or loss equal to the difference between the fair market value of the
Seagate Technology stock you receive and your tax basis in the
Seagate Software stock you surrender.
. Our tax advisor, Ernst & Young, is of the opinion that the receipt of
Seagate Technology stock in the merger by residents of Canada will
more likely than not be tax free in which case no gain or loss will
be recognized. However, Canadian resident Seagate Software
stockholders may elect not to have the tax rollover provisions apply
to the merger. If the merger is taxable to you (either because you
elect out of the rollover provisions or Revenue Canada successfully
asserts that it is taxable) a capital gain or loss will be recognized
in an amount equal to the difference between the fair market value of
the Seagate Technology shares that you receive in the merger and the
tax basis of the Seagate Software shares that you surrender. As a
Canadian resident, only three quarters of the capital gain would be
subject to income tax provided certain conditions are met.
. Our tax advisor, Ernst & Young, is of the opinion that the receipt of
Seagate Technology stock in the merger by residents of the United
Kingdom will be tax free, in which case no gain or loss will be
recognized.
4
<PAGE>
Q:What taxes will I owe if I own Seagate Software options and do not exercise
them before the closing?
A: Your Seagate Software options will be cancelled and you will receive
Seagate Technology stock net of the exercise price of your options and
any applicable tax withholding. Residents of Canada, the United Kingdom,
and the United States will recognize income equal to the fair market
value of the Seagate Technology stock received and will owe taxes on the
income recognized. Canadian residents may be entitled to a deduction
equal to 25% of the income provided certain conditions are met.
United States holders of Seagate Software incentive stock options who
do not exercise their options will lose their opportunity for all of
their gain, if any, to be taxed at long-term capital gains rates.
Q:What taxes will I owe if I exercise my Seagate Software options prior to the
merger?
A: The taxes you will owe depends on the type of options you hold and your
country of residence.
. If you are a resident of the United Kingdom or Canada or a United
States holder of stock options that are not incentive stock options,
you will recognize income equal to the difference between the
exercise price and the fair market value of the Seagate Software
stock received on exercise of your option and will owe taxes on the
income recognized. If you are a Canadian resident, however, you may
be entitled to a 25% offsetting deduction provided certain conditions
are met.
. If you are a United States holder of incentive stock options, the
rules that apply to you are complex. Although the exercise of your
options will be tax-free for regular tax purposes, for alternative
minimum tax purposes, the difference between the fair market value of
the Seagate Software stock and the option exercise price will be
included in alternative minimum taxable income unless you dispose of
the shares in the year you exercised your incentive stock options. If
you sell the Seagate Technology stock you receive in the merger two
years after the date you were granted your incentive stock option and
one year after the date you exercised the option, then any gain will
be long-term capital gain. However, if you sell your stock prior to
these dates, any gain up to the fair market value of the Seagate
Software stock at the day of exercise will be ordinary income and
only appreciation subsequent to the exercise date will be taxed as
capital gain.
For a more complete description of the tax consequences, see the
section entitled "The Merger--Material Income Tax Consequences of the
Merger" on page 30.
Questions About the Seagate Software Special Meeting
Q:How do I vote on the merger?
A: If you are an optionholder and do not hold any Seagate Software stock,
you are not entitled to vote at the special meeting. If you are a
stockholder and wish to vote at the meeting, mail your signed proxy card
in the enclosed return envelope as soon as possible so that your shares
of Seagate Software stock may be represented at the meeting. If you do
not include instructions on how to vote your properly signed proxy, your
shares will be voted "FOR" approval of the merger. Because Seagate
Technology holds substantially all of the outstanding shares of Seagate
Software, approval of the merger is virtually assured.
For a more complete description of voting at the meeting, see the
sections entitled "The Seagate Software Meeting--How proxies will be
voted" on page 24.
Q:Does the board of directors of Seagate Software recommend voting in favor of
the merger?
A: Yes. After careful consideration, Seagate Software's board of directors
recommends that its stockholders vote in favor of the merger.
For a more complete description of the recommendations of the Seagate
Software board of directors, see the section entitled "The Merger--
Recommendation of Seagate Software Board of Directors" on page 30.
5
<PAGE>
Q:Are there risks I should consider in deciding whether to vote for the merger?
A: Yes. For example, the value of Seagate Software will be substantially
influenced by the market price of VERITAS common stock before the
merger. In addition, the number of shares of Seagate Technology common
stock that Seagate Software stockholders and optionees will receive in
the merger will change if the market prices of VERITAS common stock and
Seagate Technology common stock increase or decrease before the closing
of the merger. We urge you to obtain current market quotations of
VERITAS common stock and Seagate Technology common stock.
In evaluating the merger, you should carefully consider these and other
factors discussed in the section entitled "Risk Factors" beginning on
page 11.
Q:Am I entitled to dissenters' or appraisal rights?
A: No. Seagate Software stockholders are not entitled to dissenters' rights
or appraisal rights with respect to the merger.
Q:What do I do if I want to change my vote?
A: If you want to change your vote, send the secretary of Seagate Software
a later-dated, signed proxy card before the meeting or attend the
Seagate Software special meeting in person. You may also revoke your
proxy by sending written notice to the secretary of Seagate Software
before your meeting.
For a more complete description of how to change your vote, see the
sections entitled "The Seagate Software Meeting--How you can revoke
your proxy" on page 24.
Q:If I have additional questions, whom should I contact?
A: Additional questions can be directed to Bill Rowley in Seagate
Technology's Investor Relations Department at telephone number (831)
439-2371 or by email at bill [email protected].
You may also obtain additional information about Seagate Technology and
Seagate Software from documents filed with the Securities and Exchange
Commission by following the instructions in the section entitled "Where
You Can Find More Information" on page 21.
6
<PAGE>
SUMMARY
The Companies
Seagate Software, Inc.
915 Disc Drive
Scotts Valley, California 95066
(831) 438-6550
Seagate Software develops and markets software products and provides related
services enabling business users and information technology professionals to
manage enterprise information. Seagate Software's IMG products permit analysis
and interpretation of data in order to make business decisions.
Prior to May 28, 1999, Seagate Software was comprised of two operating
groups, IMG and the Network & Storage Management Group. On May 28, 1999,
Seagate Software contributed its Network & Storage Management Group business to
VERITAS Software Corporation for 69,148,208 shares of VERITAS common stock.
Headquartered in Scotts Valley, California, Seagate Software has over 30
offices and operations in 16 countries worldwide.
Seagate Technology will hold substantially all of the approximately 58
million common and preferred shares of Seagate Software that will be
outstanding as of the closing of the merger. The remaining shares of Seagate
Software are held by current and former employees, directors and consultants of
Seagate Software, Seagate Technology and their subsidiaries. In addition,
options to purchase 4 million shares of Seagate Software common stock were
outstanding as of August 25, 1999. All of the outstanding options will be
vested as of the closing date of the merger.
Seagate Technology, Inc.
920 Disc Drive
Scotts Valley, California 95067
(831) 438-6550
Seagate Technology designs, manufactures and markets products for storage,
retrieval and management of data on computer systems and other systems which
receive, store and transmit data. These products include disc drives and disc
drive components, tape drives and software. Seagate Technology designs,
manufactures and markets a broad line of rigid disc drives. These products are
used in computer systems ranging from desktop personal computers to large,
sophisticated enterprise computers. Seagate Technology also designs and markets
tape drives ranging in capacity from 4 gigabytes to 240 gigabytes for low cost
storage and protection of large volumes of data electronically. Seagate
Technology currently produces backup solutions for desktop personal computers
and midrange servers to complement its line of disc drive products.
Seagate Software's reasons for the merger (page 29)
The Seagate Software board of directors considered a number of relevant
factors in approving the merger agreement and recommending it to you including:
. The management of Seagate Software believes that the reorganization will
provide a clearer incentive for the employees to focus on the future
development of the IMG business.
. Current and future employees of the IMG business will be able to receive
new stock options the value of which will be directly related to the
future performance of the IMG business.
Vote required (page 23)
The proposal to approve the merger requires the affirmative vote of a
majority of Seagate Software's outstanding capital stock, voting together as a
single class, and a majority of Seagate Software's preferred stock as of the
record date. Because Seagate Technology owns substantially all of the
outstanding capital stock of Seagate Software, the vote in favor of the merger
is virtually assured.
Interests of management and certain stockholders of Seagate Software (page 30)
The directors, executive officers and affiliates of Seagate Software, as a
group, owned an aggregate of 747,184 shares of outstanding Seagate Software
common stock, net of any shares held by Seagate Technology that may be deemed
to be held by those persons, and Seagate Software options.
7
<PAGE>
Conditions to the merger (page 27)
We will not complete the merger unless a number of conditions are satisfied
or waived. These include:
. approval of the merger by the holders of the outstanding Seagate Software
capital stock;
. the registration statement with respect to the Seagate Technology common
stock to be issued in connection with the merger shall have been declared
effective by the Securities and Exchange Commission;
. approval by the New York Stock Exchange of the listing of the Seagate
Technology common stock to be issued in the merger;
. receipt of customary tax opinions;
. the absence of third party actions that would prohibit or restrict the
completion of the merger or would have a material adverse effect on
either Seagate Software or Seagate Technology; and
. other customary closing conditions.
Comparison of securityholder rights (page 40)
The certificates of incorporation and by-laws of Seagate Software and
Seagate Technology vary. As a result, Seagate Software stockholders will have
different rights as Seagate Technology stockholders.
Termination of the merger agreement (page 28)
We can agree to terminate the merger agreement without completing the
merger. Either one of us can terminate the merger agreement if:
. the registration statement registering the Seagate Technology common
stock to be issued in connection with the merger has not been declared
effective by the Securities and Exchange Commission by December 31, 1999;
. we do not complete the merger by February 29, 2000;
. either of us materially breaches the merger agreement;
. an injunction prevents the merger;
. an order, rule or regulation prevents Seagate Technology from operating
Seagate Software's business;
. we mutually agree to terminate the merger.
In addition, Seagate Technology can terminate the merger agreement if the
number of its shares of common stock to be issued in the merger were to exceed
11,250,000 shares.
Income tax consequences of the merger
The merger is intended to be a nontaxable reorganization to Seagate Software
and Seagate Technology.
The tax consequences of the merger to you will depend on the facts of your
own situation. You should consult your tax advisor. See "The Merger--Material
Income Tax Consequences of the Merger" on page 30.
Regulatory filings and approvals required to complete the merger
Neither Seagate Technology nor Seagate Software is aware of any material
governmental or regulatory approval required for completion of the merger,
other than filings under the Hart-Scott-Rodino Antitrust Improvement Act of
1976 that may be required of certain officers of Seagate Software, the
effectiveness of the registration statement of which this proxy
statement/prospectus is a part and compliance with applicable corporate laws of
Delaware.
This summary may not contain all of the information that is important to
you. You should read carefully this entire document and the other documents we
refer to for a more complete understanding of the merger. In particular, you
should read the documents attached to this proxy statement/prospectus,
including the Agreement and Plan of Reorganization, which is attached as
Annex A.
8
<PAGE>
SUMMARY SELECTED CONDENSED FINANCIAL DATA
We are providing the following financial information of Seagate Technology
and Seagate Software. Substantially all of the capital stock of Seagate
Software is owned by Seagate Technology on an outstanding shares basis. The
consolidated historical results of Seagate Technology include the results of
Seagate Software. This financial information should help you analyze the
financial aspects of the merger.
The financial information of Seagate Technology for fiscal 1995 through
fiscal 1999 is derived from Seagate Technology's audited financial statements
for the same periods. The financial information of Seagate Software is derived
from Seagate Software's audited financial statements for fiscal 1995 through
fiscal 1999. The financial information for fiscal 1999 for Seagate Technology
and Seagate Software is not necessarily indicative of results that may be
achieved for fiscal 2000. This financial information is only a summary and you
should read it in conjunction with the Seagate Technology financial statements
and related notes and the Seagate Software financial statements and related
notes contained in the annual reports and other information on file with the
Securities and Exchange Commission. See "Where You Can Find More Information"
on page 21.
Selected historical financial data of Seagate Technology
<TABLE>
<CAPTION>
Fiscal Years Ended
-----------------------------------------
July July
June 30, June 28, June 27, 3, 2,
1995 1996 1997 1998 1999
-------- -------- -------- ------ ------
(in millions, except per share amounts)
<S> <C> <C> <C> <C> <C>
Revenue............................. $7,256 $8,588 $8,940 $6,819 $6,802
Gross margin........................ 1,373 1,581 2,022 989 1,552
Income (loss) from operations....... 459 287 858 (686) 258
Gain on contribution of NSMG to
VERITAS, net....................... -- -- -- -- 1,670
Net income (loss)................... 319 213 658 (530) 1,176
Basic net income (loss) per share... 1.67 1.07 2.82 (2.17) 4.94
Diluted net income (loss) per
share.............................. 1.47 0.97 2.62 (2.17) 4.53
Total assets........................ 4,900 5,240 6,723 5,645 7,072
Long-term debt, less current
portion............................ 1,066 798 702 704 703
Stockholders' equity................ $1,936 $2,466 $3,476 $2,937 $3,563
Number of shares used in per share
computations:
Basic............................. 190.6 199.7 233.6 243.6 237.9
Diluted........................... 244.7 236.1 257.9 243.6 243.1
</TABLE>
Seagate Technology's fiscal 1999 results of operations include a $1.67
billion net gain on the contribution of the Network & Storage Management Group
business to VERITAS, a $119 million charge related to Seagate Software's equity
investment in VERITAS, a $78 million charge in connection with an amendment of
the purchase agreement for the August 1997 acquisition of Quinta Corporation
and a $60 million net restructuring charge. Seagate Technology's fiscal 1998
results of operations include a $347 million restructuring charge, a $223
million write-off of in-process research and development incurred primarily in
connection with the acquisition of Quinta Corporation, a $76 million charge for
mark-to-market adjustments on certain of Seagate Technology's foreign currency
forward exchange contracts and a $22 million reduction in the charge recorded
in fiscal 1997 as a result of the adverse judgment in the Amstrad PLC
litigation. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" in Seagate
Technology's Form 10-K for the year ended July 2, 1999 incorporated by
reference in this document. The fiscal 1997 results of operations include a
$153 million charge as a result of the adverse judgment in the Amstrad PLC
litigation. The fiscal 1996 results of operations include a $242 million
restructuring charge as a result of the merger with Conner Peripherals, Inc.
and a $99 million write-off of in-process research and development incurred
9
<PAGE>
in connection with the acquisition of software companies. The fiscal 1995
results of operations include a $73 million write-off of in-process research
and development incurred in connection with business acquisitions.
We have restated prior periods to reflect the merger with Conner
Peripherals, Inc. in February 1996 on a pooling of interests basis, a two-for-
one stock split, effected in the form of a stock dividend, in November 1996,
and Statement of Financial Accounting Standards No. 128, "Earnings Per Share,"
adopted in the second quarter of fiscal 1998.
Calculation of Seagate Technology historical book value per share
The historical book value of Seagate Technology common stock is computed by
dividing stockholders' equity as of the end of each period for which such
computation is made by the number of shares of common stock outstanding at the
end of each such period.
Seagate Technology unaudited pro forma financial information
We are not providing separate pro forma financial statements or pro forma
selected financial data to reflect the acquisition of the Seagate Software
minority interests by Seagate Technology. These pro forma financial statements
are not presented because the recurring charges as a result of the acquisition
are anticipated to be less than $1 million per year and are not material to the
future operating results of Seagate Technology. Non-recurring charges of
approximately $216 million, based on the estimated exchange ratio as of August
25, 1999, will be recorded as compensation expense in the period the
transaction closes.
For information regarding the pro forma financial statements of Seagate
Technology and Seagate Software which reflect the contribution of the Network &
Storage Management Group business to VERITAS you should read the related
current reports on Form 8-K on file with the Securities and Exchange
Commission. See "Where You Can Find More Information" on page 21.
Calculation of Seagate Technology pro forma book value per share
The pro forma book value per share computation includes the effect of the
assumed cash proceeds of $37 million from the exercise of Seagate Software
stock options, the minority interest acquired of approximately $2 million, and
the compensation expense amounting to approximately $216 million as described
below. We prepared the pro forma book value per share data assuming that the
exercise of Seagate Software stock options by employees, and the purchase of
shares by Seagate Technology took place on July 2, 1999, and that 7.8 million
shares of Seagate Technology common stock were issued.
The pro forma book value per share data should be read in conjunction with
the historical financial information and related notes of Seagate Technology,
included and incorporated by reference in this proxy statement/prospectus.
Accounting Treatment of the Merger
Seagate Technology will account for the exchange of shares of its common
stock for Seagate Software common stock outstanding and vested more than six
months held by employees and all stock held by former employees and consultants
as the acquisition of a minority interest. The fair value of the shares of
Seagate Technology issues will be recorded as purchase price and will be
allocated to the assets and liabilities received. It is currently estimated
that the amount of the purchase price to be recorded and allocated will be
approximately $2 million. Seagate Technology will account for the exchange of
shares of its common stock as the settlement of an earlier stock award for
stock options in Seagate Software held by employees and stock held and vested
by employees less than six months. Seagate Technology estimates that the
settlement of earlier stock awards will result in immediate compensation
expense in the period the transaction closes of approximately $216 million.
10
<PAGE>
Seagate Technology--historical and pro forma per share data
<TABLE>
<CAPTION>
As of
July 2, 1999
------------
<S> <C>
Historical book value per common share............................. $15.58
Pro forma book value per common share.............................. $15.36
</TABLE>
Selected historical financial data of Seagate Software
<TABLE>
<CAPTION>
Fiscal Years Ended
---------------------------------------------------
June 30, June 28, June 27, July 3, July 2,
1995 1996 1997 1998 1999
-------- --------- -------- -------- ----------
(in thousands, except share and per share
amounts)
<S> <C> <C> <C> <C> <C>
Revenue................... $ 92,796 $ 141,586 $216,950 $293,226 $ 343,473
Gross profit.............. 70,417 112,567 169,161 242,766 290,725
Income (loss) from
operations............... (80,166) (137,806) (60,296) 6,125 27,938
Gain on contribution of
NSMG to VERITAS, net..... -- -- -- -- 1,670,301
Net income (loss)......... (82,864) (129,668) (53,963) (9,270) 938,990
Net income (loss) per
common share:
Basic................... (796.63) (56.33) 1,703.53
Diluted................. (796.63) (56.33) 14.89
Total assets.............. 101,928 201,598 147,331 138,997 1,883,540
Stockholders' equity...... $ 47,215 $ 115,602 $ 65,355 $ 57,106 1,177,261
Number of shares used in
per share computations:
Basic................... 67,714 164,571 551,202
Diluted................. 67,714 164,571 63,047,127
</TABLE>
The above information includes the impact of dilutive convertible preferred
stock held by Seagate Technology and one of its subsidiaries.
Seagate Software's fiscal 1999 results of operations include a $1.67 billion
net gain on the contribution of the Network & Storage Management Group business
to VERITAS and a $119 million expense related to Seagate Software's equity
investment in VERITAS. See Seagate Software "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere
in this proxy statement/prospectus.
11
<PAGE>
RISK FACTORS
The merger involves a high degree of risk. You will receive shares of
Seagate Technology common stock for your Seagate Software shares and options in
the merger. An investment in Seagate Technology common stock involves a high
degree of risk. In addition to the other information contained in this proxy
statement/prospectus, Seagate Software's stockholders should carefully consider
the following risk factors.
Risks Relating To the Proposed Merger
The expected benefits of reorganizing Seagate Software may not be realized
Seagate Technology and Seagate Software entered into the Agreement and Plan
of Reorganization with the expectation that the merger will result in benefits
to Seagate Software, including the refocus of Seagate Software's activities on
its IMG business. If Seagate Software is unable to refocus its operations in a
timely and efficient manner, then the benefits of the merger and the
reorganization will not be realized and, as a result:
. Seagate Technology's operating results and the market price of Seagate
Technology's common stock may be adversely effected;
. Seagate Software may lose key personnel; and
. Seagate Software may not be able to grow or expand its operations.
In addition, the attention and effort devoted to the merger and
reorganization will divert management's attention from other important issues,
and could significantly harm Seagate Software's business and operating results.
The number of shares of Seagate Technology common stock you will receive in
the merger will depend in part on the future changes in the market prices of
Seagate Technology common stock and VERITAS common stock
In accordance with the terms of the Agreement and Plan of Reorganization,
Seagate Technology will issue shares of its common stock in exchange for all of
the Seagate Software stock and options. The aggregate purchase price for
Seagate Software will equal the value of Seagate Software, including its IMG
assets and the VERITAS shares it holds. The value of Seagate Software will
depend on the market price of VERITAS common stock shortly before the closing.
The number of Seagate Technology shares you will receive will vary depending on
the market prices of Seagate Technology common stock and VERITAS common stock
when the exchange ratio is calculated. You are urged to obtain recent market
quotations for Seagate Technology and VERITAS common stock. Seagate Technology
cannot predict or give assurances to the market price of Seagate Technology
common stock at any time before or after the merger. The prices of Seagate
Technology and VERITAS common stock may vary for many reasons. See "The
Merger--Purchase Price and Exchange Ratio" for a description of how the
exchange ratio is calculated.
Risk Factors Applicable To Seagate Technology
Seagate Technology competes 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 Seagate Technology. Many of these factors may also impact
Seagate Technology's business in the future.
Slowdown in demand for computer systems may cause a decline in demand for
Seagate Technology's products
Seagate Technology's 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 Seagate Technology's disc drive and tape
drive products, in any given period. In the past, unexpected slowdowns in
demand for
12
<PAGE>
computer systems have generally caused sharp declines in demand for disc drives
and tape drive products. Seagate Technology expects that this situation will
occur again in the future and that demand for Seagate Technology's disc drive
and tape drive products may be reduced. Causes of the declines in demand in the
past for Seagate Technology's products have included the announcement or
introduction of major operating system or semiconductor improvements, such as
Windows 95 or the Pentium II. Seagate Technology believes these announcements
and introductions caused consumers to defer their purchases and made existing
inventory obsolete.
In Seagate Technology's industry, the supply of drives periodically exceeds
demand. When this happens, the over supply of available products causes Seagate
Technology to have higher than anticipated inventory levels, and Seagate
Technology experiences intense price competition from other disc drive and/or
tape drive manufacturers.
Seagate Technology's financial results will vary
Seagate Technology often experiences a high volume of sales at the end of
the quarter, so Seagate Technology may not be able to determine that its fixed
costs are too high relative to sales until late in any given quarter. Since
this happens late in the quarter, Seagate Technology does not have enough time
to reduce these costs. As a result, Seagate Technology 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:
. the timing of orders from and shipment of products to major customers,
such as Compaq,
. its product mix, with respect to higher margin, more recently introduced
disc drive products versus older, lower margin disc drive products,
. accelerated reduction in the price of its disc drive products due to an
oversupply of disc drives in the world market,
. manufacturing delays or interruptions, particularly at its major
manufacturing facilities in Malaysia, Thailand, China and Singapore,
. acceptance by customers of competing technologies in lieu of its
products,
. variations in the cost of components for its products,
. limited access to components that Seagate Technology obtains from a
single or a limited number of suppliers,
. Seagate Technology's inability to reduce its fixed costs to match
revenues in any quarter because of its vertical manufacturing strategy,
. the impact of changes in foreign currency exchange rates on the cost of
its products and the effective price of such products to foreign
consumers, and
. competition and consolidation in the data storage industry.
In addition, Seagate Technology's future operating results may also be
adversely affected if it receives an adverse judgment or settlement in any of
the legal proceedings to which it is a party.
Seagate Technology faces intense competition and may not be able to compete
effectively
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. Historically Seagate Technology's competitors have offered new or
existing products at lower prices as part of a strategy to gain or retain
market share and customers. Seagate Technology expects these practices to occur
again in the future. Seagate Technology also expects that price erosion in its
industry will continue for the foreseeable future. Because Seagate Technology
may need to
13
<PAGE>
reduce its prices to retain its market share, the competition could adversely
affect its results of operations in any given quarter. Seagate Technology has
experienced and expects to continue to experience intense competition from a
number of domestic and foreign companies including the other leading
independent disc drive manufacturers, such as:
Independent
Integrated
Maxtor Corporation
Fujitsu Limited Quantum Corporation
International Business Machines Western Digital Corporation
Corporation
NEC Corporation
Samsung Electronics Co. Ltd.
Toshiba Corporation
Integrated multinational manufacturers present formidable competitors
because they have more substantial resources and access to customers without
having to consider the profitability of the disc drive business in pricing its
components. For example, IBM recently entered into agreements with both Dell
Computer and EMC under which IBM will likely supply a substantial portion of
each company's disc drive needs. Seagate Technology faces risks that IBM and
other integrated multinational manufacturers will enter into similar agreements
with a substantial number of its customers to supply those customers' disc
drive requirements as part of a more expansive agreement.
Seagate Technology also faces 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 Seagate Technology's customers decide to
manufacture their own drives, it could have a material adverse effect on
Seagate Technology's business, results of operations and financial condition.
Seagate Technology also competes 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.
Seagate Technology may not be able to compete successfully against current
or future competitors. If Seagate Technology fails to compete successfully, its
business, operating results and financial condition may be materially adversely
affected.
Seagate Technology may not develop products in time to meet changing
technologies
Seagate Technology's 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 improved performance and reliability. As a result, the life cycles
of its products have been shortened, and Seagate Technology has been required
to constantly develop and introduce new cost-effective drive products within
time to market windows that become progressively shorter. Seagate Technology
had research and development expenses of $459 million, $585 million and $581
million in fiscal 1997, 1998 and 1999, respectively.
When Seagate Technology develops new disc and tape drive products with
higher capacity and more advanced technology, its 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 Seagate Technology's products suffer increases in failures, are of
low quality or are not reliable, customers may reduce their purchases of its
products and its manufacturing rework and scrap costs and service and warranty
costs may increase. In addition, a decline in the reliability of Seagate
Technology's products may make it less competitive as compared with other disc
and tape drive manufacturers.
Seagate Technology's products are used in combination with other hardware,
such as microprocessors, and other software. Seagate Technology's future
success will also require strong demand by consumers and businesses for
computer systems, storage upgrades to computer systems and multimedia
applications, such as
14
<PAGE>
digital video and video-on-demand. If delivery of Seagate Technology's products
is delayed, its original equipment manufacturer ("OEM") customers may use its
competitors' products in order to meet their production requirements. In
addition, if delivery of those OEMs' computer systems into which Seagate
Technology's products are integrated is delayed, consumers and businesses may
purchase comparable products from the OEMs' competitors. The consumers and
businesses may wait to make their purchases if they want to buy a product that
has been announced but not yet released, thus we would not be able to sell our
existing inventory of products. If customers hold back in anticipation of a new
product, or buy from a competitor instead, Seagate Technology's operating
results may be significantly adversely impacted.
Consumers have shown that they want to purchase personal computers costing
less than $1,000. Seagate Technology is producing and selling low cost disc
drives to meet the demand for disc drives that are components of low cost
personal computers. However, Seagate Technology may not be able to produce disc
drives that meet its quality and performance standards at a cost low enough to
yield gross margins at acceptable levels to sustain the development efforts.
Seagate Technology discontinued production of disc drives that use media
smaller than 3.5 inches, in January 1998. Seagate Technology is continuing
research and development of smaller drives, because it believes that to compete
successfully to supply components for mobile, laptop, notebook and
ultraportable computers, we must supply a smaller product. Seagate Technology
intends to re-enter this market with a durable, low power application in the
future, although there can be no assurance that it will be able to do so
successfully.
Seagate Technology's vertical integration strategy entails a high level of
fixed costs
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. Seagate Technology's strategy of vertical integration has allowed it to
internally manufacture many of the critical components used in its products.
Seagate Technology has pursued a strategy of vertical integration of its
manufacturing processes in order to reduce costs, control quality and assure
availability and quality of certain components.
Seagate Technology's vertical integration strategy entails a high level of
fixed costs and requires a high volume of production and sales to be
successful. During periods of decreased production, these high fixed costs have
had, and could in the future have, a material adverse effect on its operating
results and financial condition. In addition, a strategy of vertical
integration has in the past and could continue to delay its ability to
introduce products containing market-leading technology, because Seagate
Technology may not have developed the technology in house and do not have
access to external sources of supply without incurring substantial costs. For
example, over the past two years Seagate Technology has experienced delays in
product launches due to delays in production of certain components as a result
of slower than anticipated internal development and manufacturing scale-up of
new designs.
Seagate Technology has experienced delays in the introduction of products due
to supply of components
Seagate Technology also relies on independent suppliers for certain
components. In the past Seagate Technology has experienced production delays
when it was 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 its business, operating results and financial
condition. Seagate Technology relies on single or limited source suppliers for
certain components used in its products. Seagate Technology may not be able to
obtain components that meet its specifications and quality standards at prices
that enable Seagate Technology to earn a profit on the finished products. For
example, in the past Seagate Technology has experienced delays obtaining head
stack assemblies and certain integrated circuits for printed circuit board
assemblies due to lead-time requirements or changes in specifications. As a
result, certain of its suppliers substantially increased the price of such
components, and Seagate Technology has incurred increased costs for
15
<PAGE>
certain of these components as a result of supply shortages. If Seagate
Technology experiences any extended interruption or reduction in the supply of
any key components, its business, results of operations and financial condition
could be materially adversely affected.
If Seagate Technology's customers delay or cancel orders, its revenue will be
adversely affected
The data storage industry has been characterized by large volume OEM
purchase agreements and large distributor orders. Typically, Seagate
Technology's OEM purchase agreements permit the OEMs to cancel orders and
reschedule delivery dates without significant penalties. In the past, orders
from many of Seagate Technology's OEMs were cancelled or delivery schedules
were delayed as a result of changes in the requirements of the OEM's customers.
These order cancellations and delays in delivery schedules have had a material
adverse effect on Seagate Technology's results of operations in the past, and
may again in the future. Seagate Technology's OEMs and foreign distributors
typically furnish it with non-binding indications of their near-term
requirements, with product deliveries based on weekly confirmations. To the
extent actual orders from foreign distributors and OEMs decrease from their
non-binding forecasts, such variances could have a material adverse effect on
Seagate Technology's business, results of operations and financial condition.
Seagate Technology faces risks from its international operations
Seagate Technology has significant offshore operations including
manufacturing facilities, sales personnel and customer support operations.
Seagate Technology has manufacturing facilities in Singapore, Thailand, the
People's Republic of China, Northern Ireland, Malaysia and Mexico, in addition
to those in the United States. Seagate Technology's offshore operations are
subject to certain inherent risks including:
. fluctuations in currency exchange rates, such as the $76 million charge
to income Seagate Technology incurred in fiscal 1998 from marking our
hedge positions to market,
. longer payment cycles for sales in foreign countries,
. difficulties in staffing and managing international manufacturing
operations,
. seasonal reductions in business activity in the summer months in Europe
and certain other countries,
. increases in tariffs and duties, price controls, restrictions on foreign
currencies and trade barriers imposed by foreign countries, and
. 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.
Seagate Technology's products are priced predominately 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 Seagate Technology's 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
Seagate Technology's products. Seagate Technology anticipates that the turmoil
in financial markets and the deterioration of the underlying economic
conditions in the recent past 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:
. the impact of currency fluctuations on the relative price of our
products,
. restrictions on government spending imposed by the International
Monetary Fund in those countries receiving the International Monetary
Fund's assistance,
. customers' reduced access to working capital to fund purchases of disc
drive components or software, such as our products due to:
-- higher interest rates,
16
<PAGE>
-- 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.
Seagate Technology face risks from the spin-off of Seagate Software's Network
& Storage Management Group business
Seagate Technology consolidated its software businesses into a single entity
called Seagate Software in 1996. Seagate Software's business consisted of two
primary divisions, Network & Storage Management Group and Information
Management Group. Seagate Software contributed the Network & Storage Management
Group business to VERITAS Software Corporation on May 28, 1999. Seagate
Software and Seagate Software employees who became VERITAS employees and who
held stock options in Seagate Software received approximately 42% of the fully
diluted equity in VERITAS.
Seagate Technology faces a number of risks from the Network & Storage
Management Group business contribution including:
. the remaining Seagate Software employees may be distracted by concerns
about whether Seagate Software will continue to operate that business or
spin off Seagate Software, and may not meet critical deadlines in their
assigned tasks,
. the ongoing OEM relationship with the Network & Storage Management Group
and Seagate Technology's tape drive operations may be disrupted and
Seagate Technology may not be able to meet its customers' order
deadlines or needs as a result,
. Seagate Technology has agreed not to compete in certain storage
management software businesses for a specified period of time after the
closing of the Network & Storage Management Group contribution and may
not be able to benefit from future opportunities in that market,
. Seagate Technology does not have significant control over the management
of VERITAS, although currently Seagate Software has two representatives
on its board of directors, but Seagate Technology's financial statements
and results of operations will reflect 36% of VERITAS' operations which
may impact Seagate Technology's stock price, and
. Seagate Software is only permitted to sell its interest in VERITAS in
limited increments, such as the 8,232,667 shares of VERITAS common stock
Seagate Software sold in August 1999 in an underwritten offering where
Seagate Software agreed not to sell any additional shares, except to the
underwriters, until November 7, 1999.
Acquisition related accounting charges will delay and reduce Seagate
Technology's profits
Seagate Technology intends 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. Seagate
Technology expects that it will continue to incur substantial expenses as it
acquires other businesses including charges for the write-off of in-process
research and development. Seagate Technology's operating results have
fluctuated in the past and may fluctuate in the future because of the timing of
such write-off. For example, Seagate Technology 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 its acquisition of
Quinta Corporation and a charge to operations in the fourth quarter of fiscal
1999 of approximately $85 million for the write-off of in-process research and
development related to the contribution of the Network & Storage Management
Group business to VERITAS, and will experience ongoing charges related to the
amortization of purchased intangibles amounting to approximately $100 million
per quarter.
Systems failures could adversely affect Seagate Technology's business
Seagate Technology's operations are dependent on our ability to protect its
computer equipment and the information stored in our databases from damage by
fire, natural disaster, power loss, telecommunications
17
<PAGE>
failures, unauthorized intrusion and other catastrophic events. Seagate
Technology believes that it has taken prudent measures to reduce the risk of
interruption in its operations. However, Seagate Technology cannot be sure that
these measures are sufficient. Any damage or failure that causes interruptions
in its operations could have a material adverse effect on its business, results
of operations and financial condition.
Seagate Technology may experience Year 2000 computer problems that harm its
business
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. Seagate Technology 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.
Seagate Technology's Products. Seagate Technology is assessing the
capability of its products to determine whether or not they are in Year 2000
compliance. Although Seagate Technology believes its disc and tape drive
products and certain of its software products are in Year 2000 compliance,
Seagate Technology has determined that certain software products produced by
Seagate Software, which are not material to Seagate Technology, are not and
will not be Year 2000 compliant. Seagate Technology is taking measures to
inform its customers that those products are not and will not be Year 2000
compliant. To assist its customers in evaluating their Year 2000 issues,
Seagate Software has developed a list of 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 Seagate
Technology has 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. Seagate Technology
considers a disc drive or tape product to be Year 2000 capable if when used
properly and in conformity with the product information provided by us, 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 Technology disc drive or
tape product properly exchanges date data with the Seagate Technology product.
Seagate Technology is incurring various costs to provide customer support
and customer satisfaction services regarding Year 2000 issues and anticipate
that these expenditures will continue in fiscal 2000 and thereafter. In
addition, Seagate Technology has contacted its major customers to determine
whether their products into which Seagate Technology's products have been and
will be integrated are Year 2000 compliant. Seagate Technology has received
assurances of Year 2000 compliance from major US customers. Many offshore
customers have not responded and are under no contractual obligation to provide
us with Year 2000 compliance information. Seagate Technology is taking steps
with respect to new customer agreements to ensure that the customers' products
and internal systems are Year 2000 compliant.
Even if Seagate Technology's products are Year 2000 compliant, we may be
named as a defendant in litigation against the vendors of all of the component
products of systems if some components of the systems are unable to properly
manage data related to the Year 2000. Seagate Technology's customer agreements
typically contain provisions designed to limit its 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, Seagate
Technology's 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.
18
<PAGE>
Seagate Technology's Systems. Seagate Technology has also initiated a
comprehensive program to address Year 2000 readiness in its internal systems
and with its customers and suppliers. Seagate Technology's program has been
designed to address its most critical internal systems first and to gather
information regarding the Year 2000 compliance of products supplied to Seagate
Technology and into which its products are integrated. Seagate Technology
conducted a Year 2000 inventory of information technology systems in the first
quarter of 1997. Risk assessment was substantially complete by the end of the
second quarter of 1997, and remediation activities were completed. However, as
participation in the Year 2000 readiness projects continues to increase
throughout Seagate Technology, additional systems are being added for
assessment and audit. Approximately 2,200 items were identified, and as of
August 1999, all items have been resolved with the exception of two phased
deployments in certain Asian plants which are on schedule and are being managed
on an exception basis to the overall project schedule. Before new technology
acquisitions are implemented, they are inventoried and assessed; these are not
included in the foregoing project dates. An initial inventory of technology
systems not managed by the Information Technology organization was completed in
the third calendar quarter of 1997. A second inventory in the second and third
calendar quarters of 1998 included all manufacturing operations with special
emphasis on embedded technology and facilities. Approximately 6,000 items were
identified (non-information technology and embedded combined) of which
approximately two-thirds are Year 2000 compliant.
Seagate Technology is using the following phased approach to Year 2000
readiness: inventory, assessment, disposition, test and audit. Anticipated
dates of completion of each phase are as follows:
<TABLE>
<C> <S> <C>
1. Inventory......................................... Complete
2. Assessment........................................ Complete
3. Disposition....................................... Complete
4. Test.............................................. Complete
5. Audit............................................. September 15, 1999
</TABLE>
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, Seagate Technology has not incurred
material costs related to assessment and remediation of Year 2000 readiness.
Seagate Technology currently expects that the total cost of its Year 2000
readiness programs, excluding redeployed resources, will not exceed $10
million. 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 and time to
completion estimates are based on the current assessment of our Year 2000
readiness needs and are subject to change as the projects proceed.
Seagate Technology's material third party relationships include
relationships with suppliers, customers and financial institutions. Seagate
Technology has identified 600 suppliers which are critical to our operations,
and we have surveyed each to provide details of their Year 2000 efforts,
including internal systems, operations and supply chain as well as a schedule
for their projects. As of September 1999, 99% of such suppliers had responded
affirmatively and been approved. In May 1999, Seagate Technology initiated an
onsite validation process for those suppliers considered most critical. Seagate
Technology expects to complete this phase by the end of September 1999; plans
will be developed for any that fail validation, including alternate sources or
additional inventory for sole source suppliers. In addition, Seagate Technology
has joined the High Tech Consortium for Year 2000 to pool supply chain efforts
with other companies in our industry.
Seagate Technology's largest customers were also surveyed regarding their
Year 2000 efforts. We currently does not anticipate any material impact due to
a Year 2000-related failure of a major customer. All of our financial
institutions have been surveyed. All of its primary banking activities can be
accommodated by its two major multi-national banking partners with the
exception of payroll in certain Asian countries that must be handled in local
currency. Seagate Technology is following Year 2000 progress in these areas
closely and will develop specific contingency plans for meeting payroll if we
cannot obtain assurance that these local banks are fully prepared.
19
<PAGE>
Because Year 2000 compliance measures for Seagate Technology's core and
mission-critical systems are complete, Seagate Technology does not consider
failure of these systems to be within a reasonable Year 2000 worst case
scenario. Seagate Technology believes it is primarily at risk due to failures
within external infrastructures such as utilities and transportation systems.
Seagate Technology is currently examining these risk areas to develop responses
and action plans. These include a business shutdown at all locations on
December 31, 1999 and, where justified due to external risk factors, power down
on December 31, 1999 with controlled startup prior to business resumption on
January 3, 2000.
While Seagate Technology currently expects that the Year 2000 issues will
not pose significant operational problems, Seagate Technology could experience
material adverse effects on its business if Seagate Technology fails to fully
identify all Year 2000 dependencies in its systems and in the systems of its
suppliers, customers and financial institutions. Those material adverse effects
could include delays in the delivery or sale of Seagate Technology's products.
Therefore, Seagate Technology is developing contingency plans for continuing
operations in the event such problems arise.
Seagate Technology's stock price will fluctuate
Seagate Technology's stock price has varied greatly as has the volume of
shares of its common stock that are traded. Seagate Technology expects these
fluctuations to continue due to factors such as:
. announcements of new products, services or technological innovations by
Seagate Technology or its competitors,
. announcements of major restructurings by Seagate Technology or our
competitors,
. quarterly variations in our results of operations as a result of our
fixed short-term cost structure and volatility in the demand for its
products,
. changes in revenue or earnings estimates by the investment community and
speculation in the press or investment community stemming from its past
performance, concerns about demand for its products, or announcements by
our competitors,
. general conditions in the data storage industry or the personal computer
industry such as the substantial decline in demand for disc drive
products that occurred during fiscal 1998,
. changes in Seagate Technology's revenue growth rates or the growth rates
of our competitors,
. sales of large blocks of Seagate Technology's stock that may lead to
investors' concerns that its performance will falter and leading those
investors to flood the market to liquidate their holdings of Seagate
Technology shares,
. adverse impacts on its operating results if Seagate Technology receives
an adverse judgment or settlement in any of the legal proceedings to
which it is a party, such as the impact on its earnings in fiscal 1997
from the costs resulting from the settlement of a lawsuit by Amstrad
PLC, and
. price erosion of Seagate Technology's products.
The stock market may from time to time experience extreme price and volume
fluctuations. Many technology companies have experienced such fluctuations. In
addition, Seagate Technology's stock price may be affected by general market
conditions and domestic and international macroeconomic factors unrelated to
its performance. Often such fluctuations have been unrelated to the operating
performance of the specific companies. The market price of Seagate Technology's
common stock may experience significant fluctuations in the future. For
example, its stock price fluctuated from a high of $44 1/4 to a low of $16 1/8
during fiscal 1999.
20
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
We have each made forward-looking statements in this document and in
documents that are attached or incorporated by reference that are subject to
risks and uncertainties. Forward-looking statements include the information
concerning possible or assumed future results of operations of Seagate
Technology and Seagate Software. When we use words such as "believes,"
"expects," "anticipates" or similar expressions, we are making forward-looking
statements. You should note that many factors, some of which are discussed
elsewhere in this document, could affect our future financial results and cause
those results to differ materially from those we anticipate in the forward-
looking statements.
For a discussion of the detailed factors we anticipate will influence our
future results, please refer to the "Risk Factors" section beginning on page 11
and to the "Management's Discussion and Analysis of Financial Condition and
Results of Operations" of each of Seagate Technology and Seagate Software
included herein.
21
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the Securities and Exchange Commission's public reference
rooms in Washington, D.C., New York, and Chicago, Illinois. Please call the
Securities and Exchange Commission at 1-800-SEC-0330 for further information on
the public reference rooms. Our Securities and Exchange Commission filings are
also available to the public from the Securities and Exchange Commission's web
site at http://www.sec.gov.
Seagate Technology filed a Registration Statement on Form S-4 to register
with the Securities and Exchange Commission the Seagate Technology common stock
to be issued to the Seagate Software stockholders in the merger. This document
is a part of that registration statement. As allowed by Securities and Exchange
Commission rules, this document does not contain all the information you can
find in the registration statement or the exhibits to the registration
statement.
The Securities and Exchange Commission allows us to "incorporate by
reference" the documents and information therein we file with the Securities
and Exchange Commission, which means that we can disclose important information
to you by referring you to those documents. The information incorporated by
reference is considered to be part of this document, and later information that
we file with the Securities and Exchange Commission will automatically update
and supersede this information. We incorporate by reference the Seagate
Technology and Seagate Software documents listed below and any future filings
with the Securities and Exchange Commission under Section 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act of 1934, as amended:
Seagate Technology
. Annual Report on Form 10-K for the year ended July 2, 1999
. Proxy Statement dated September 24, 1998
. The description of Seagate Technology common stock contained in the
Registration Statement on Form 8-A/A dated December 2, 1994
. Current Report on Form 8-K dated September 3, 1999
Seagate Software
. Annual Report on Form 10-K for the year ended July 2, 1999
. The description of the Seagate Software common stock contained in
Amendment No. 1 to the Registration Statement on Form 10 dated December
2, 1997
. Current Report on Form 8-K dated September 3, 1999
22
<PAGE>
How to Obtain These Documents
You may request a copy of these filings for either Seagate Technology or
Seagate Software, at no cost, by writing or telephoning:
Bill Rowley
Investor Relations
Seagate Technology, Inc.
920 Disc Drive
Scotts Valley, California 95066
(831) 439-2371
bill [email protected]
You should rely only on the information incorporated by reference or
provided in this document or any supplement. We have not authorized anyone else
to provide you with different information. We are not making our offer in any
state where our offer is not permitted.
23
<PAGE>
THE SEAGATE SOFTWARE MEETING
When and where the meeting will be held
The special meeting of stockholders of Seagate Software will be held at
a.m., Pacific time on , October , 1999, at 915 Disc Drive, Scotts Valley,
California 95066.
What will be voted upon
At the Seagate Software meeting, you will be asked to approve the following
proposals:
. To approve the merger of Seagate Daylight Merger Corp., a wholly owned
subsidiary of Seagate Technology, Inc., with and into Seagate Software,
Inc. in accordance with the terms of the Agreement and Plan of
Reorganization dated as of September 2, 1999 among Seagate Technology,
Seagate Daylight Merger Corp. and Seagate Software. As a result of the
merger, Seagate Software will become a wholly-owned subsidiary of
Seagate Technology.
. The transaction of other business that may properly come before the
Seagate Software meeting.
Only stockholders on September , 1999 will be entitled to vote
You will be entitled to vote at the Seagate Software meeting only if you are
a holder of record of shares of Seagate Software common stock or preferred
stock at the close of business on September , 1999, the record date. On that
date there were shares of Seagate Software common stock outstanding, which
were held by holders, and shares of Series A preferred stock
outstanding which were held by Seagate Technology.
You will be entitled to one vote for each share of Seagate Software common
stock and Series A preferred stock you held on the record date on each matter
to be acted upon that may properly come before the Seagate Software meeting.
Vote required to approve the proposal
The approval of the merger described above will require the affirmative vote
of a majority of the shares of Seagate Software capital stock outstanding
voting together as a single class. In addition, the affirmative vote of a
majority of the outstanding shares of Seagate Software preferred stock is
required. We expect that Seagate Technology will vote in favor of the proposal,
as Seagate Technology is a party to the Agreement and Plan of Reorganization.
As a result, approval of the merger is virtually assured.
Shares held by directors, executive officers and their affiliates
On the record date, the directors and officers of Seagate Software
beneficially owned substantially all of the outstanding voting stock of Seagate
Software including shares held by Seagate Technology over which the directors
and officers may be deemed to have voting control.
Votes needed for a quorum
The required quorum for the transaction of business at the Seagate Software
meeting is a majority of the shares of each of the Seagate Software common
stock and preferred stock outstanding on the Seagate record date.
Effect of abstentions and broker non-votes
Abstentions will be counted in establishing the quorum at the Seagate
Software meeting and will have the same effect as a vote against the proposal
presented to the Seagate Software stockholders. Because no Seagate Software
shares are held through brokers, there will be no broker non-votes.
24
<PAGE>
Adjourning the meeting
We believe it is unlikely that the Seagate Software meeting will be
adjourned because the shares of Seagate Software's capital stock held by
Seagate Technology are sufficient to establish a quorum. However, in the event
that there are not sufficient votes to approve the merger at the time of the
Seagate Software meeting, the merger could not be approved unless the Seagate
Software meeting was adjourned in order to permit further solicitation of
proxies from Seagate Software stockholders. Proxies that are being solicited by
the Seagate Software board of directors grant the discretionary authority to
vote for any such adjournment, if necessary. If it is necessary to adjourn the
Seagate Software meeting, and the adjournment is for a period of less than 30
days, no notice of the time and place of the adjourned meeting is required to
be given to you other than an announcement of such time and place at the
Seagate Software meeting. A majority of the voting power represented and voting
at the Seagate Software meeting is required to approve any such adjournment,
whether or not a quorum is present at the Seagate Software meeting.
Seagate Software will pay the expenses of proxy solicitation
Seagate Software will pay the expenses of soliciting proxies to be voted at
the Seagate Software meeting. Following the original mailing of the proxies,
this document and other soliciting materials, proxies may be solicited by
Seagate Technology's and Seagate Software's directors, officers and other
employees personally or by telephone, facsimile or telegram without
compensation for such services.
How proxies will be voted
The Seagate Software proxy accompanying this document is solicited on behalf
of the Seagate Software board of directors for use at the Seagate Software
meeting. If you are a Seagate Software stockholder, we request that you
complete, date and sign the accompanying proxy and return it in the enclosed
envelope or otherwise mail it to Harris Trust Company of California. When
proxies are properly dated, executed and returned, the shares they represent
will be voted at the Seagate Software meeting in accordance with your
instructions. If no specific instructions are given, your shares will be voted
for the approval of the merger and at the discretion of the proxy holders, upon
such other business as may properly come before the Seagate Software meeting or
any adjournment or postponement thereof.
How you can revoke your proxy
If you have given a proxy, you may revoke it at any time before it is
exercised at the Seagate Software meeting by:
. delivering a written notice stating that the proxy is revoked to the
Secretary of Seagate Software by any means, including facsimile, bearing
a date later than the date of the proxy;
. signing and delivering a proxy relating to the same shares that bears a
later date prior to the vote at the Seagate Software meeting; or
. attending the Seagate Software meeting and voting in person.
If you attend the Seagate Software meeting, your proxy will not be revoked
unless you also take one of the other actions outlined above.
You do not have dissenters' or appraisal rights for the merger
You are not entitled to dissenters' rights or appraisal rights with respect
to any of the proposals to be considered at the Seagate Software meeting.
25
<PAGE>
THE MERGER
The following is a brief summary of some of the aspects of the merger that
is qualified in its entirety by reference to the Agreement and Plan of
Reorganization, or merger agreement, a copy of which is attached to this proxy
statement/prospectus as Appendix A and is incorporated in this proxy
statement/prospectus by reference. We urge you to read the merger agreement
carefully.
Background of the Merger
On June 10, 1999 a meeting was held at the offices of the law firm of Wilson
Sonsini Goodrich & Rosati at which representatives of Wilson Sonsini Goodrich &
Rosati, Seagate Technology and Seagate Software, including Mr. Donald L. Waite,
Executive Vice President and Chief Administrative Officer for Seagate
Technology and a director of Seagate Software, Mr. Gregory B. Kerfoot,
President, Chief Operating Officer and director of Seagate Software, Ms. Ellen
E. Chamberlain, Senior Vice President, Chief Financial Officer of Seagate
Software and Susan J. Wolfe, Vice President, Legal Affairs of Seagate Software,
discussed alternative structures for the proposed reorganization of IMG.
On June 15, 1999 and June 24, 1999, representatives of Wilson Sonsini
Goodrich & Rosati and Ernst & Young, Ms. Chamberlain and Ms. Wolfe met to
formalize the alternatives for discussion and the tax accounting, legal and
corporate issues surrounding the proposed reorganization.
On July 6, 1999 Mr. Kerfoot, Mr. Stephen J. Luczo, Chairman of the Board of
Seagate Software and President, Chief Executive Officer and a director of
Seagate Technology, Ms. Chamberlain, Mr. Waite and representatives of Wilson
Sonsini participated in a conference call to discuss the alternatives to
structure the proposed IMG reorganization and how to proceed in evaluating
them.
On July 14, 1999, representatives of Wilson Sonsini Goodrich & Rosati, Mr.
Waite, Mr. Charles C. Pope, Executive Vice President and Chief Financial
Officer of Seagate Technology, Mr. Thomas F. Mulvaney, Senior Vice President,
and General Counsel of Seagate Technology, Ms. Chamberlain and representatives
of the Seagate Technology tax department met to further discuss the
alternatives in more detail.
On July 23, 1999, Ms. Wolfe, Mr. Waite, Mr. Mulvaney and Mr. Pope,
participated in a conference call at which they discussed the potential
benefits and detriments of the various alternatives for the IMG
Recapitalization. The participants determined that Ms. Chamberlain should
present the status of the analysis and the alternatives being considered to
Seagate Software's board of directors.
On July 26, 1999, Ms. Chamberlain presented to the Seagate Software board of
directors the alternatives being considered, and the board of directors advised
the officers of Seagate Software to continue to analyze the possible
alternatives.
On July 30, 1999, representatives of Wilson Sonsini Goodrich & Rosati, Mr.
Pope, Mr. Waite, Mr. Mulvaney, Ms. Chamberlain, Ms. Wolfe and Mr. Kerfoot
participated in a conference call to review the status of the alternatives
under consideration.
On August 4, 1999 and August 6, 1999, Ms. Wolfe, Mr. Pope, Mr. Mulvaney,
representatives of Wilson Sonsini Goodrich & Rosati and Ernst & Young, Mr.
Kerfoot and representatives from the Seagate Technology's tax department met at
the offices of Seagate Technology to discuss and agree upon a proposal to
reorganize IMG to be presented to the board of directors of both companies.
On August 19, 1999, representatives of Wilson Sonsini Goodrich & Rosati,
Ernst & Young and the Seagate Technology tax and financial reporting
departments, Mr. Kerfoot, Mr. Pope, Mr. Mulvaney and Ms. Wolfe met to assign
specific responsibilities and develop a timeline for the proposed
reorganization and merger.
26
<PAGE>
On August 25, 1999 and August 26, 1999, respectively, the Seagate Software
board of directors and the Seagate Technology board of directors met and gave
conditional approval of the proposed merger and reorganization, pending the
negotiation of a definitive merger agreement.
On September 2, 1999, the boards of directors of Seagate Technology and
Seagate Software each met to review and consider the merger agreement and the
reorganization and approved the merger and reorganization.
General information about the merger
When the merger is completed, a wholly-owned subsidiary of Seagate
Technology, Seagate Daylight Merger Corp., or "Sub," will be merged with and
into Seagate Software, with Seagate Software as the surviving corporation. When
the merger is closed, Sub's organizational documents will be the organizational
documents of the surviving entity.
Effective Time
We anticipate closing the merger as promptly as possible after the approval
of the merger by Seagate Software stockholders at the Seagate Software special
meeting that is currently scheduled for October , 1999, and when all of the
conditions contained in the merger agreement are satisfied or waived.
Purchase Price and Exchange Rate
The Amount of the Purchase Price
The purchase price payable to the Seagate Software stockholders and
optionholders in the merger will be equal to the value of Seagate Software
immediately prior to the closing of the merger. The value of Seagate Software
will be determined based upon the following factors:
. The value of the IMG business, which will be determined by Seagate
Software's board of directors prior to the closing of the merger.
Seagate Software currently estimates that the value of the IMG business
will be approximately $375 million;
. The cash received by Seagate Software from its sale of 8.2 million
VERITAS shares. The after tax proceeds of the sale of the VERITAS shares
was approximately $250 million;
. Proceeds which would be received by Seagate Software upon the exercise
of all currently outstanding options to purchase Seagate Software common
stock; and
. The value of the shares of VERITAS stock held by Seagate Software
(60,915,541 shares as of the date of this proxy statement/prospectus).
The value of the VERITAS stock will be calculated based upon the average
closing price of the VERITAS common stock as traded on the Nasdaq
National Market for the five consecutive trading days ending on and
including the second trading day prior to the date of the closing of the
merger. Based upon the closing price of VERITAS common stock on August
25, 1999 of $61.875 per share, the value of the VERITAS common stock
held by Seagate Software on that date was approximately $3.8 billion.
Based upon the closing price of VERITAS's common stock on August 25, 1999,
and based upon the reasonable assumptions Seagate Software believes that it has
made with regard to the factors discussed above, the estimated value of Seagate
Software would be approximately $4.5 billion. The actual purchase price will,
of course, fluctuate up or down prior to the merger based on changes in the
factors discussed above. The value of Seagate Software will be primarily
influenced by changes in the trading price of VERITAS common stock.
The Exchange Rate
The purchase price in the merger will be paid to the stockholders and
optionholders of Seagate Software in shares of Seagate Technology common stock.
The number of shares of Seagate Technology common stock to be issued for each
outstanding share of Seagate Software will be determined in accordance with an
exchange rate calculated as follows:
27
<PAGE>
. The numerator of the exchange rate will be equal to (A) the value of
Seagate Software calculated as described above under "The Amount of the
Purchase Price" divided by (B) the sum total of all outstanding shares
of preferred stock and common stock of Seagate Software as well as all
shares of common stock issuable upon exercise of all outstanding stock
options; and
. The denominator of the exchange rate will equal the value of one share
of Seagate Technology's common stock based upon the average closing
price of the common stock as traded on the New York Stock Exchange for
the five consecutive trading days ending on and including the second
trading day prior to the date of the closing of the merger.
For optionholders whose Seagate Software options are exchanged for Seagate
Technology shares of common stock in the merger, the number of Seagate
Technology shares received will be reduced by the total exercise price of that
holder's options and any taxes which must be with held under applicable law.
Fractional shares will be rounded up to the nearest whole share.
See page 3 of "Questions and Answers About the Seagate Software Merger and
Reorganization" for an example of how the exchange rate will be computed.
The Merger Agreement
The following is a summary that highlights some of the significant
provisions of the merger agreement. You may read the merger agreement, which is
attached to this proxy statement/prospectus as Appendix A for more detail. We
encourage you to read the merger agreement in its entirety.
Representations and Warranties of Seagate Software. The merger agreement
contains representations and warranties made by Seagate Software relating to,
among other things,
. the proper organization of Seagate Software and similar corporate
matters;
. the capital structure of Seagate Software;
. the authorization, performance and enforceability of the merger
agreement;
. the absence of violations of Seagate Software's governing instruments
and applicable laws and agreements, governmental filings, authorizations
and consents required to complete the merger;
. compliance with applicable laws;
. the furnishing of true and correct copies of Seagate Software's
Securities and Exchange Commission filings; and
. the vote required for Seagate Software.
Representations and Warranties of Seagate Technology and Sub. The merger
agreement contains representations and warranties made by Seagate Technology
and Sub relating to, among other things,
. the proper organization of Seagate Technology and Sub and similar
corporate matters;
. the capital structure of Seagate Technology and the issuance of the
common stock;
. the authorization, performance and enforceability of the merger
agreement; and
. the furnishing of true and correct copies of Seagate Technology's
Securities and Exchange Commission filings.
Conditions to the Merger. Completion of the merger is subject to a number of
conditions, including:
. the approval of the merger agreement by the affirmative vote of the
holders or majority of the holders of Seagate Software's outstanding
capital stock, voting as a single class, and a majority of the
outstanding Seagate Software preferred stock voting as a separate class;
28
<PAGE>
. the registration statement with respect to the Seagate Technology common
stock to be issued in connection with the merger shall have been
declared effective by the Securities and Exchange Commission;
. approval by the New York Stock Exchange of the listing of the common
stock to be issued in the merger;
. receipt of customary tax opinions;
. the absence of third party actions that would prohibit or restrict the
completion of the merger or would have a material adverse effect on
either Seagate Software or Seagate Technology; and
. other customary closing conditions.
There can be no assurance as to when and if the conditions to completion of
the merger will be satisfied or, where permissible, waived, or that the merger
will be completed. However, Seagate Technology holds substantially all of
Seagate Software's capital stock, so the Seagate Software stockholder vote is
virtually assured.
Amendment of Merger Agreement. The parties may modify or amend the merger
agreement by written agreement prior to the completion of the merger subject to
the provisions of applicable law.
Waiver and Termination. The merger agreement permits the parties to waive
any of the conditions to the merger that are in favor of that party.
The merger agreement is subject to termination by one or more of the parties
at any time prior to the effective time if, among other things:
. the parties do not complete the merger by February 29, 2000, subject to
certain exceptions;
. either Seagate Technology or Seagate Software materially breaches the
merger agreement;
. by Seagate Technology if at any time prior to the closing more than
11,250,000 shares of Seagate Technology Common Stock shall be issuable
in the merger; or
. Seagate Technology and Seagate Software mutually agree to terminate the
merger.
In addition, Seagate Technology can terminate the merger agreement if the
number of its shares of common stock to be issued in the merger were to exceed
11,250,000 shares.
Listing. Seagate Technology will use all reasonable efforts to cause the
common stock to be issued in the merger to be approved for listing and
quotation on the New York Stock Exchange prior to the completion of the merger.
This listing is also a condition to completion of the merger. Seagate
Technology anticipates that it will file a listing application with the New
York Stock Exchange relating to the issuance by Seagate Technology of its
common stock prior to the closing of the merger.
Registration Statement. Both Seagate Software and Seagate Technology have
made agreements relating to the filing of the Registration Statement of which
this proxy statement/prospectus forms a part and the accuracy of the
information contained within it. They have also agreed to take all appropriate
action, and do all things necessary, proper or advisable under applicable law
to complete the transactions contemplated by the merger agreement and to use
all reasonable efforts to cooperate with each other in connection with the
making of all required filings.
29
<PAGE>
Restrictions on the transfer of Seagate Technology common stock to be received
by affiliates of Seagate Software
The Seagate Technology common stock issuable in connection with the merger
has been registered under the Securities Act of 1933, as amended. However,
certain of the Seagate Software stockholders will be deemed to be "affiliates"
of Seagate Technology, as that term is defined in Rule 144 and Rule 145 adopted
under the Securities Act. Therefore, the shares held by these affiliates may be
resold without registration only as provided for by Rule 145 or as otherwise
permitted under the Securities Act. In connection with the merger, each
affiliate will be required to execute an affiliate agreement providing that the
affiliate will not sell, transfer or otherwise dispose of the shares of common
stock to be received by that person in the merger (1) except in compliance with
the applicable provisions of the Securities Act and its rules and regulations;
(2) unless counsel representing the affiliate, satisfactory to Seagate
Technology, advises Seagate Technology in a written opinion letter satisfactory
to Seagate Technology and Seagate Technology's counsel that no registration
under the Securities Act would be required in connection with the proposed
sale, transfer or other disposition of the affiliate's shares; (3) except
pursuant to a registration statement under the Securities Act covering the
common stock proposed to be sold, transferred or otherwise disposed of,
describing the manner and terms of the proposed sale, transfer or other
disposition, and containing a current prospectus under the Securities Act that
is effective under the Securities Act; or (4) unless an authorized
representative of the Securities and Exchange Commission has rendered written
advice to the affiliate to the effect that the Securities and Exchange
Commission would take no action with respect to the proposed sale, transfer or
other disposition if consummated.
Reasons for the Merger
In reaching its decision, the Seagate Software board of directors has
identified several potential benefits of the merger, the most important of
which included:
. The separation of Seagate Software's VERITAS stock and the IMG business
will enable its management and other employees to focus more fully on
the development of the IMG business. The management of Seagate Software
believes that, since the value of the VERITAS stock is so
disproportionately large in comparison with the value of the IMG
business, the stock is a potential distraction to the future development
of the IMG business.
. Current and future employees of the IMG business will be able to receive
new stock options the value of which will be directly related to the
future performance of the IMG business. Management believes this will
better incent employees to develop the IMG business.
In reaching its decision to approve the merger and to recommend that Seagate
Software's stockholders vote to approve and adopt the merger, the Seagate
Software board of directors also considered the following factors:
. its knowledge of the business, operations, properties, assets, financial
condition and operating results of the IMG business;
. the future prospects of the IMG business and what those prospects may be
as a result of the merger;
. the potential adverse effects on the IMG business including:
-- the effect on Seagate Software's ability to retain key management,
marketing and technical personnel who will experience full
acceleration of their Seagate Software stock options in anticipation
of the merger;
-- the potential disruption of its business that might result from
employee uncertainty and lack of focus following announcement of the
merger; and
-- the other risks described under "Risk Factors" on page 11.
30
<PAGE>
The above discussion of the information and factors considered by the
Seagate Software board is not intended to be exhaustive. However, Seagate
Software believes it includes all material factors considered by the Seagate
Software board. In view of the variety of factors considered in connection with
its evaluation of the merger, the Seagate Software board did not find it
practicable to and did not quantify or otherwise assign relative weight to the
specific factors considered. In addition, individual members of the Seagate
Software board may have given different weight to different factors.
Recommendation of the Seagate Software Board of Directors
After careful consideration, the Seagate Software board of directors has
determined the merger agreement and the reorganization are fair to and in the
best interests of the Seagate Software stockholders and optionees.
Interests of Certain Persons in the Merger
Prior to the closing of the merger, Seagate Technology will hold
substantially all of the outstanding common and preferred shares of Seagate
Software. The remaining shares of Seagate Software are held by current and
former employees, directors and consultants of Seagate Software, Seagate
Technology and their subsidiaries. In addition options to purchase 4,002,326
shares of Seagate Software common stock were outstanding as of August 25, 1999.
Gary B. Filler and Lawrence Perlman, who are members of the board of
directors of Seagate Software, are each also the Co-Chairman of the board of
directors of Seagate Technology. Stephen J. Luczo, the Chairman of Seagate
Software's board of directors is also the President, Chief Executive Officer
and a director of Seagate Technology. Donald L. Waite, a director of Seagate
Software, is the Executive Vice President and Chief Administrative Officer of
Seagate Technology.
Our executive officers and directors are also stockholders and optionees of
Seagate Software. In connection with the Merger, those persons will receive
consideration based upon their outstanding securities holdings in Seagate
Software. See "Security Ownership of Certain Beneficial Owners and Management
of Seagate Software."
Material Income Tax Consequences of the Merger
The following discussion addresses the material income tax considerations of
the merger that are generally applicable to holders of vested shares of Seagate
Software common stock exchanging their Seagate Software common stock for
Seagate Technology common stock. Stockholders of Seagate Software should be
aware that the following discussion does not address all income tax
considerations that may be relevant to particular Seagate Software stockholders
in light of their particular circumstances, such as stockholders who are
dealers in securities, or except as described below, who acquired their Seagate
Software common stock in compensatory transactions. In addition, the following
discussion does not address the tax consequences of any transactions completed
prior to or after the merger except, to the extent discussed below, the
exercise of vested options or vested rights to purchase Seagate Software common
stock in anticipation of the merger. Furthermore, the following discussion does
not address the tax consequences of the merger under the tax laws of countries
other than the national income and capital gains tax regimes of the U.S.,
Canada and the U.K., as set forth below. Accordingly, Seagate Software
stockholders are urged to consult their own tax advisors as to the specific tax
consequences to them of the merger, including the applicable U.S. federal,
state and local, Canadian federal and provincial, U.K. and other foreign tax
consequences to them of the merger.
Material United States income tax consequences of the merger
The following discussion is based upon an opinion of Ernst & Young LLP as to
the material U.S. tax consequences that are generally applicable to persons
subject to U.S. tax. The opinion is based on the U.S. Internal Revenue Code,
applicable Treasury Regulations, judicial authority and administrative rulings
and practice, all as of the date hereof. The Internal Revenue Service is not
precluded from adopting a contrary
31
<PAGE>
position. In addition, there can be no assurance that future legislative,
judicial or administrative changes or interpretations will not adversely affect
the accuracy of the statements and conclusions set forth herein. Any such
changes or interpretations could be applied retroactively and could affect the
tax consequences of the transactions taken in connection with the merger.
In the opinion of Ernst & Young LLP, it is more likely than not the merger
will qualify as a reorganization under Section 368(a) of the U.S. Internal
Revenue Code in which case:
(1) You would not recognize any gain or loss upon the receipt of Seagate
Technology common stock solely in exchange for such Seagate Software
common stock in the merger;
(2) Your aggregate tax basis of the Seagate Technology common stock you
received in the merger would be the same as the aggregate tax basis of
the Seagate Software common stock you surrendered;
(3) The holding period of the Seagate Technology common stock you receive
in the merger would include the period for which the Seagate Software
common stock surrendered in exchange therefor was considered to be
held, provided that the Seagate Software common stock surrendered is
held as a capital asset on the date of the merger; and
(4) Neither Seagate Technology nor Seagate Software would recognize gain or
loss solely as a result of the merger.
Neither Seagate Technology nor Seagate Software has requested a ruling from
the Internal Revenue Service in connection with the merger. Seagate Technology
and Seagate Software have received an opinion from Ernst & Young LLP to the
effect that, for U.S. federal income tax purposes, the merger is likely to
constitute a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code. However, there are no court decisions or other
authorities bearing directly on a transaction with facts sufficiently similar
to the merger. The opinion reflects Ernst & Young's best judgement, and neither
binds the Internal Revenue Service nor precludes the Internal Revenue Service
from adopting a contrary position. The opinion is subject to certain
assumptions and qualifications and is based in part on the truth and accuracy
of certain representations of Seagate Technology and Seagate Software. Of
particular importance is the representation and assumption to the effect that
no consideration other than Seagate Technology stock is being issued as
consideration for the Seagate Software shares in the merger. If the Internal
Revenue Service successfully asserted that the merger is taxable, a Seagate
Software stockholder would recognize gain or loss with respect to each share of
Seagate Software common stock surrendered equal to the difference between the
stockholder's basis in such share and the fair market value, as of the date of
the merger, of the Seagate Technology stock received in the merger. The gain
you would recognize would constitute long-term capital gain if you held the
Seagate Software common stock you surrendered in the merger for more than a
year. In addition, if you acquired the Seagate Software common stock you
surrendered through the exercise of an incentive stock option, the option must
have been granted more than two years prior to the date the merger closes, and
you must have exercised the option more than one year prior to the date the
merger closes in order for you to receive long-term capital gains treatment for
your entire gain, if any. A Seagate Software stockholder's aggregate basis in
the Seagate Technology common stock received in the merger would equal its fair
market value, and the stockholder's holding period for such stock would begin
the day after the merger.
Even if the merger qualifies as a reorganization for U.S. federal income tax
purposes, a recipient of shares of Seagate Technology common stock would
recognize gain to the extent that such shares were considered to be received in
exchange for services or property other than solely Seagate Software common
stock. All or a portion of such gain may be taxable as ordinary income. Gain
would also have to be recognized to the extent that a Seagate Software
stockholder was treated as receiving, directly or indirectly, consideration
other than Seagate Technology common stock in exchange for the Seagate Software
common stock.
You are urged to consult your own tax advisors in light of your personal
circumstances.
32
<PAGE>
Material Canadian income tax consequences of the merger
The following discussion is based upon an opinion of Ernst & Young LLP as to
the material Canadian income tax considerations that are generally applicable
to Canadian resident holders of Seagate Software common stock exchanging their
Seagate Software common stock for Seagate Technology common stock in the
merger. Stockholders of Seagate Software should be aware that the following
discussion does not deal with all Canadian income tax considerations that may
be relevant to particular Seagate Software stockholders in light of their
particular circumstances.
The following discussion is based on the Canadian income tax laws as of this
date. Revenue Canada or an applicable Canadian provincial taxing authority is
not precluded from successfully adopting a contrary position. In addition,
there is no assurance that future legislative, judicial or administrative
changes or interpretations will not affect the accuracy of the statements and
conclusions described below. Any such changes or interpretations could be
applied retroactively and could affect the tax consequences to stockholders of
Seagate Software in the merger.
In the opinion of Ernst & Young LLP, it is more likely than not that the
reorganization will qualify as a foreign merger for Canadian income tax
purposes pursuant to subsection 87(8) of the Canadian Income Tax Act in which
case: (1) the stockholder will not recognize any gain or loss upon the receipt
of Seagate Technology common stock received under the reorganization provided
that the shares constitute capital property; (2) the stockholder's adjusted
cost basis of the Seagate Technology common stock received under the
reorganization would be the same as the adjusted cost basis of the Seagate
Software common stock surrendered. If you also own other Seagate Technology
common stock, the tax basis per share of the Seagate Technology common stock is
calculated as the total tax basis of all shares of Seagate Technology common
stock you owned divided by the total number of such shares owned.
Generally, where the shares of Seagate Software common stock exchanged are
held as investment property and the holder does not deal with the shares and
other securities in a manner similar to a trader or dealer of securities, the
Seagate Software common stock exchange should be considered capital property.
A Canadian resident stockholder of Seagate Software common stock may elect,
by attaching a letter with his tax return, not to have the tax rollover
provisions of the Canadian Income Tax Act apply to this transaction and as a
result may trigger a capital gain or loss for Canadian income tax purposes.
You are urged to consult your own tax advisors in light of your personal
circumstances.
Material United Kingdom income tax consequences of the merger
The following discussion is based upon an opinion of Ernst & Young as to the
material U.K. tax considerations of U.K. resident holders of Seagate Software
common stock exchanging their Seagate Software common stock for Seagate
Technology common stock in the merger. The discussion relates only to U.K.
resident holders of stock in Seagate Software and is confined to their U.K. tax
position.
You should be aware that the following discussion does not deal with all
U.K. tax considerations that may be relevant to you as a U.K. resident in light
of your particular circumstances.
The following discussion is based on Ernst & Young's best judgement
regarding the application of U.K. taxation legislation. The views expressed are
not binding on the courts or Inland Revenue and there is no assurance that the
Inland Revenue will not seek to assert a contrary position. Furthermore, no
assurance can be given that future legislation, judicial or administrative
changes or interpretations will not adversely affect the accuracy of the
statements and conclusions set forth herein. These could be on either a
prospective or retroactive basis. We undertake no responsibility to advise you
of any new developments in the application or interpretation of the U.K.
taxation laws.
33
<PAGE>
Neither Seagate Technology nor Seagate Software has requested advance
confirmation from the Inland Revenue that the Inland Revenue is satisfied that
the provisions of Section 135 will apply to the proposed merger. Seagate
Technology and Seagate Software have received an opinion from the United
Kingdom firm of Ernst & Young, a member of Ernst & Young International, to the
effect that, for U.K. tax purposes, the proposed transaction will fall within
the rules applicable to reorganizations. The opinion, subject to certain
assumptions and qualifications, is based in part on the truth and accuracy of
certain representations of Seagate Technology and Seagate Software.
Capital Gains Tax. In the opinion of Ernst & Young, the merger will fall
within the U.K. tax laws for reorganizations with the result that:
(1) You will not recognize any gain or loss upon receipt of Seagate
Technology common stock solely in exchange for your Seagate Software
common stock in the merger.
(2) Your aggregate tax basis of the Seagate Technology common stock you
receive in the merger will be the same as the aggregate tax basis of
the Seagate Software common stock you surrender in exchange.
(3) The holding period of the Seagate Technology common stock you receive
in the merger will include the period for which the Seagate Software
common stock you surrender in exchange therefor was considered to be
held by you as a capital asset on the date of the merger.
Income Tax. The opinion concludes that the exchange offer constitutes a
company reorganization, in which case, no income tax charge should arise in the
exchange offer.
You are urged to consult your own tax advisors in light of your personal
circumstances.
Material tax consequences to optionees who do not exercise their Seagate
Software options prior to the merger and receive Seagate Technology stock in
cancellation of their options
The following discussion is based upon the opinions of Seagate Software's
tax advisors and addresses the material tax consequences to holders of Seagate
Software options who do not exercise their options prior to the merger,
resulting in the cancellation of such options and the receipt, by the
optionees, of Seagate Technology stock. The discussion is based on
interpretations of the existing authorities. The applicable taxing authorities
are not precluded from successfully adopting a contrary position to that
described here. In addition, there is no assurance that future legislative,
judicial, or administrative changes or interpretations will not affect the
accuracy of the statements and conclusions described below. Any such changes or
interpretations could be applied retroactively and could affect the tax
consequences to holders of Seagate Software options who do not exercise their
options and therefore receive Seagate Technology shares in cancellation of such
options.
U.S. Consequences
If you are subject to U.S. tax, and you allow your option to be cancelled in
exchange for a payment of shares of Seagate Technology common stock, Wilson
Sonsini Goodrich & Rosati, Professional Corporation is of the opinion that upon
the receipt of the Seagate Technology shares, you will have ordinary income
equal to the fair market value of the shares received. If, at the time you
receive the shares of Seagate Technology you are an employee of Seagate
Technology, Seagate Software or any of their subsidiaries, any income
recognized upon the receipt of the Seagate Technology shares will constitute
wages for which your employer will be required to withhold income and
employment taxes. The tax basis of the Seagate Technology shares received will
be equal to the fair market value of the Seagate Technology shares at the time
of the merger. Any later disposition of the Seagate Technology shares will be
taxable as a capital gain or loss.
Holders of incentive stock options who do not exercise their options will
lose their opportunity for all of their gain, if any, to be taxed at long term
capital gains rates.
34
<PAGE>
Canadian Consequences. This section applies to a Canadian resident employee
of Seagate Software or its Canadian subsidiaries who by virtue of such
employment obtained a stock option to acquire Seagate Software common stock. In
the opinion of Ernst & Young LLP, a Canadian resident employee who fails to
exercise an option and therefore receives Seagate Technology stock will be
required to include in his or her employment income the fair market value of
the Seagate Software common stock so received, as determined at the time of
receipt. The tax basis of the Seagate Technology shares received is equal to
the fair market value of the shares at the time of the receipt. Where you also
own other Seagate Technology common stock, the tax basis per share of the
Seagate Technology common stock is calculated as the total tax basis of all
shares of Seagate Technology common stock you owned divided by the total number
of such shares owned.
Where you include in your employment income compensation as the result of
the receipt of Seagate Technology stock as discussed above, an offsetting
deduction equal to 25% of the income may be available in computing your taxable
income for the year of receipt provided certain conditions are met. A Canadian
resident employee who receives Seagate Technology stock should be entitled to
this deduction.
You will be required to pay income tax, Canada Pension Plan premiums or
Quebec Pension Plan premiums on this employment benefit arising from the
receipt of the Seagate Technology stock.
U.K. Consequences.
Options Obtained By Reason of Employment. In the opinion of Ernst & Young,
where you acquired the options as a director or employee, you will be liable
for U.K. income tax on the receipt of Seagate Technology shares. The amount of
income will equal the fair market value of the Seagate Technology shares
received on the date of receipt. You will also be liable for National Insurance
Contributions on this income, up to the monthly earnings limit. The amount that
is subject to income tax is added to the cost basis of the Seagate Technology
shares for purposes of computing the U.K. capital gains tax, if any, on the
subsequent sale of such shares. Any further gain arising on the subsequent sale
of the shares will make you liable for U.K. capital gains tax.
Options Not Obtained by Reason of Employment. In the opinion of Ernst &
Young, where your options were not obtained by reason of employment, the
receipt of Seagate Technology shares does not result in any U.K. taxable income
nor liability for National Insurance Contributions. The subsequent sale of the
shares will be a disposal of a capital asset and any resulting gain will be
subject to U.K. capital gains tax.
Material tax consequences to optionees who exercise their options prior to the
merger
The following discussion is based upon the opinions of Seagate Software's
tax advisors and addresses the material tax consequences to holders of Seagate
Software options who exercise their options prior to the merger. The discussion
is based on interpretations of the existing authorities. The applicable taxing
authorities are not precluded from successfully adopting a contrary position to
that are described here. In addition, there is no assurance that future
legislative, judicial, or administrative changes or interpretations will not
affect the accuracy of the statements and conclusions described below. Any such
changes or interpretations could be applied retroactively and could affect the
tax consequences to holders of Seagate Software options who exercise their
options. You are urged to consult your own tax advisors prior to the exercise
of any options in light of your personal circumstances.
U.S. Consequences. In the opinion of Wilson Sonsini Goodrich & Rosati,
Professional Corporation, you will not recognize regular taxable income upon
the exercise of an incentive stock option. However, the difference between the
option exercise price paid for the shares and fair market value of the shares
on the date of exercise will be alternative minimum taxable income and may
subject you to the alternative minimum tax under Section 55 of the Internal
Revenue Code unless you dispose of the shares in the year you exercise the
incentive stock option.
35
<PAGE>
If you sell or otherwise dispose of the Seagate Technology common stock you
receive in connection with the merger, you will recognize taxable income for
any amount in excess of the incentive stock options' aggregate exercise price.
If you dispose of the shares more than two years from the grant date of your
incentive stock option and more than one year after the exercise of your
incentive stock option, then upon the sale or other disposition, any gain you
recognize will be long term capital gain and any loss will be long term capital
loss. If you dispose of your shares before the end of either of the holding
periods described in the preceding sentence, then you will recognize ordinary
income in the year of the disposition equal to the excess, if any, of the fair
market value of the shares at exercise or, if less, the amount realized on the
disposition of the shares, over the option exercise price paid for the such
shares. Any further gain realized by you will be taxed as capital gain. If you
dispose of your shares before the end of either of the holding periods
described above in the first sentence of this paragraph at a price less than
the option exercise price paid, you will have a capital loss for the difference
between the option exercise price paid and the amount realized on the
disposition of your shares.
If you are subject to U.S. tax and you exercise a nonstatutory stock option,
Wilson Sonsini Goodrich & Rosati, Professional Corporation is of the opinion
that upon exercise you will recognize ordinary income in an amount equal to the
difference between the option exercise price you pay for the shares and the
fair market value on the date of exercise. Your basis will be the fair market
value of such shares on the date of exercise. Upon a taxable disposition of the
Seagate Technology shares you receive in the merger, any gain or loss is
generally treated as capital gain or loss. If at the time of grant of the
option you were an employee of Seagate Technology, Seagate Software or any of
their respective subsidiaries any income recognized upon exercise of your
nonstatutory stock option will constitute wages for which your employer will be
required to withhold taxes.
Canadian Consequences. This section applies to a Canadian resident employee
of Seagate Software or its Canadian subsidiaries who by virtue of such
employment obtained a stock option to acquire Seagate Software common stock. In
the opinion of Ernst & Young LLP, a Canadian resident employee who exercises a
vested option is generally required to include in his or her employment income
the fair market value of the Seagate Software common stock so acquired, as
determined at the time of exercise, less the actual amount paid or to be paid
by the employee to acquire those shares. As a result of the exercise, the tax
basis of the shares so acquired is adjusted to equal the fair market value of
the shares at the time of the exercise. Where you also own other Seagate
Software common stock, the tax basis per share of the Seagate Software common
stock is calculated as the total tax basis of all shares of Seagate Software
common stock you owned divided by the total number of such shares owned.
Where you include in your employment income a benefit from exercising a
stock option as discussed above, an offsetting deduction equal to 25% to the
benefit may be available in computing your taxable income for the year of the
exercise provided certain conditions are met. A Canadian resident employee who
exercises a stock option to acquire Seagate Software common stock should be
entitled to this deduction.
You will be required to pay income tax, Canada Pension Plan premiums or
Quebec Pension Plan premiums on this employment benefit arising from the
exercise of the stock option.
U.K. Consequences.
Options Obtained By Reason Of Employment. In the opinion of Ernst & Young,
where you acquired the options as a director or employee, you will be liable
for U.K. income tax, payable at the time of exercise, on an amount equal to the
excess of the market value on the date of exercise of the options of the
Seagate Software shares acquired as a result of the exercise of the option,
over the amount paid to exercise the option. The amount that is subject to
income tax is added to the cost of the shares acquired upon exercise for
purposes of computing the U.K. capital gains tax, if any, on the subsequent
sale of the shares.
Where options being exercised were granted on or after April 6, 1999, you
will also be liable for National Insurance Contributions up to the monthly
earnings limit.
36
<PAGE>
Any further gain arising on the subsequent sale of the shares will make you
liable for U.K. capital gains tax.
Options Not Obtained By Reason Of Employment. In the opinion of Ernst &
Young, where you did not acquire the options as a director or employee, the
exercise of your options will not result in either a U.K. income tax or U.K.
capital gains tax liability.
Any gain, which equals the excess of sale proceeds over the exercise price,
arising on the subsequent sale of the shares will make you liable for U.K.
capital gains tax.
Accounting Treatment of the Merger
Seagate Software will account for the exchange of shares of its common stock
as the acquisition of a minority interest for Seagate Software common stock
outstanding and vested more than six months held by employees and all stock
held by former employees and consultants. The fair value of the shares of
Seagate Technology issued will be recorded as purchase price and will be
allocated to the assets and liabilities received. It is currently estimated
that the amount of the purchase price to be recorded and allocated will be
approximately $2 million. Seagate Technology will account for the exchange of
shares of its common stock for stock options in Seagate Software held by
employees and stock held and vested by employees less than six months as the
settlement of an earlier stock award. Seagate Technology estimates that the
settlement of earlier stock awards will result in immediate compensation
expense in the period the transaction closes of approximately $216 million.
Regulatory Filings and Approvals Required to Complete the Merger
We are not aware of any license or regulatory permit, other than compliance
with Delaware corporate law and the effectiveness of the Seagate Technology
registration statement for the shares to be issued, material to us that might
be adversely affected by Seagate Technology's acquisition of Seagate Software
common stock as contemplated in the merger. We are also not aware of any
approval or other action by any government or governmental, administrative or
regulatory authority or agency, domestic or foreign, that would be required for
Seagate Technology's acquisition or ownership of Seagate Software common stock
as contemplated by the merger, except with respect to the Hart-Scott-Rodino
Antitrust Improvements Act as discussed below. Should any such approval or
other action be required, we currently contemplate that Seagate Technology or
Seagate Software, as the case may be, will seek such approval or take such
other action. Without limitation to any other approval that may be required, to
the extent that the acquisition of Seagate Technology common stock by any
holder(s) of Seagate Software common stock pursuant to the merger results in
the requirement of Seagate Technology and such holder(s) to file Notification
and Report Forms under the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended, with the Federal Trade Commission and the Antitrust Division
of the Department of Justice, we will file the required Notification and Report
Forms. With respect to any such holder(s) of Seagate Software common stock, the
reorganization could not occur until the waiting period(s) under the Hart-
Scott-Rodino Antitrust Improvement Act of 1976 had expired or been granted
early termination. Until the applicable waiting periods expire, Seagate
Technology would have no obligation under the merger agreement, to complete the
reorganization. We cannot predict whether we may determine that Seagate
Technology is required to delay the completion of the reorganization pending
the outcome of any such matter. There can be no assurance that any such
approval or other action, if needed, would be obtained or would be obtained
without substantial conditions or that the failure to obtain any such approval
or other action might not result in adverse consequences to Seagate Software's
business. Seagate Technology's obligations under the merger agreement are
subject to certain conditions.
37
<PAGE>
RELATED AGREEMENTS
Affiliate Agreements
In connection with the merger, each affiliate will be required to execute an
Affiliate Agreement providing that the affiliate will not sell, transfer or
otherwise dispose of the shares of Seagate Technology Common stock to be
received by that person in the merger (1) except in compliance with the
applicable provisions of the Securities Act of 1933, as amended, and its rules
and regulations; (2) unless counsel representing the affiliate, satisfactory to
Seagate Technology, advises Seagate Technology in a written opinion letter
satisfactory to Seagate Technology and its counsel that no registration under
the Securities Act would be required in connection with the proposed sale,
transfer or other disposition of the affiliate's shares; (3) except pursuant to
a registration statement under the Securities Act covering the Seagate
Technology common stock proposed to be sold, transferred or otherwise disposed
of, describing the manner and terms of the proposed sale, transfer or other
disposition, and containing a current prospectus under the Securities Act that
is effective under the Securities Act; or (4) unless an authorized
representative of the Securities and Exchange Commission has rendered written
advice to the affiliate to the effect that the Securities and Exchange
Commission would take no action with respect to the proposed sale, transfer or
other disposition if consummated.
38
<PAGE>
PRICE RANGE OF SEAGATE TECHNOLOGY COMMON STOCK
Seagate Technology's common stock trades on the New York Stock Exchange
under the symbol "SEG." The price range per share, reflected in the table
below, is the highest and lowest sale prices for Seagate Technology's common
stock as reported by the New York Stock Exchange during each quarter since
Seagate Technology's fiscal year 1997. Seagate Technology's present policy is
to retain its earnings to finance future growth. Seagate Technology has never
paid cash dividends and has no present intention to pay cash dividends. At
August 25, 1999, there were 6,759 stockholders of record of Seagate
Technology's common stock.
<TABLE>
<CAPTION>
High Low
----- -----
<S> <C> <C>
Fiscal 1997:
First Quarter........................................... $ 29 5/16 $ 18 1/16
Second Quarter.......................................... 42 3/4 25 7/8
Third Quarter........................................... 56 1/4 37 3/8
Fourth Quarter ......................................... 54 1/4 32 1/2
Fiscal 1998:
First Quarter........................................... $ 45 3/4 $ 34 1/8
Second Quarter.......................................... 40 5/8 18 7/16
Third Quarter........................................... 27 3/16 17 3/4
Fourth Quarter ......................................... 29 5/8 19 7/16
Fiscal 1999:
First Quarter........................................... $ 27 3/8 $ 16 1/8
Second Quarter.......................................... 34 1/2 19 13/16
Third Quarter........................................... 44 1/4 25 5/8
Fourth Quarter ......................................... 33 1/2 25 5/8
Fiscal 2000:
First Quarter (to August 25, 1999)...................... $ 33 7/8 $ 25 1/8
</TABLE>
On September , 1999, the last sales price of Seagate Technology common
stock, as reported by the New York Stock Exchange, was $ per share.
You should obtain current market quotations for Seagate Technology common
stock. In recent months, the market price of Seagate Technology common stock
has fluctuated substantially due to volatility in the market place. The market
price of Seagate Technology common stock will fluctuate between the date of
this document and the closing date of the merger. We can give you no assurances
concerning the market price of Seagate Technology common stock before or after
the date on which the merger is closed.
39
<PAGE>
DESCRIPTION OF SEAGATE TECHNOLOGY CAPITAL STOCK
The authorized capital stock of Seagate Technology consists of 600,000,000
shares of Seagate Technology common stock, $.01 par value, and 1,000,000 shares
of Seagate Technology preferred stock, $.01 par value.
As of August 25, 1999, there were 215,792,554 shares of Seagate Technology
common stock outstanding held of record by 6,759 registered stockholders.
Subject to preferences that may be applicable to any outstanding Seagate
Technology preferred stock, holders of Seagate Technology common stock are
entitled to receive ratably such dividends as may be declared by the Seagate
Technology board of directors out of funds legally available therefor. Seagate
Technology has not paid any cash dividends on the Seagate Technology common
stock. Each holder of Seagate Technology common stock is entitled to one vote
for each share held of record on all matters submitted to a vote of
stockholders, except that upon giving notice required by law and the bylaws of
Seagate Technology, stockholders may cumulate their votes in the election of
directors. In the event of a liquidation, dissolution or winding up of Seagate
Technology, holders of Seagate Technology common stock are entitled to share
ratably in all assets remaining after payment of liabilities and the
liquidation preference of any outstanding Seagate Technology preferred stock.
Holders of Seagate Technology common stock have no preemptive rights and
have no rights to convert their Seagate Technology common stock into any other
securities and there are no redemption provisions with respect to such shares.
The transfer agent and registrar for the Seagate Technology common stock is
Harris Trust Company of California.
As of August 25, 1999, there were no shares of Seagate Technology preferred
stock outstanding. The Seagate Technology preferred stock may be issued from
time to time in one or more series. The Seagate Technology board has authority
to fix the designation, powers, preferences and rights of each such series and
the qualifications, limitations and restrictions thereon and to generally
increase or decrease the number of shares of such series without any further
vote or action by the stockholders. Seagate Technology has no present plans to
issue any shares of Seagate Technology preferred stock.
40
<PAGE>
COMPARISON OF RIGHTS OF HOLDERS OF SEAGATE SOFTWARE
COMMON STOCK AND SEAGATE TECHNOLOGY COMMON STOCK
In the event that the merger is completed, Seagate Software's stockholders
whose shares of Seagate Software common stock are exchanged in the merger will
become holders of Seagate Technology common stock. Their rights will be
governed by the Seagate Technology certificate of incorporation, the Seagate
Technology bylaws and the laws of the State of Delaware.
Certain differences between the rights of Seagate Software common
stockholders and Seagate Technology stockholders are set forth below. We are
not presenting an analysis of Seagate Software's preferred stock as those
shares are held exclusively by Seagate Technology. As both Seagate Software and
Seagate Technology are organized under the laws of Delaware, these differences
in the rights of common stockholders primarily arise from various provisions of
the Seagate Technology certificate of incorporation, the Seagate Technology
bylaws, the Seagate Software certificate of incorporation and the Seagate
Software bylaws. This summary contains a description of the material
differences in stockholder rights, but is not meant to be relied upon as an
exhaustive list or detailed description of the provisions discussed herein and
is qualified in its entirety by reference to the laws of the State of Delaware,
the Seagate Technology certificate of incorporation, the Seagate Technology
bylaws, the Seagate Software certificate of incorporation and the Seagate
Software bylaws.
Directors
The Seagate Technology bylaws currently provide for a seven member board of
directors. Directors are elected at each annual meeting of stockholders to hold
office until the next annual meeting and until his or her successor is elected
and qualified or until his or her earlier resignation or removal. The Seagate
Software bylaws provide that the number of directors shall be five, which
number may be changed by a bylaw or certificate of incorporation amendment duly
adopted by the Seagate Software board or by the stockholders of Seagate
Software.
Special Meetings
The Seagate Technology bylaws provide that Seagate Technology stockholders
holding shares representing not less than 10% of the outstanding votes entitled
to vote at a stockholders' meeting may call a special meeting of stockholders.
Any stockholder request for a special meeting of stockholders must be in
writing, specifying the time of such meeting and the general nature of the
business proposed to be transacted, and must be delivered to the chairman of
the board, president, any vice president or secretary of Seagate Technology.
Under the Seagate Software bylaws, Seagate Software's stockholders may call
a special meeting of stockholders, provided that one or more of the
stockholders calling for the special meeting, in the aggregate, hold not less
than a majority of the shares entitled to vote at such meeting.
Indemnification
The Seagate Technology certificate of incorporation and the Seagate Software
certificate of incorporation provide that directors will not be personally
liable to their respective companies or stockholders for monetary damages for
breach of their fiduciary duty as directors and shall be indemnified to the
fullest extent authorized by Delaware law. The Seagate Technology bylaws
provide that directors, officers and certain other persons will be indemnified
with respect to third-party actions or suits, provided such person acted in
good faith and in a manner such person reasonably believed to be in or not
opposed to the best interests of Seagate Technology. The Seagate Technology
bylaws further provide that directors, officers and certain other persons will
be indemnified with respect to actions or suits by or in the right of Seagate
Technology, provided that such person
41
<PAGE>
acted in good faith and in a manner such person reasonably believed to be in or
not opposed to the best interests of Seagate Technology; except that no
indemnification shall be made in the event that such person shall be adjudged
to be liable to Seagate Technology, unless a court determines that
indemnification is fair and reasonable in view of all the circumstances. The
Seagate Technology bylaws and the Seagate Software certificate of incorporation
require Seagate Technology and Seagate Software, respectively, to pay all
expenses incurred by a director or officer in defending any proceeding within
the scope of the indemnification provisions as such expenses are incurred in
advance of its final disposition, subject to repayment if it is ultimately
determined that such party was not entitled to indemnity by Seagate Technology
and Seagate Software, respectively. The Seagate Software bylaws provide that
Seagate Software shall indemnify its officers and directors to the fullest
extent authorized by Delaware law and may elect to indemnify its employees and
agents to the fullest extent authorized by Delaware law.
42
<PAGE>
BUSINESS OF SEAGATE TECHNOLOGY
General
Seagate Technology designs, manufactures and markets products for storage,
retrieval and management of data on computer and data communications systems.
These products include disc drives and disc drive components, tape drives and
software.
Seagate Technology designs, manufactures and markets a broad line of rigid
magnetic disc drives for use in computer systems ranging from desktop personal
computers to workstations and supercomputers as well as in multimedia
applications. Seagate Technology's products currently include rigid disc drive
models in the 3.5 inch form factor with capacities ranging from 2 gigabytes
("GB") to 50 GB. Seagate Technology sells its products to OEMs for inclusion in
their computer systems or subsystems, and to or through distributors,
resellers, dealers, system integrators and retailers. Seagate Technology has
pursued a strategy of vertical integration and accordingly designs and
manufactures rigid disc drive components including recording heads, discs, disc
substrates, and motors. It also assembles certain of the key subassemblies for
use in its products including printed circuit board and head stack assemblies.
Seagate Technology's products are currently manufactured offshore with limited
production in the United States.
In addition to its core product line of rigid disc drives and related
components, Seagate Technology has broadened its strategy to more fully address
the markets for storage, retrieval and management of data. In line with this
broadened strategy, Seagate Technology has made the following investments:
In July 1994, Seagate Technology began investing in Dragon Systems, Inc., a
developer of speech and language technology, including speech recognition
software.
In December 1994, Seagate Technology acquired Applied Magnetics
Corporation's tape head subsidiary, a manufacturer of magnetic recording heads
for tape drives.
In February 1996, Seagate Technology added tape drives to its product line
as a result of its merger with Conner Peripherals, Inc. ("Conner").
In June 1997, Seagate Technology began investing in Gadzoox Networks, Inc.,
a manufacturer of Fibre Channel based storage network connectivity products.
In August 1997, Seagate Technology acquired Quinta Corporation, a developer
of optically assisted Winchester disc drives.
In April 1999, Seagate Technology invested in iCompression, a developer of
real time MPEG-2 video and audio compression technology.
Seagate Technology has also invested in, and currently intends to continue
investigating opportunities to invest in software businesses.
Seagate Technology anticipates that its broadened strategy may include
additional acquisitions of, investments in and strategic alliances with
complementary businesses, products and technologies to enable lower cost per
megabyte, faster time to market, increased capacity, and better performance
characteristics for its products. Seagate Technology's strategy includes
acquiring companies that possess technology and development personnel which
provide long-term growth potential to Seagate Technology's business.
In connection with Seagate Technology's broadened strategy, two new
organizations were formed to specifically address new market opportunities. In
April 1999 Seagate Technology formed a Consumer Solutions organization. The
group will work with Seagate's product sites to deliver innovative solutions
for storage intensive consumer applications by combining Seagate Technology's
expertise in storage technology with the
43
<PAGE>
development of core competencies and intellectual properties in audio/visual
("A/V") recording, home networking, satellite and cable communications. In May
1999 Seagate Technology announced the establishment of its Intelligent Storage
Platforms group, an organization which will leverage Seagate Technology's
leadership in network and server storage to deliver innovative solutions for
new network computing applications. These solutions will combine hardware,
software and services to provide new products for Seagate Technology's existing
OEM and strategic distributor customer base and address the needs of emerging
markets for storage and storage-related applications.
Additionally, to drive the development of next generation storage
applications throughout the industry, in April 1999 Seagate Technology
announced the formation of Seagate Technology Investments, Inc. This
subsidiary, acting as a venture fund, will provide seed capital and first round
financing to software, services and hardware companies creating and developing
complementary technologies in storage-intensive applications. Seagate intends
to invest side-by-side with venture capital investment firms.
Rigid Disc Drive Technology
Magnetic disc drives are used in computer systems to record, store and
retrieve digital information. Most computer applications require access to a
greater volume of data than can economically be stored in the random access
memory of the computer's central processing unit (commonly known as
"semiconductor" memory). This information can be stored on a variety of storage
devices, including rigid disc drives, both fixed and removable, flexible disc
drives, magnetic tape drives, optical disc drives and semiconductor memory.
Rigid disc drives provide access to large volumes of information faster than
optical disc drives, flexible disc drives or magnetic tape drives and at
substantially lower cost than high-speed semiconductor memory.
Although products vary, all rigid disc drives incorporate the same basic
technology. One or more rigid discs are attached to a spindle assembly that
rotates the discs at a high constant speed around a hub. The discs (also known
as recording media or disc media) are the components on which data is stored
and from which it is retrieved. Each disc typically consists of a substrate of
finely machined aluminum or glass with a magnetic layer of a "thin-film"
metallic material.
Rigid disc drive performance is commonly measured by five key
characteristics: average seek time (commonly expressed in milliseconds), which
is the time needed to position the heads over a selected track on the disc
surface; media data transfer rate (commonly expressed in megabytes per second),
which is the rate at which data is transferred to and from the disc; storage
capacity (commonly expressed in megabytes or gigabytes), which is the amount of
data that can be stored on the disc; spindle rotation speed (commonly expressed
in revolutions per minute), which has an effect on speed of access to data; and
interface transfer rate (commonly expressed in megabytes per second), which is
the rate at which data moves between the disc drive and the computer
controller.
Read/write heads, mounted on an arm assembly similar in concept to that of a
record player, fly extremely close to each disc surface and record data on and
retrieve it from concentric tracks in the magnetic layers of the rotating
discs.
Upon instructions from the drive's electronic circuitry, a head positioning
mechanism (an "actuator") guides the heads to the selected track of a disc
where the data will be recorded or retrieved. The disc drive communicates with
the host computer through an internal controller. Disc drive manufacturers may
use one or more of several industry standard interfaces, such as SCSI (Small
Computer System Interface), ATA (Advanced Technology Architecture), and FC-AL
(Fibre Channel--Arbitrated Loop).
Areal density is a measure of storage capacity per square inch on the
recording surface of a disc. It represents the number of bits of information on
a linear inch of the recording track (specified in bits per inch or bpi)
multiplied by the number of recording tracks on a radial inch of the disc.
Current areal densities are sufficient to meet the requirements of most
applications today. However, the long-term demand for increased
44
<PAGE>
drive capacities is expected to increase at an accelerating rate since sound
and moving pictures require many times the storage capacity of simple text.
Seagate Technology has and continues to aggressively pursue a range of
technologies to increase areal densities across the entire range of its
products not only to increase drive capacities, but to allow the elimination of
components at a stated capacity as areal density increases, thus reducing
costs. As a result, Seagate drives today use advanced signal processing
techniques such as PRML (Partial Response Maximum Likelihood) read/write
channels, advanced servo systems, higher precision mechanics and advanced head
technologies. To attain greater areal densities, Seagate Technology currently
incorporates magneto-resistive ("MR") heads into its disc drives and is in the
process of transitioning to giant magneto-resistive ("GMR") heads. MR and GMR
heads have discrete read and write structures which take advantage of special
magnetic properties in certain metals to achieve significantly higher storage
capacities. There can be no assurance that Seagate Technology's GMR head
development effort will continue to be successful. See "--Product Development."
Market Overview
Rigid disc drives are used in a broad range of computer systems as well as
for multimedia applications. Seagate Technology defines the major computer
system markets to include mobile computers, desktop personal computers,
workstation systems and server/multi-user systems. Users of computer systems
are increasingly demanding additional data storage capacity with higher
performance in order to (i) use more sophisticated applications software,
including database management, CAD/CAM/CAE, desktop publishing, video editing
and enhanced graphics applications and (ii) operate in multi-user, multitasking
and multimedia environments. There is also a large and growing market for
ultra-low cost personal computers. Additionally, there is a sizable market for
rigid disc drives in the existing installed base of computer systems, some of
which require additional storage capacity. These requirements for storage
upgrades can be served through authorized distribution channels. There is also
an emerging market for consumer appliances (Digital video recorders, sub-$500
PCs, Internet appliances and set-top boxes). This market requires mainstream to
low performance at low cost.
Personal Computers--Desktop and Mobile
Desktop and portable personal computers are used in a number of
environments, ranging from homes to businesses and multi-user networks.
Software applications are primarily word processing, spreadsheet, desktop
publishing, database management, multimedia, Internet caching, digital photos,
games, audio/video applications and other related applications. Seagate
Technology believes the minimum storage requirements in the past year for
entry-level personal computers were generally 2 GB to 4.3 GB of formatted
capacity with seek times in the sub-11 millisecond ("msec") range. The entry
level capacities continue to increase. In addition, users of personal computers
have become increasingly price sensitive. Seagate Technology's objective for
the personal computer market is to design drives for high-volume, low-cost
manufacturing.
Seagate divides the desktop market into three segments: entry-level,
mainstream and high performance. Seagate Technology designs and manufactures
drives for each of these segments, as follows: U-series drives for the entry
level market segment, Medalist and Barracuda ATA drives for the mainstream
market segments and Barracuda ATA drives for the high performance segment.
Smaller footprint systems, such as mobile, laptop, notebook and
ultraportable computers require rigid disc drives in form factors of less than
3.5 inches that emphasize durability and low power consumption in addition to
capacity and performance characteristics found in their desktop functional
equivalents. Personal digital assistants, hand-held and pen-based computers may
use 1.8 inch or 2.5 inch hard disc drives or flash memory such as a PCMCIA card
for additional memory. These mobile applications also emphasize low power
consumption as well as very high degrees of durability. Seagate Technology
discontinued production of disc drives in form factors of less than 3.5 inches
in January 1998. However, Seagate Technology is continuing research and
development in this area and intends to reenter this market at a future date.
45
<PAGE>
Workstation Systems
Workstation systems include high performance microcomputers, technical
workstations, servers and minicomputers. Applications are characterized by
compute-intensive and data-intensive solutions, such as CAD/CAM/CAE, network
management, larger database management systems, scientific applications and
small to medium-sized business applications such as materials requirement
planning, payroll, general ledger systems and related management reports.
Workstation systems typically require rigid disc drive storage capacities of
9 GB and greater per drive, average seek times of 8 msec or less and rotation
speeds of 7,200 rpm to 10,000 rpm. Due to the leading edge characteristics
required by end-users of workstation systems, manufacturers of such systems
emphasize performance as well as price as the key selling points.
Server/Multi-user Systems
Large systems include mainframes and supercomputers. Typical applications
are medium and large business management systems, transaction processing,
parallel processing and other applications requiring intensive data
manipulation.
Users of these systems generally require capacities of 9 GB and greater per
drive with average seek times of 8 msec or less and rotation speeds of 7,200
rpm to 10,000 rpm. End-users of large systems tend to be less concerned than
users of smaller systems with the size, weight, power consumption and absolute
cost of the drive. As with workstation systems, disc drive products are
typically designed into these systems by the OEM with emphasis on performance,
reliability and capacity. In this market segment, data storage subsystems are
used containing large numbers of disc drives. Because data integrity is
paramount, high device reliability and maintainability are key features.
Mainframe and supercomputer systems also benefit from very high data transfer
rates (up to ten times that in small computer systems).
Users of these systems may also utilize redundant arrays of inexpensive disc
drives ("RAID"). A RAID combines multiple small drives into an array of disc
drives which yield performance equal to or exceeding a single high performance
drive. The array of drives appears to the computer as a single storage drive.
Products
Rigid Disc Drives
Seagate Technology produces a broad line of rigid disc drives in the 3.5
inch form factor with capacities ranging from 2 GB to 50 GB. Seagate Technology
provides more than one product at some capacity points and differentiates
products on a price/performance and form factor basis. Seagate Technology
believes that its broad range of rigid disc drives is particularly appealing to
customers, such as large OEMs, which require a wide variety of drive
capacities, performance levels and interfaces. Producing for several market
segments also broadens Seagate Technology's customer base and reduces Seagate
Technology's reliance on any one segment of the computer market. Seagate
Technology continues to devote its resources to developing products with
industry leading performance characteristics and to being among the first to
introduce such products to market. Seagate Technology continuously seeks to
enhance its market presence in emerging segments of the rigid disc drive market
by drawing on its established capabilities in high-volume, low-cost production.
Seagate Technology believes it offers the broadest range of disc storage
products available. See "Product Development."
Mobile Computing
In January 1998, Seagate Technology discontinued production of 2.5 inch disc
drives for the mobile computer market due to intense competition resulting in a
substantial loss of market share. The design center for mobile drives in San
Jose, California was closed and relocated to Longmont, Colorado. Seagate
Technology is continuing research and development for mobile products and
intends to reenter this market at a future date.
46
<PAGE>
Desktop Computing
In fiscal 1999, which ended on July 2, 1999, Seagate Technology continued to
introduce new disc drive products for the desktop computing market. Seagate's
desktop products are all industry standard 3.5 inch form factor, 1 inch high
drives.
In June 1998, Seagate announced the U2 to address the entry-level personal
computer ("PC") market and began volume production in the first fiscal quarter
of 1999. This drive provides 2.1 GB of storage capacity at 4500 rpm, with an
Ultra ATA interface. Seagate Technology also produces a two disc, 4 GB version
of the U2.
In the first fiscal quarter of 1999, Seagate began production of the
Medalist 10240 family of products for entry and mainstream PC markets. This
product family featured a rotation speed of 5400 rpm, low acoustics, Ultra ATA
interface, and Seagate's exclusive SeaShield to protect the PCB from handling
and electrostatic damage. Products included the 10.2 GB Medalist 10240, the 8.6
GB Medalist 8641, the 6.5 GB Medalist 6531, the 3.2 GB Medalist 3221, and the
2.5 GB Medalist 2510.
In the second fiscal quarter of 1999, Seagate began volume production of the
Medalist 13640 family of products for the entry and mainstream desktop market
segments. This product family had similar features to the Medalist 10240
family, but significantly better performance and higher capacities. Products
included the 13.6 GB Medalist 13640, the 10.2 GB Medalist 10230, the 6.4 GB
Medalist 6422, and the 3.2 GB Medalist 3210.
In the third fiscal quarter of 1999, Seagate began volume production of the
Medalist 17240 family of products for the mainstream PC market segment. This
product family features a rotation speed of 5400 rpm, low acoustics, Ultra ATA
interface, and Seagate's exclusive expanded SeaShield System to protect the
drive and ease installation. Products include the 17.2 GB Medalist 17240, the
13.0 GB Medalist 13030, the 8.4 GB Medalist 8420, and the 4.3 GB Medalist 4310.
In the third fiscal quarter of 1999, Seagate announced two new product
families: the Medalist 17242 family for mainstream and high performance desktop
PCs, and the U4 for the entry-class desktop segment. Both families commenced
volume production in the fourth fiscal quarter of 1999.
The Medalist 17242 family features 5400 rpm, numerous performance
enhancements, low acoustics, Ultra ATA/66 interface, and Seagate's exclusive
expanded SeaShield System. The family includes the 17.2 GB Medalist 17242, the
13.0 GB Medalist 13032, the 8.4 GB Medalist 8422, and the 4.3 GB Medalist 4312.
The U4 product family of low cost disc drives features 5400 rpm, Ultra
ATA/66 interface, low acoustics, and Seagate's soft SeaShield cover for
additional handling protection. Storage capacities for the U4 products include
8.4 GB, 6.4 GB, 4.3GB, and 2.1 GB.
In the fourth fiscal quarter of 1999, Seagate announced its new Barracuda
ATA product family for mainstream and high performance desktop market segments,
scheduled for production commencing in the first fiscal quarter of 2000. This
product family features 7200 rpm performance, Ultra ATA/66 interface,
SeaShield, G-Force Protection for Desktop enhancements to increase durability,
and Drive Self Test in the firmware. Products include the 28 GB Barracuda ATA
28040, the 20.4 GB Barracuda ATA 20430, the 13.6 GB Barracuda ATA 13620, the
10.2 GB Barracuda ATA 10220, and the 6.8 GB Barracuda ATA 6810.
Workstation Systems
In fiscal year 1999, Seagate Technology introduced a new product in the
7,200 rpm Barracuda family targeted at the Workstation market, the Barracuda
18LP. The Barracuda 18LP is an 18.2 GB formatted capacity, mainstream-
performance drive in the low-profile form factor. The Barracuda 18LP is
designed to provide a balance of price and performance for the workstation
market. Volume production of the Barracuda 18LP began in the fourth quarter of
fiscal 1999.
47
<PAGE>
In fiscal year 1999, Seagate Technology introduced a new product in the
10,000 rpm Cheetah family targeted at the high performance segment of the
Workstation market, the Cheetah 18LP. The Cheetah 18LP is an 18.2 GB formatted
capacity, high performance drive in the low-profile form factor. Volume
production of the Cheetah 18LP began in the fourth quarter of fiscal 1999.
Server/Multi-user Systems
High-end applications include high-end file servers, minicomputers,
mainframes and supercomputers. The Barracuda 36, a 36.4 GB formatted capacity
drive, is the fourth generation of disc drives in the Barracuda family. The
Barracuda 36 began volume production in the first quarter of fiscal 2000. The
Barracuda 18LP discussed under "Workstation Systems" above, is also used in
server/multi-user systems. In addition, Seagate Technology began volume
production in the fourth quarter of fiscal 1999 of the Barracuda 50. This drive
has a formatted capacity of 50 GB and is targeted at the Enterprise Server
market where high capacity is critical.
In fiscal 1999, Seagate Technology announced another generation of the 3.5
inch Cheetah family, with spindle rotation speeds of 10,000 rpm, formatted
capacities of 18.2 GB and 36.4 GB, and read/seek times of 5.2 msec and 5.7
msec. This drive family is focused on the high performance segment of the
server market. The Cheetah 18LP and the Cheetah 36 are the third generation of
10,000 rpm drives. Volume production of these drives began in the fourth
quarter of fiscal 1999 and first quarter of fiscal 2000, respectively. Both
drives have data transfer rates up to 80 megabytes ("MB") per second with the
Ultra2 SCSI interface or 100 MB per second with the Fibre Channel interface.
The Barracuda and Cheetah families utilize industry leading technologies
such as MR heads, PRML channels, embedded servo and laser textured media.
Tape Drives
Tape drives are peripheral hardware devices which enable low cost storage
and protection of large volumes of data through the use of small tape
cartridges. Computer systems of all types increasingly need dedicated backup
storage peripherals that combine high capacity, high performance, low cost and
reliability. Seagate markets a broad line of Travan, Digital Audio Tape
("DAT"), and Advanced Intelligent Tape ("AIT") drives and autoloaders with
capacities of up to 200 GB for a wide range of backup and removable storage
needs. Seagate Technology currently produces backup solutions for market
segments from high performance workstations to midrange servers. Seagate
Technology offers tape products through a variety of channels including OEMs,
distributors, VARs, resellers and system integrators. Seagate Technology works
closely with OEMs to customize storage solutions that meet their customers'
needs.
Hornet Travan Drives
To meet the backup requirements of small servers and Windows NT
workstations, Seagate's Hornet Travan drives have capacities of up to 20 GB on
a single low-cost removable cartridge. Hornet Travan products are available
with either SCSI or IDE interfaces. To better suit the backup needs of the
small PC server market, Seagate offers the Hornet Travan Network Series (NS)
products with read-while-write technology and hardware data compression. The
Hornet Travan drives are manufactured by Seagate in Singapore.
Scorpion DAT Drives
Scorpion(R) DAT drives and autoloaders with capacities of up to 96 GB are
suited for a wide range of platforms including large PC servers and Unix
workstations. Seagate has a long history of producing DAT drives for this
market segment. Recently, Seagate announced the Scorpion 40 DDS-4 drive which
offers up to 40 GB of storage with compression on a single DDS-4 cartridge. The
Scorpion DAT drives are manufactured for Seagate by Matsushita-Kotobuki
Electronics Industries, Ltd. ("MKE") in Japan.
48
<PAGE>
Sidewinder AIT Drives
Seagate's Sidewinder AIT drives and autoloaders offer high data integrity,
reliability and performance for larger servers and tape libraries. Seagate's
stand alone drive, the Sidewinder 50, offers up to 50 GB of capacity while the
Sidewinder 200 autoloader offers up to 200 GB of storage on four AIT tapes. AIT
offers many performance advantages over competing technologies such as fast
cartridge load and file access times, a thorough self-cleaning head and durable
AME (Advanced Metal Evaporation) media. In addition, Sidewinder drives are
available in both external and compact internal form factors for easy
integration. Sidewinder drives are currently manufactured for Seagate by Sony.
Linear Tape Open (LTO)
Seagate, Hewlett-Packard and IBM, created Linear Tape-Open (LTO) technology,
a powerful, scaleable, open tape architecture that is expected to meet the
growing storage demands of midrange to enterprise-class servers with up to 200
GB of data per cartridge. Seagate Technology anticipates that in fiscal year
2000 LTO will be open for licensing to vendors in two formats based on the
technology: Ultrium, a 200 GB product for high-capacity needs and Accelis, a
fast-access, dual-reel implementation that will offer data retrieval in under
10 seconds.
Other Products
Seagate Technology offers warranty and out-of-warranty repair service to
users of its disc and tape drives. Seagate Technology also offers software
products directed towards the client/server and network computing environments.
See "Business of Seagate Software."
Marketing and Customers
Seagate Technology sells its products primarily to OEMs and distributors.
OEM customers incorporate Seagate drives into computer systems for resale. OEMs
either manufacture and assemble computer system components into computer
systems, purchase components to build their systems, or purchase complete
computer systems and integrate the drives and other hardware and software.
Distributors typically sell Seagate disc drives to small OEMs, dealers, system
integrators and other resellers. Certain resellers to which Seagate Technology
directly sells its products also resell Seagate drives as part of enhanced
packages (e.g., an add-on kit for a computer or as part of their own
computers). Shipments to OEMs were 65%, 65% and 71% of disc drive revenue in
fiscal 1999, 1998 and 1997, respectively. Sales to Compaq Computer Corporation
accounted for approximately 17%, 13% and 11% of Seagate Technology's
consolidated revenue in fiscal 1999, 1998 and 1997, respectively. No other
customer accounted for 10% or more of consolidated revenue in 1999, 1998 or
1997.
OEMs
OEM customers typically enter into purchase agreements with Seagate
Technology. These agreements provide for pricing, volume discounts, order lead
times, product support obligations and other terms and conditions, usually for
periods of 12 to 24 months, although product support obligations generally
extend substantially beyond this period. These master agreements typically do
not commit the customer to buy any minimum quantity of products. Deliveries are
scheduled only after receipt of purchase orders. In addition, with limited lead
time, customers may cancel or defer most purchase orders without significant
penalty. Anticipated orders from many of Seagate's customers have in the past
failed to materialize or OEM delivery schedules have been deferred or altered
as a result of changes in their business needs, such as extensive use of just-
in-time warehouse locations. Such order fluctuations and deferrals have had a
material adverse effect on Seagate Technology's operations in the past, and
there can be no assurance that Seagate Technology will not experience such
adverse effects in the future.
49
<PAGE>
Distributors
In the third quarter of fiscal 1999, Seagate Technology launched its
Distribution Partnership Program. Under this program, Seagate Technology has
selected a limited number of key distributors, predominately in North America
with which it will jointly develop marketing programs targeted at value-added
resellers ("VARs"), resellers and systems integrators. Shipments to these key
distributors are on a consignment basis whereby Seagate Technology's inventory
held by these distributors is still owned by Seagate Technology and Seagate's
revenue recognition is delayed until the product is utilized by the distributor
to fill an end-user order.
Seagate Technology's distributors outside of North America generally enter
into non-exclusive agreements for the redistribution of Seagate Technology's
products. They typically furnish Seagate Technology with a non-binding
indication of their near-term requirements and product deliveries are generally
scheduled based on a weekly confirmation by the distributor of its requirements
for that week. The agreements typically provide the distributors with price
protection with respect to their inventory of Seagate drives at the time of a
reduction by Seagate in its selling price for the drives, and also provide
limited rights to return the product.
Service and Warranty
Seagate warrants its products against defects in design, materials and
workmanship by Seagate Technology generally for one to five years depending
upon the capacity category of the drive, with the higher capacity products
being warranted for the longer periods. During fiscal 1999, Seagate Technology
began to relocate its customer service operations in Singapore, Scotland and
Costa Mesa, California to Reynosa, Mexico. Seagate Technology's products are
refurbished or repaired at its facilities located in Oklahoma City, Oklahoma,
Singapore, Malaysia and Mexico.
Sales Offices
Seagate Technology maintains sales offices throughout the United States and
in Australia, England, France, Germany, Hong Kong, Ireland, Japan, Singapore,
Spain, Sweden, Switzerland, Taiwan and the United Kingdom. Foreign sales are
subject to certain controls and restrictions, including, in the case of certain
countries, approval by the office of Export Administration of the United States
Department of Commerce and other United States governmental agencies.
Backlog
In view of customers' rights to cancel or defer orders with little or no
penalty, Seagate Technology believes backlog in the disc drive industry may be
misleading. Seagate Technology's backlog includes only those orders for which a
delivery schedule has been specified by the customer. Substantially all orders
shown as backlog at July 2, 1999 were scheduled for delivery within six months.
Because many customers place large orders for delivery throughout the year, and
because of the possibility of customer cancellation of orders or changes in
delivery schedules, Seagate Technology's backlog as of any particular date is
not indicative of Seagate Technology's potential sales for any succeeding
fiscal period. Seagate Technology's order backlog at July 2, 1999 was
approximately $862 million compared with approximately $793 million at July 3,
1998.
Manufacturing
Seagate Technology's business objectives require it to establish
manufacturing capacity in anticipation of market demand. The key elements of
Seagate Technology's manufacturing strategy are: high-volume, low-cost assembly
and test; vertical integration in the manufacture of selected components; and
establishment and maintenance of key vendor relationships. The highly
competitive disc drive industry requires that Seagate Technology manufacture
significant volumes of high-quality drives at low per unit cost. To do this,
Seagate Technology must rapidly achieve high manufacturing yields and obtain
uninterrupted access to high-quality components in required volumes at
competitive prices.
50
<PAGE>
Manufacturing of Seagate Technology's rigid disc drives is a complex
process, requiring a "clean room" environment, the assembly of precision
components within narrow tolerances and extensive testing to ensure
reliability. The first step in the manufacturing of a rigid disc drive is the
assembly of the actuator mechanism, heads, discs, and spindle motor in a
housing to form the head-disc assembly (the "HDA"). The assembly of the HDA
involves a combination of manual and semiautomated processes. After the HDA is
assembled, a servo pattern is magnetically recorded on the disc surfaces. Upon
completion, circuit boards are mated to the HDA and the completed unit is
thoroughly tested prior to packaging and shipment. Final assembly and test
operations of Seagate Technology's disc drives take place primarily at
facilities located in Singapore, Malaysia, China, Minnesota and Oklahoma.
Subassembly and component operations are performed at Seagate Technology's
facilities in Singapore, Malaysia, Thailand, Minnesota, California, Northern
Ireland, and Mexico. In addition, independent entities manufacture or assemble
components for Seagate Technology in the United States, Europe and various Far
East countries including Hong Kong, Japan, Korea, China, the Philippines,
Singapore, Malaysia, Taiwan and Thailand.
Seagate Technology believes that it must continue to develop automated
manufacturing processes in order to remain competitive. In this regard, Seagate
Technology selectively evaluates which steps in the manufacturing process would
benefit from automation. There can be no assurance that Seagate Technology's
efforts to develop and improve its automated manufacturing processes will be
successful. Any failure of Seagate Technology to continue to develop and
improve its automated manufacturing processes could have a material adverse
effect on Seagate Technology's business.
The cost, quality and availability of certain components including recording
heads, media, ASICs (application specific integrated circuits), spindle motors,
actuator motors, printed circuit boards and custom semiconductors are critical
to the successful production of disc drives. Seagate Technology's design and
vertical integration have allowed it to internally manufacture substantial
percentages of its critical components other than ASICs and motors. Seagate
Technology's objectives of vertical integration are to maintain control over
component technology, quality and availability, and to reduce costs. Seagate
Technology believes that its strategy of vertical integration gives it an
advantage over other disc drive manufacturers. However, this strategy entails a
high level of fixed costs and requires a high volume of production to be
successful. During periods of decreased production, these high fixed costs in
the past have had and in the future could have a material adverse effect on
Seagate Technology's results of operations.
All three primary stages of manufacturing for both MR and GMR recording
heads are carried out at Seagate Technology's facilities. These three stages
are wafer production, slider fabrication and head gimbal assembly. While the
majority of its requirements for magnetic recording heads are produced
internally, Seagate Technology purchases up to 20% of its heads from third
party suppliers to afford it access to the widest possible head technology
available. However, Seagate Technology plans to continue to manufacture the
majority of its head requirements internally. For disc, or media, production
Seagate Technology purchases aluminum substrate blanks from third parties
mainly in Japan. These blanks are machined, plated and polished to produce
finished substrates at Seagate Technology's plants in California, Mexico and
Northern Ireland. Seagate Technology's media manufacturing plants in California
and Singapore put these substrates through the manufacturing processes
necessary to deposit the magnetic storage layer, the protective carbon overcoat
and the lubricant as well as to achieve the proper degree of final surface
smoothness and also carry out the quality assurance activities necessary to
deliver finished media to Seagate's disc drive manufacturing plants. Seagate
Technology's internal media manufacturing operations supply the majority of its
needs for media but media is also purchased from third party suppliers located
in the U.S. and the Far East. Spindle motors are sourced principally from
outside vendors in the Far East. Seagate Technology participates in the design
of all of its ASICs for motor and actuator control. It designs all or part of
many of the other ASICs in the drive such as interface controllers, read/write
channels and pre-amplifiers, and procures these from third parties. The vast
majority of the high-volume surface-mount printed circuit assemblies are
assembled internally. Seagate Technology evaluates the need for second sources
for all of its components on a case-by-case basis and, where it is deemed
desirable and feasible to do so, secures multiple sources. Seagate Technology
has experienced
51
<PAGE>
production delays when unable to obtain sufficient quantities of certain
components or assembly capacity. Seagate Technology attempts to maintain
component inventory levels adequate for its short-term needs. However, an
inability to obtain essential components, if prolonged, would adversely affect
Seagate Technology's business.
Because of the significant fixed costs associated with the manufacture of
its products and components and the industry's history of declining prices,
Seagate Technology must continue to produce and sell its disc drives in
significant volume, continue to lower manufacturing costs and carefully monitor
inventory levels. Toward these ends, Seagate Technology continually evaluates
its components and manufacturing processes as well as the desirability of
transferring volume production of disc drives and related components between
facilities, including transfer overseas to countries where labor costs and
other manufacturing costs are significantly lower than in the U.S., principally
Singapore, Thailand, Malaysia and China. Frequently, transfer of production of
a product to a different facility requires qualification of such new facility
by certain of Seagate Technology's OEM customers. There can be no certainty
that such changes and transfers will be implemented on a cost-effective basis
without delays or disruption in Seagate Technology's production and without
adversely affecting Seagate Technology's results of operations.
Offshore operations are subject to certain inherent risks, including delays
in transportation, changes in governmental policies, tariffs, import/export
regulations, and fluctuations in currency exchange rates in addition to
geographic limitations on management controls and reporting. There can be no
assurance that the inherent risks of offshore operations will not adversely
effect Seagate Technology's future operating results. During fiscal 1998,
several Far East currencies significantly declined in value relative to the
U.S. dollar. As a result during fiscal 1998, Seagate Technology was required to
mark-to-market a portion of its foreign currency forward exchange contracts
that it had taken out as a hedge of these currencies and recorded a $76 million
charge against income. As of July 3, 1998, Seagate Technology had effectively
closed out all of its foreign currency forward exchange contracts by purchasing
offsetting contracts. During fiscal 1999 Seagate Technology temporarily ceased
its foreign currency hedging program and as of July 2, 1999, Seagate Technology
had no outstanding foreign currency forward exchange or purchased currency
option contracts. See "Seagate Technology--Management's Discussion and Analysis
of Financial Condition and Results of Operations--Disclosures about Market
Risk." Certain of the Far East countries in which Seagate Technology operates
have experienced political unrest and Seagate Technology's operations have been
adversely affected for short periods of time.
Product Development
Seagate Technology's strategy for new products emphasizes developing and
introducing on a timely and cost effective basis products that offer
functionality and performance equal to or better than competitive product
offerings. The rigid disc drive industry is characterized by ongoing, rapid
technological change, relatively short product life cycles and rapidly changing
user needs. Seagate Technology believes that its future success will depend
upon its ability to develop, manufacture and market products which meet
changing user needs, and to successfully anticipate or respond to changes in
technology and standards on a cost-effective and timely basis. Accordingly,
Seagate Technology is committed to the development of new component
technologies, new products, and the continuing evaluation of alternative
technologies.
Seagate Technology develops new disc drive products and the processes to
produce them at four locations: Longmont, Colorado; Oklahoma City, Oklahoma;
Shakopee, Minnesota; and Singapore. Generally speaking, Longmont and Singapore
are responsible for development of 3.5 inch form factor drives intended for
desktop personal computer systems; Oklahoma City is responsible for development
of 3.5 inch disc drives with capacities and interfaces intended for use in
minicomputers, supermicrocomputers, workstations and file servers; and Shakopee
is responsible for 3.5 inch products principally intended for use in systems
ranging from workstations and superminicomputers to mainframe and
supercomputers. Development of 2.5 inch form factor drives intended for mobile
personal computers is also conducted in Longmont although Seagate Technology
does not currently manufacture such form factors for sale to the marketplace.
52
<PAGE>
Seagate Technology is increasing its focus on research and development and
has realigned its disc drive development process. This structured new product
development process is designed to speed new products to market through
predictable and repeatable methodologies. In 1998 Seagate established a
research facility based in Pittsburgh, PA. The vision of Seagate Research is
dedicated to extending the limits of magnetic and optical recording and
exploring alternative data storage technologies. Seagate also has an Advanced
Concepts program which focuses Seagate Technology's disc drive and component
research efforts into three areas that specialize in developing and staging
advanced technologies for future data storage products. The three areas are
recording subsystems including heads and media, market specific product
technology, and technology focused towards new business opportunities.. The
primary charter of Advanced Concepts is to ensure timely availability of mature
component and subsystem technologies to Seagate Technology's product
development teams and allow Seagate Technology to leverage and coordinate those
technologies across products. With Advanced Concepts focused on technology
staging and a consistent product development process, Seagate Technology is
beginning to see significant improvements in delivery of innovative time-to-
market products.
Seagate Technology believes that vertical integration in strategic
technologies is a key competitive advantage to maintaining a leadership
position in today's rapidly changing markets. Seagate Technology has focused
its component research and development efforts in four main areas: heads,
media, motors and ASICs. The major emphasis of this research and development
effort is higher capacity, reduced size and power consumption, improved
performance and reliability, and reduced cost.
Seagate Technology's head research and development efforts are focused on
increasing recording densities, reducing the size and mass of the slider,
developing microactuator suspensions and assembly technology for reduced head
size, reducing the cost and increasing the reliability. This research and
development includes substantial effort to develop and manufacture MR and GMR
heads and advanced air bearing sliders for high areal density and small form
factor products. There can be no assurance that Seagate Technology's head
development efforts will be successful and a failure of Seagate Technology to
successfully manufacture and market products incorporating its advanced head
technology in a timely manner could have a material adverse effect on Seagate
Technology's business and results of operations.
Media research and development is primarily related to achieving higher
areal densities consistent with the efforts undertaken in the head operations
of Seagate Technology as well as developing the capability to produce media of
reduced dimensions from those of current main-stream products. These media
research and development efforts are subdivided into several main approaches to
achieving these goals: developing smoother, flatter substrates that permit
lower head flying heights; developing thinner, smaller-diameter substrates to
support development of physically smaller disc drives; developing improved
magnetic storage alloys, overcoat materials and surface lubricants that permit
higher coercivities and improved electromagnetic performance while providing
enhanced wear and reliability performance; and, finally, developing enhanced
substrate and media manufacturing processes that allow Seagate Technology to
implement the results of its other developments while increasing the
consistency and reducing the cost of producing high performance magnetic
storage media. As a consequence of these efforts, Seagate Technology reviews,
on an on-going basis, not only new versions and smaller size versions of the
industry-standard aluminum and glass substrates but also substrates of
alternative materials. Seagate Technology experiments with the elemental
content of the storage alloys and overcoat materials and the sputtering
processes used to deposit them. Seagate Technology evaluates different
lubricants and pursues variations in the techniques used to obtain the proper
degree of surface smoothness including both mechanical and other processes.
There can be no assurance that Seagate Technology's media development efforts
will be successful.
ASIC development has been and will continue to be focused on optimizing the
product architecture for system performance, cost and reliability. Some
specific areas of focus are reducing the number of parts, reducing power
consumption and increasing areal densities by use of advanced signal processing
techniques.
The disc drive spindle motor is becoming an increasingly critical component
as disc drive technology continues to increase track density at an accelerating
rate and spindle speeds approach the reliability limits of
53
<PAGE>
ball bearings. Seagate Technology's research and development investment in
motor technology has made it a leader in the design of fluid dynamic bearing
motors for disc drives. Seagate Technology remains today the only disc drive
company shipping these advanced spindle motors since their introduction over a
year ago. The principal areas of research and development relating to spindle
motors are lower power requirements, reduced noise level, improved reliability
and reduced cost. The motor design and development center is located in Scotts
Valley, California.
Seagate recently embarked on a significant change in its approach to process
development. Consistent with the formation of the Advanced Concepts group in
Development Engineering, Seagate Technology has formed an Advanced
Manufacturing group in Manufacturing Engineering. The primary focus is best-in-
class operational performance. This new group will focus the efforts of the
process development groups within Seagate Technology on one process capable of
building all of Seagate Technology's drives on any of Seagate Technology's disc
drive assembly lines. In addition, the group will focus on benchmarking best-
in-class performance, evaluation of new materials and state of the art process
control systems. Seagate Technology believes that its future success is linked
to its ability to reduce supply lines, respond to demand changes, and
ultimately provide the highest quality products to its customers.
In fiscal year 1999, Seagate Technology formed its Consumer Solutions
organization. This organization is working with Seagate Technology's product
sites to develop products for storage intensive consumer applications such as
digital video recorders, sub-$500 personal computers, Internet appliances and
set-top boxes. The Consumer Solutions organization is currently negotiating
with potential technology partners to jointly develop technologies for
Information Appliances, Personal Video Recorders, and Home A/V Networking.
Within Consumer Solutions, Seagate is establishing a Consumer Applications
Lab (CA Lab), with expertise in system architectures, A/V recording, home
networking and storage interconnects. As part of its charter, the CA Lab will
provide strategic direction to Seagate's product sites in the development of
disc drives and other storage technologies which will be optimized for consumer
applications.
Also in fiscal year 1999, Seagate Technology established its Intelligent
Storage Platforms group, an organization which will leverage Seagate
Technology's expertise in network and server storage to develop products for
new network devices, the Internet, high performance servers and other
information-centric computing applications. These solutions will combine
hardware, software and services to provide new products for Seagate
Technology's existing OEM and strategic distributor customer base and address
the needs of emerging markets for storage and storage-related applications.
Intelligent Storage Platforms' solutions are focused on the emergence of
Information Appliances, application-based servers, and storage services to
benefit users by delivering a greater range of online services, higher
networked-computing performance, and a reduced IT cost structure.
No assurance can be given that Seagate Technology will be able to
successfully complete the design or introduction of new products in a timely
manner, that Seagate Technology will be able to manufacture new products in
volume with acceptable manufacturing yields, or successfully market these
products, or that these products will perform to specifications on a long-term
basis. Failure to meet any of the above objectives in a timely manner has in
the past and may in the future have a material adverse effect on Seagate
Technology's business and results of operations.
During the fiscal years ended July 2, 1999, July 3, 1998 and June 27, 1997,
Seagate Technology's product development expenses were $581 million, $585
million and $459 million, respectively.
Patents and Licenses
Seagate Technology has approximately 1,032 U.S. patents and 572 foreign
patents and has approximately 857 U.S. and 875 foreign patent applications
pending. Due to the rapid technological change that characterizes
54
<PAGE>
the rigid disc drive industry, Seagate Technology believes that the improvement
of existing products, reliance upon trade secrets and unpatented proprietary
know-how and development of new products are generally more important than
patent protection in establishing and maintaining a competitive advantage.
Nevertheless, Seagate Technology believes that patents are of value to its
business and intends to continue its efforts to obtain patents, when available,
in connection with its research and development program. There can be no
assurance that any patents obtained will provide substantial protection or be
of commercial benefit to Seagate Technology, or that their validity will not be
challenged.
Because of rapid technological development in the disc drive industry,
certain of Seagate Technology's products have been and it is possible other
products could be accused of infringement of existing patents. The rigid disc
drive industry has been characterized by significant litigation relating to
patent and other intellectual property rights. From time to time, Seagate
Technology receives claims that certain of its products infringe patents of
third parties. Although Seagate Technology has been able to resolve some such
claims or potential claims by obtaining licenses or rights under the patents in
question without a material adverse affect on Seagate Technology, other such
claims are pending which if resolved unfavorably to Seagate Technology could
have a material adverse effect on Seagate Technology's business. For a
description of current disputes see "Legal Proceedings," below. In addition,
the costs of engaging in intellectual property litigation may be substantial
regardless of outcome. Seagate Technology has patent cross licenses with a
number of companies in the computer industry. Additionally, Seagate Technology
has agreements in principle with other major disc drive companies.
Competition
The rigid disc drive industry is intensely competitive, with manufacturers
competing for a limited number of major customers. The principal competitive
factors in the rigid disc drive market include product quality and reliability,
form factor, storage capacity, price per unit, price per megabyte, product
performance, production volume capability and responsiveness to customers. The
relative importance of these factors varies with different customers and for
different products. Seagate Technology believes that it is generally
competitive as to these factors.
Seagate Technology has experienced and expects to continue to experience
intense competition from a number of domestic and foreign companies, some of
which have far greater resources than Seagate Technology. Seagate Technology
competes with other independent disc drive manufacturers in the market for disc
drive products. In addition to independent rigid disc drive manufacturers,
Seagate Technology also faces competition from present and potential customers,
including IBM, Toshiba, NEC, Fujitsu Limited and Samsung who continually
evaluate whether to manufacture their own drives or purchase them from outside
sources. These manufacturers also sell drives to third parties which results in
direct competition with Seagate Technology.
Product life cycles are relatively short in the disc drive industry. Seagate
Technology expects its competitors to offer new and existing products at prices
necessary to gain or retain market share and customers. To remain competitive,
Seagate Technology believes it will be necessary to continue to reduce its
prices and aggressively enhance its product offerings. In addition to the
foregoing, the ability of Seagate Technology to compete successfully will also
depend on its ability to provide timely product introductions and to continue
to reduce production costs. Seagate Technology's establishment of production
facilities in Singapore, Thailand, Malaysia and China are directed toward such
cost reductions. Seagate Technology believes that its future success will
depend upon its ability to develop, manufacture and market products of high
quality and reliability which meet changing user needs, and which successfully
anticipate or respond to changes in technology and standards on a cost-
effective and timely basis, of which there can be no assurance.
The introduction of products using alternative technologies could be a
significant source of competition. For example, high-speed semiconductor memory
could compete with Seagate Technology's products in the future. Semiconductor
memory (SRAM and DRAM) is much faster than magnetic disc drives, but currently
is
55
<PAGE>
volatile (i.e., subject to loss of data in the event of power failure) and much
more costly. Flash EE prom, a nonvolatile semiconductor memory, is currently
much more costly and, while it has higher read performance than disc drives, it
has lower write performance. Flash EE prom could become competitive in the near
future for applications requiring less storage capacity (i.e., less than 200
MB) than is required in Seagate Technology's more traditional computer related
market place.
Employees
From July 3, 1998 to July 2, 1999, the number of persons employed worldwide
by Seagate Technology decreased from approximately 87,000 to approximately
82,000. Approximately 65,000 of Seagate Technology's employees were located in
Seagate Technology's Far East operations as of July 2, 1999. In addition,
Seagate Technology makes use of supplemental employees, principally in
manufacturing, who are hired on an as-needed basis. Management believes that
the future success of Seagate Technology will depend in part on its ability to
attract and retain qualified employees at all levels, of which there can be no
assurance. Seagate Technology believes that its employee relations are good.
56
<PAGE>
SHARE OWNERSHIP BY PRINCIPAL STOCKHOLDERS, MANAGEMENT
AND DIRECTORS OF SEAGATE TECHNOLOGY
The following table sets forth information with respect to the beneficial
ownership of Seagate Technology's outstanding common stock as of July 2, 1999
for:
. each person who we know holds more than 5% of Seagate Technology's
common shares;
. Seagate Technology's most highly compensated executive officers
individually;
. Seagate Technology's directors individually; and
. Seagate Technology's directors and executive officers as a group.
Seagate Technology has determined beneficial ownership in accordance with
the rules of the Securities and Exchange Commission. To its knowledge, the
persons named in the table have sole voting and investment power with respect
to all shares shown as beneficially owned by them unless indicated otherwise
below and subject to community property laws where applicable.
Seagate Technology has calculated percentage ownership based on 228,717,889
common shares as of July 2, 1999. Seagate Technology has included in each
person's beneficial ownership that person's options to purchase Seagate
Technology common stock that he or she can exercise within 60 days after July
2, 1999. However, Seagate Technology has not included any other person's
options for the purpose of computing percentage ownership.
<TABLE>
<CAPTION>
Number of Percent of
Common Common
Stockholder Shares Shares
- ----------- ---------- ----------
<S> <C> <C>
Putnam Investments(1)................................... 15,495,600 6.8%
One Post Office Square
Boston, MA 02109-2103
Stephen J. Luczo........................................ 798,179 *
Robert A. Kleist........................................ 254,081 *
Lawrence Perlman........................................ 232,562 *
Gary B. Filler.......................................... 215,626 *
Kenneth E. Haughton..................................... 127,464 *
Thomas P. Stafford...................................... 100,282 *
Laurel L. Wilkening..................................... 83,994 *
Alan F. Shugart......................................... 177,500 *
Bernardo A. Carballo.................................... 552,985 *
Donald L. Waite......................................... 412,502 *
Townsend H. Porter, Jr.................................. 160,488 *
William D. Watkins...................................... 387,812 *
All directors and executive officers as a group (15
persons)............................................... 4,070,765 1.8%
</TABLE>
- --------
* Less than 1%
(1) Beneficial ownership for Putnam Investments reflects ownership as reported
on Schedule 13F showing ownership as of March 31, 1999 as filed with the
Securities and Exchange Commission by Putnam Investments, an investment
company registered under Section 8 of the Investment Company Act of 1940,
as amended. Putnam Investments has sole voting power and shared dispositive
power with respect to all such shares of Seagate Technology's common stock.
Seagate Technology has no information with respect to the identities of the
parties with whom Putnam Investments shares dispositive power.
57
<PAGE>
With respect to the beneficial ownership of the following persons, the
security ownership table above includes options exercisable within 60 days of
July 2, 1999 in the following amounts:
<TABLE>
<CAPTION>
Name Options
---- ---------
<S> <C>
Stephen J. Luczo................................................... 375,000
Robert A. Kleist................................................... 68,596
Lawrence Perlman................................................... 192,764
Gary B. Filler..................................................... 183,116
Kenneth E. Haughton................................................ 68,284
Thomas P. Stafford................................................. 66,302
Laurel L. Wilkening................................................ 57,109
Alan F. Shugart.................................................... 177,500
Bernardo A. Carballo............................................... 374,500
Donald L. Waite.................................................... 165,000
Townsend H. Porter, Jr............................................. 60,000
William D. Watkins................................................. 180,188
All directors and executive officers as a group (15 persons)....... 2,304,110
</TABLE>
58
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF SEAGATE TECHNOLOGY
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements based upon
current expectations that involve risks and uncertainties. When used in this
prospectus, the words "intend," "anticipate," "believe," "estimate," "plan" and
"expect" and similar expressions as they relate to Seagate Technology are
included to identify forward-looking statements. Seagate Technology's actual
results and the timing of certain events could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth under "Risk Factors" and elsewhere in this
prospectus.
Overview
The following discussion should be read in conjunction with the "Selected
Financial Data" and Seagate Technology's consolidated financial statements and
the notes thereto included elsewhere herein. All references to years represent
fiscal years unless otherwise noted.
Overview
Seagate Technology designs, manufactures and markets products for storage,
retrieval and management of data on computer and data communications systems.
These products include disc drives, tape drives and software. Seagate
Technology designs, manufactures and markets a broad line of rigid magnetic
disc drives for use in computer systems ranging from desktop personal computers
to workstations and supercomputers, as well as in multimedia applications.
Seagate Technology sells its products to original equipment manufacturers for
inclusion in their computer systems or subsystems, and to distributors who
typically sell to small OEMs, dealers, system integrators and other resellers.
In addition, Seagate Technology markets a broad line of Travan, Digital Audio
Tape and Advanced Intelligent Tape products. These products are dedicated back-
up storage peripherals designed to meet the needs of market segments ranging
from desktop PCs to midrange servers.
Seagate Technology has pursued a strategy of vertical integration and
accordingly designs and manufactures rigid disc drive components including
recording heads, discs, disc substrates, motors and custom integrated circuits.
It also assembles certain of the key subassemblies for use in its products
including printed circuit board and head stack assemblies.
Seagate Technology has also invested in, and currently intends to continue
investigating opportunities to invest in software activities. Seagate
Technology anticipates that users of computer systems will increasingly rely
upon client/server network computing environments and believes that as this
reliance increases, users will demand software that more efficiently and
securely stores, manages, and accesses data and transforms it into usable
information. As such, Seagate Technology has broadened its core competencies to
include software products and technologies to meet these requirements.
On May 28, 1999, Seagate Technology completed the contribution of NSMG to
VERITAS. As part of the NSMG contribution to VERITAS, Seagate Technology
received an equity position in VERITAS. Seagate Technology retains ownership of
the remaining portion of its Seagate Software subsidiary, IMG.
In addition, Seagate Technology has equity positions in Dragon Systems,
Inc., a developer and producer of voice recognition software; Gadzoox Networks,
a developer and producer of hardware and software products for storage area
networks; SanDisk Corp., a designer and manufacturer of flash memory data
storage products used in a wide variety of electronic products; and
iCompression, a provider of real time MPEG-2 video and audio compression
technology that enables low cost digital video-based solutions and allows
economic storage and transmission of TV quality multimedia data.
59
<PAGE>
Business Combinations--In Process Research and Development
Seagate Technology has a history of business combinations and during the
three most recent fiscal years these included the contribution of NSMG to
VERITAS in fiscal 1999 and the acquisitions of Quinta Corporation and Eastman
Storage Software Management Group in fiscal 1998. No significant business
combinations occurred in fiscal 1997. In connection with these business
combinations, Seagate Technology has recognized significant write-offs of in-
process research and development. The completion of the underlying in-process
projects acquired within each business combination was the most significant and
uncertain assumption utilized in the valuation analysis of the in-process
research and development. Such uncertainties could give rise to unforeseen
budget over runs and/or revenue shortfalls in the event that Seagate Technology
is unable to successfully complete a certain research and development project.
Seagate Technology is primarily responsible for estimating the fair value of
the purchased research and development in all business combinations accounted
for under the purchase method. The nature of research and development projects
acquired, the estimated time and costs to complete the projects and significant
risks associated with the projects are described below.
Contribution of NSMG to VERITAS
On May 28, 1999, Seagate Technology, and its direct and indirect
subsidiaries, Seagate Software and the Seagate Software NSMG, closed and
consummated the Agreement and Plan of Reorganization (the "Plan") dated as of
October 5, 1998 with VERITAS and VERITAS Operating Corporation ("Old VERITAS").
The Plan provided for the contribution by Seagate Technology, Seagate Software,
and certain of their respective subsidiaries to VERITAS of (a) the outstanding
stock of the NSMG and certain other subsidiaries of Seagate Software and (b)
those assets used primarily in the network and storage management business of
Seagate Software (the "NSMG business"), in consideration for the issuance of
shares of Common Stock of VERITAS to Seagate Software and the offer by VERITAS
to grant options to purchase Common Stock of VERITAS to certain of Seagate
Software's employees who become employees of VERITAS or its subsidiaries. As
part of the Plan, VERITAS assumed certain liabilities of the NSMG business. The
Plan was structured to qualify as a tax-free exchange.
Subsequent to the consummation, all outstanding securities of VERITAS were
assumed and converted into common stock of VERITAS with identical rights,
preferences and privileges, on a share for share basis. As a result of the
contribution of the NSMG business to VERITAS, Seagate Software received a total
of 69,148,208 shares of VERITAS common stock and former employees of the NSMG
business received options to purchase an aggregate of 6,945,048 shares of
VERITAS common stock. Share and option amounts for VERITAS have been adjusted
to reflect the two-for-one stock split effective July 9, 1999 by VERITAS.
Seagate Technology has accounted for the contribution of NSMG to VERITAS as
a non-monetary transaction using the fair value of the assets and liabilities
exchanged. After the transaction, Seagate Software owns approximately 41.63%
(69,148,208 shares) of the outstanding shares of VERITAS, including the NSMG
business. Because Seagate Technology still owns a portion of the NSMG business
through its ownership of VERITAS, Seagate Technology did not recognize 100% of
the gain on the exchange. The gain recorded is equal to the difference between
58.37% of the fair value of the VERITAS common stock received and 58.37% of
Seagate Technology's basis in the NSMG assets and liabilities exchanged.
Seagate Technology is accounting for its on going investment in VERITAS using
the equity method. The difference between the recorded amount of Seagate
Technology's investment in VERITAS and the amount of its underlying equity in
the net assets of VERITAS has been allocated based upon the fair value of the
underlying tangible and intangible assets and liabilities of VERITAS. The
intangible assets included amounts allocated to in-process research and
development and resulted in a $85 million write-off included in activity
related to equity interest in VERITAS in the accompanying statement of
operations. Intangible assets including goodwill are being amortized over four
years.
Seagate Technology will include in its financial results its share of the
net income or loss of VERITAS, excluding certain NSMG purchase accounting
related amounts recorded by VERITAS, but including Seagate
60
<PAGE>
Technology's amortization of the difference between its recorded investment and
the underlying assets and liabilities of VERITAS. Because of practicality
considerations, the net income or loss of VERITAS will be included in the
results of Seagate Technology on a one quarter lag basis. The results of
VERITAS for the period from May 29, 1999 to June 30, 1999, the period
subsequent to the contribution of NSMG to VERITAS, will be included in Seagate
Technology's results of operations for the quarter ended October 1, 1999. The
results of VERITAS for the period from July 1, 1999 to September 30, 1999 will
be included in Seagate Technology's results for the quarter ended December 31,
1999.
In a separate but related transaction to the NSMG contribution to VERITAS,
on June 9, 1999, Seagate Technology exchanged 5,275,772 shares of its common
stock for 3,267,255 of the outstanding shares of Seagate Software common stock
owned by employees, directors and consultants of Seagate Software. The exchange
ratio was determined based on the estimated value of Seagate Software common
stock divided by the fair market value of Seagate Technology common stock.
The estimated value of Seagate Software common stock exchanged into Seagate
Technology common stock was determined based upon the sum of the fair value of
the NSMG business, as measured by the fair value of the shares received from
VERITAS, plus the estimated fair value of IMG of Seagate Software as determined
by the Seagate Technology board of directors, plus the assumed proceeds from
the exercise of all outstanding Seagate Software stock options, divided by the
number of fully converted shares of Seagate Software. The board of directors of
Seagate Technology considered a number of factors in determining the estimated
fair value of the IMG business, including historical and projected revenues,
earnings and cash flows, as well as other factors and consultations with
financial advisors.
The fair value of the Seagate Software shares acquired less the original
purchase price paid by the employees was recorded as compensation expense for
those shares outstanding and vested less than six months. The purchase of
Seagate Software shares outstanding and vested more than six months was
accounted for as the purchase of a minority interest and, accordingly, the fair
value of the shares exchanged has been allocated to all of the identifiable
tangible and intangible assets and liabilities of Seagate Software. In
connection with the acquisition, Seagate Software recorded the acquisition of
the minority interest, Seagate Technology recorded compensation expense
amounting to approximately $124 million and wrote off purchased research and
development amounting to $2 million in the fourth quarter of fiscal 1999.
Associated intangible assets and goodwill are being amortized to operations
over four years.
The value allocated to projects identified as in-process technology at
VERITAS and Seagate Software, for the minority interest acquired, were charged
to expense in the fourth quarter of fiscal 1999. These write-offs were
necessary because the acquired technologies had not reached technological
feasibility at the date of purchase and have no future alternative uses.
Seagate Software expects that the acquired in-process research and development
will be successfully developed, but there can be no assurance that commercial
viability of these products will be achieved.
The nature of the efforts required to develop the purchased in-process
technology into commercially viable products principally relate to the
completion of all planning, designing, prototyping, verification and testing
activities that are necessary to establish that the product can be produced to
meet its design specifications, including functions, features and technical
performance requirements. The value of the purchased in-process technology for
VERITAS was estimated as the projected net cash flows related to such products,
including costs to complete the development of the technology and the future
revenues to be earned upon commercialization of the products, excluding
revenues attributable to future development efforts. These cash flows were then
discounted back to their net present value. The projected net cash flows from
such projects were based on management's estimates of revenues and operating
profits related to such projects.
As of the date of the contribution of NSMG to VERITAS, Seagate Software's
management and VERITAS's management anticipated the costs to complete the in-
process technologies at approximately $5.8 million and $44.2 million,
respectively.
61
<PAGE>
Quinta Corporation
Quinta's research and development efforts revolve around Optically Assisted
Winchester ("OAW") technology. OAW refers to Quinta's newly designed recording
technology that, upon completion, would be implemented into Winchester hard
disc drives. OAW combines traditional magnetic recording technology with
Winchester hard disc drives and optical recording capabilities; optical
recording technology enables greater data storage capacity. By integrating
advanced optical features along with a highly fine and sophisticated tracking
and delivery system within the head design, OAW would multiply the areal
density of disc drives.
Through August 8, 1997, the acquisition date, Quinta had demonstrated
significant achievements in developing its technology. However, further
technological milestones were required before technological feasibility could
be achieved. Quinta's development process consists of the following development
milestones: (i) route light (optical fiber), (ii) flying head use, (iii)
recording media, (iv) mirror creation and demonstration (two stage servo), (v)
complete assembly, (vi) form factor containment, (vii) design verification
test, (viii) customer qualification, and (ix) delivery. Future products were
expected to include fixed and removable drives and cartridges. Seagate
Technology expected to introduce products incorporating Quinta's OAW technology
within 12 months of the acquisition date.
At the time of completing the Quinta acquisition, Seagate Technology
estimated that additional research and development spending of $9.4 million and
$3.9 million in fiscal 1998 and 1999, respectively, would be required to
complete the project. Since that time, Seagate Technology has redirected its
efforts so that Seagate Technology is focused less on the development of a
specific product and more on the advancement of optical technology in general.
As such, the spending elements associated with the development of optical
technology are embedded in the research and development budgets of Seagate
Technology's product design centers and component technology organizations.
At the present time Seagate Technology has no immediate plans to release a
storage device which makes specific use of Quinta's "Optically Assisted
Winchester" technology. Delay in releasing such a storage device is not
expected to materially affect Seagate Technology's future earnings.
Eastman Software Storage Management Group
Eastman Software Storage Management Group, Inc. ("Eastman") was acquired in
June 1998. Eastman develops a hierarchical storage management product for
Microsoft's Windows NT platform and its two primary products are OPEN/stor for
Windows NT and AvailHSM for NetWare. By integrating Eastman's product line,
Seagate Technology will be able to convert its Storage Migrator product into a
stand-alone HSM application for Windows NT environments. As of the date of
acquisition, Seagate Technology abandoned the AvailHSM product and technology
due to dated features and functionality; the valuation analysis did not include
a fair value for the AvailHSM product.
As for OPEN/stor at the date of acquisition, Seagate Technology planned to
phase out the product over the following 12 to 15 months. Seagate Technology's
purpose for the acquisition was for the next generation technologies that were
underway at Eastman, referenced by project names Sakkara and Phoenix. These
projects were complete re-writes of Eastman's prior generation technology that
would allow the product to be sold stand-alone upon completion. The anticipated
release dates for Sakkara and Phoenix were the 2nd quarter of fiscal year 1999
and the 4th quarter of fiscal year 1999, respectively. As of the date of
acquisition, Seagate Technology anticipated the costs to complete both Sakkara
and Phoenix at approximately $1.8 million. These products were not released
prior to the closing of the contribution of NSMG to VERITAS.
62
<PAGE>
Results of Operations
The following table sets forth certain items in Seagate Technology's
Consolidated Statements of Operations as a percentage of revenue for each of
the three years in the period ended July 2, 1999.
<TABLE>
<CAPTION>
Percentage of
Revenue
-----------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Revenue.................................................. 100% 100% 100%
Cost of sales............................................ 77 85 77
--- --- ---
Gross margin............................................. 23 15 23
Product development...................................... 9 9 5
Marketing and administrative............................. 8 7 6
Amortization of goodwill and other intangibles........... -- 1 --
In-process research and development...................... -- 3 --
Restructuring............................................ 1 5 --
Unusual items............................................ 1 -- 2
--- --- ---
Income (loss) from operations............................ 4 (10) 10
Other income, net........................................ 23 -- --
--- --- ---
Income (loss) before income taxes........................ 27 (10) 10
Benefit (provision) for income taxes..................... (10) 2 (3)
--- --- ---
Net income (loss)........................................ 17% (8)% 7%
=== === ===
</TABLE>
1999 vs 1998--Revenue in 1999 was flat when compared to 1998. A higher level
of unit shipments, an increase of 9% as compared to 1998, combined with a shift
in mix to Seagate Technology's higher priced products was offset by a
continuing decline in the average unit sales prices of Seagate Technology's
products as a result of intensely competitive market conditions. Revenue
decreased to $1.643 billion in the fourth quarter of 1999 from $1.805 billion
in the third quarter of 1999 as a result of price erosion. Seagate Technology's
overall average unit sales price on its disc drive products was $194, $194,
$196 and $177 for the four quarters of fiscal 1999, respectively. Average price
erosion from fiscal year 1998 to fiscal year 1999 was 9%. Seagate Technology
expects that price erosion in the data storage industry will continue for the
foreseeable future. This competition and continuing price erosion may adversely
affect Seagate Technology's results of operations in any given quarter and such
an adverse effect often cannot be anticipated until late in any given quarter.
The increase in gross margin as a percentage of revenue from the prior year
was primarily due to cost savings as a result of Seagate Technology's
restructuring activities and an intensive program of cost reduction resulting
in lower average unit costs per disc produced. Excluding the gross margin of
Seagate Software, which subsidiary's products generally have higher gross
margins, Seagate Technology's gross margins would have been 19% and 11% in 1999
and 1998, respectively.
Product development expenses decreased by $4 million (1%) compared with
1998, primarily due to a decrease of $23 million in occupancy costs, and a $19
million accrual in fiscal year 1998 for payments to former shareholders of
Quinta for achievement of certain product development milestones. These
decreases were substantially offset by increases of $12 million in salaries and
related costs, $12 million in profit sharing accruals and $11 million in
depreciation. The decrease of $23 million in occupancy costs from the
comparable year-ago period was primarily due to the closure of certain of
Seagate Technology's product design centers pursuant to its January 1998
restructuring plan.
Marketing and administrative expenses increased by $32 million (6%) compared
with 1998, primarily due to increases of $28 million related to Seagate
Technology's software products and services, particularly those of Seagate
Software's IMG, $17 million in salaries and related costs, $8 million in legal
expenses which includes settlements in the White, Hedgcoth and Lemelson cases
(see "Business of Seagate Technology"),
63
<PAGE>
$7 million in profit sharing accruals and $6 million in depreciation. These
expenses were partially offset by decreases of $27 million in occupancy costs
and $13 million in advertising and promotion expenses. The decrease of $27
million in occupancy costs from the comparable year-ago period was primarily
due to the closure of certain of Seagate Technology's facilities pursuant to
its January 1998 restructuring plan.
Of the $223 million charge for the write-off of in-process research and
development in 1998, $214 million was a result of the August 1997 acquisition
of Quinta and $7 million was a result of the June 1998 acquisition of Eastman.
See Acquisitions note to the consolidated financial statements.
In 1999, Seagate Technology recorded restructuring charges of $72 million
and reversed $12 million of restructuring accruals recorded in fiscal 1998,
resulting in a net restructuring charge of $60 million. The $12 million
reversal was a result of Seagate Technology abandoning its plan to seek an
agreement with an external vendor to supply parts currently manufactured at a
facility in Thailand. The $72 million restructuring charge was a result of
steps Seagate Technology is taking to further improve the efficiency of its
operations. These actions include closure of Seagate Technology's microchip
manufacturing facility in Scotland; discontinuance of Seagate Technology's
recording head suspension business located in Malaysia and Minnesota;
consolidation of global customer service operations by relocating such
operations in Singapore, Scotland and Costa Mesa, California to Mexico; and
closure of Seagate Technology's recording media substrate facility in Mexico.
In connection with this restructuring, Seagate Technology currently expects a
workforce reduction of approximately 1250 employees. Approximately 631 of the
1,250 employees had been terminated as of July 2, 1999. As a result of employee
terminations and the write-off or write-down of equipment and facilities in
connection with implementing the fiscal year 1999 restructuring plan, Seagate
Technology estimates that annual salary and depreciation expense will be
reduced by approximately $27 million and $16 million, respectively. Seagate
Technology anticipates that the implementation of the restructuring plan will
be substantially complete by the end of March 2000.
Seagate Technology is in the process of developing a restructuring plan
designed to realign its manufacturing capacity and increase productivity. Some
minor restructuring activities have taken place during the first quarter of
fiscal 2000; however, as the plan is further developed, Seagate Technology
expects there to be additional restructuring activities that could be
substantial. As a result, Seagate Technology will be required to record a
potentially substantial charge to operations associated with this restructuring
in its fiscal quarter ended October 1, 1999.
The $78 million charge to unusual items in 1999 was in connection with an
amendment to the purchase agreement for the August 1997 acquisition of Quinta.
See Acquisitions note to the consolidated financial statements. The $22 million
in income in unusual items in 1998 represents a $22 million reduction of the
$153 million charge recorded in 1997 to settle a lawsuit against Seagate
Technology by Amstrad PLC.
Net other income in 1999 increased by $1.633 billion compared with 1998. The
increase in net other income was primarily due to the net gain of $1.670
billion on the contribution of Seagate Technology's NSMG business to VERITAS
partially offset by the charge related to Seagate Technology's equity
investment in VERITAS of $119 million in the fourth quarter of 1999. The net
gain of $1.670 billion consisted of a gain of $1.806 billion net of
compensation expense of $124 million and merger-related expenses of $12
million. In addition, the increase in net other income was due to $76 million
of expenses related to mark-to-market adjustments in 1998 on certain of Seagate
Technology's foreign currency forward exchange contracts for the Thai baht and
the Malaysian ringgit.
Seagate Technology recorded a $697 million provision for income taxes at an
effective rate of 37% in 1999 compared with a $174 million benefit for income
taxes at an effective rate of 25% in 1998. The change in income taxes was
primarily due to income from operations in 1999 and to income taxes provided on
the pre-tax gain of $1.670 billion recorded on the contribution of Seagate
Technology's NSMG business to VERITAS. Excluding the effects of the VERITAS
transaction, the non-deductible charges from the Quinta acquisition and certain
non-recurring restructuring costs, the effective tax rate was approximately 28%
in 1999.
64
<PAGE>
Seagate Technology provided income taxes at the U.S. statutory rate in 1999
on approximately 55% of its foreign earnings compared with approximately all of
such earnings in 1998. A substantial portion of Seagate Technology's Far East
manufacturing operations at plant locations in Singapore, Thailand, Malaysia
and China operate under various tax holidays which expire in whole or in part
during fiscal years 2001 through 2009. The net impact of these tax holidays was
to increase net income by approximately $35 million ($.14 per share, diluted)
in 1999. The tax holidays had no impact on the net loss in 1998.
Seagate Technology received a statutory notice of deficiency dated June 27,
1997 from the Internal Revenue Service relative to taxable years 1991 through
1993 assessing potential deficiencies approximating $39 million plus interest
and approximately $6 million of penalties. Seagate Technology petitioned the
United States Tax Court on September 24, 1997 for a re-determination of the
deficiencies. Seagate Technology believes that the likely outcome of this
matter will not have a material adverse effect on its financial position or
results of operations.
Seagate Technology received a statutory notice of deficiency dated June 12,
1998 from the Internal Revenue Service relative to Conner's taxable years 1991
and 1992 assessing potential deficiencies approximating $11 million plus
interest. Seagate Technology petitioned the United States Tax Court on
September 10, 1998 for a re-determination of the deficiencies. Seagate
Technology believes that the likely outcome of this matter will not have a
material adverse effect on its financial position or results of operations.
1998 vs 1997--Revenue in 1998 was 24% lower than that reported in 1997. The
decrease in revenue from the prior year was due primarily to a continuing
decline in the average unit sales prices of Seagate Technology's products as a
result of intensely competitive market conditions, a lower level of unit
shipments reflecting continuing weakness in demand for Seagate Technology's
disc drive products and a shift in mix away from Seagate Technology's higher
priced products. The price erosion accounted for $1.6 billion of the revenue
decline while volume issues accounted for $0.4 billion.
The decrease in gross margin as a percentage of revenue from the prior year
was primarily due to a continuing decline in the average unit sales prices of
Seagate Technology's disc drive products, particularly its desktop products, as
a result of intensely competitive market conditions, lower consolidated revenue
and a shift in mix away from Seagate Technology's higher performance disc
drives, partially offset by reductions in manufacturing costs. In 1997 desktop
gross margins improved over 1996 primarily due to strong demand for these
products. This strong demand resulted in most of Seagate Technology's desktop
disc drive products going on allocation and thus stabilizing prices. In 1998
the situation changed. There was excess capacity in the industry for desktop
disc drives which resulted in severe price erosion. Because of these factors,
as well as poor time-to-market performance with respect to Seagate Technology's
products, desktop gross margins declined substantially in 1998. Seagate
Technology's overall average unit sales price on its disc drive products was
$219, $206, $208 and $229 for the four quarters of fiscal 1998, respectively.
Additionally, there was an increase in revenue (34%) of Seagate Software, which
subsidiary's products generally have higher gross margins. Excluding the gross
margin of Seagate Software, Seagate Technology's gross margins would have been
11% and 22% in 1998 and 1997, respectively.
Product development expenses increased by $126 million (27%) compared with
1997, primarily due to increases of $39 million in salaries and related costs,
$26 million in allocated occupancy costs and $19 million in payments or
accruals for such payments to former shareholders of Quinta for achievement of
certain product development milestones, and an overall increase in Seagate
Technology's product development efforts. Seagate Technology's product
development activities include efforts to improve its time-to-market
performance, the development of ultra-high capacity disc drive technologies,
including a new OAW technology being developed by Quinta and development
efforts related to its software and tape drive products. These increases in
expenses were partially offset by substantially reduced employee profit sharing
and executive bonuses in 1998.
Marketing and administrative expenses increased by $9 million (2%) compared
with 1997, primarily due to increases of $22 million in advertising and
promotion expenses, $21 million in marketing and administrative
65
<PAGE>
expenses related to Seagate Technology's software products and services,
particularly those of Seagate Software's IMG and $17 million in salaries and
related costs. These increases in expenses were partially offset by decreases
of $21 million in allocated occupancy costs, $15 million in employee profit
sharing and executive bonuses, $10 million in legal expenses and $6 million in
the provision for bad debts.
Amortization of goodwill and other intangibles decreased by $10 million
(20%) compared with 1997, primarily due to the inclusion in amortization
expense of the write-down of goodwill and the write-offs and write-downs in
1997 of certain intangible assets related to past acquisitions of software
companies whose value had become permanently impaired and the resultant
subsequent $13 million reduction in amortization expense, partially offset by
additional amortization of $2 million related to goodwill and intangibles
arising from Seagate Technology's additional investment in Dragon in September
1997.
Of the $223 million charge for the write-off of in-process research and
development, $214 million was a result of the August 1997 acquisition of Quinta
and $7 million was a result of the June 1998 acquisition of Eastman. In April
and June 1997, Seagate Technology invested an aggregate of $20 million to
acquire approximately ten percent (10%) of Quinta's stock. In August 1997,
Seagate Technology completed the acquisition of Quinta. Pursuant to the
purchase agreement with Quinta, the shareholders of Quinta, other than Seagate
Technology, 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, Seagate Technology and Quinta amended the
purchase agreement to eliminate the product development and early production
milestones and provide that the former shareholders of Quinta would be eligible
to receive the remaining $77 million and the $14 million that had been accrued
but unpaid in fiscal 1998. In the first quarter of fiscal 1999, Seagate
Technology took a charge to operations for the remaining $77 million. Seagate
Technology recognizes the uncertainty associated with the completion of
purchased in-process research and development. Such uncertainties could give
rise to unforeseen budget overruns and/or revenue shortfalls in the event that
Seagate Technology is unable to successfully complete a given research and
development project.
Seagate Technology recorded restructuring charges of $205 million in the
second quarter of 1998 and $142 million in the third quarter of 1998. The
aggregate charges of $347 million reflect steps Seagate Technology is taking to
align worldwide operations with current market conditions by reducing existing
capacity in all areas of Seagate Technology and improving the productivity of
its operations and the efficiency of its development efforts by consolidating
manufacturing and research and development operations. Actions include exiting
production of mobile products; early discontinuation of several other products;
closing and selling the Clonmel, Ireland drive manufacturing facility; closing
and subleasing the San Jose and Moorpark, California design center facilities;
aborting production expansion projects in Cork, Ireland; and divesting Seagate
Technology of the new Philippines manufacturing facility, which was nearing
completion.
The restructuring charges were comprised of employee related costs for
severance of $57 million; facilities costs for facilities Seagate Technology is
no longer using for current activities which include lease termination and
holding costs of $24 million for facilities located in California and the Far
East, and the write-off or write-down of owned and leased facilities located in
California, the Philippines and Ireland of $54 million; write-off or write-down
of $137 million for excess manufacturing, assembly and test equipment and
tooling formerly utilized primarily in California, Singapore, Thailand and
Ireland; write-off of intangibles and other assets including $9 million for
capital equipment deposits and $2 million for goodwill associated with
permanently impaired equipment; contract cancellations comprised of $43 million
for costs incurred to cancel outstanding purchase commitments existing prior to
the plan of restructure; and other costs comprised of the repayment of various
grants to the Industrial Development Agency of Ireland of $7 million and a
contingency of $14 million for adjustments to estimates used when the
restructuring charge was recorded.
The fiscal year 1998 aggregated restructuring reserve included asset write-
offs or write-downs of tangible assets totaling $200 million and intangible
assets totaling $2 million. During the quarter ended January 2, 1998,
66
<PAGE>
forecasted production needs were much lower than the current capacity of
Seagate Technology and Seagate Technology recognized that the recent oversupply
in the marketplace was not a short-term anomaly. This oversupply was as a
result of competitors in the drive industry completing expansion plans at the
same time that customer demand flattened out in addition to efficiency
improvements achieved in Seagate Technology's manufacturing processes. In this
period, Seagate Technology also decided to discontinue production of all or a
portion of products within the Elite, Bali, Cuda, Explorer and Phoenix/Futura
product families, rendering test and manufacturing equipment unique to those
products as excess. Prior to this period, there was no indication of permanent
impairment of the assets associated with the recent excess capacity of Seagate
Technology or the products to be discontinued. These assets included owned
facilities that Seagate Technology is vacating, manufacturing, assembly and
test equipment and tooling unique to production of discontinued products and
excess equipment as a result of consolidating facilities and leasehold
improvements for leased facilities to be vacated. Discounted future cash flows
and evaluations of the resale market for certain assets were used to estimate
fair value.
The Clonmel, Ireland facility was sold in May 1998 and the majority of the
other tangible assets have been disposed of or sold. The remaining assets are
the Philippines facility, a manufacturing facility in Thailand and the
manufacturing equipment located at the Thailand facility. The Philippines
facility remains vacant and Seagate Technology continues to actively seek a
buyer. The manufacturing facility in Thailand continues to be utilized until a
satisfactory agreement can be made with an external vendor to supply parts
currently manufactured at this location. Seagate Technology is actively seeking
such an agreement. Until such time as a supplier is qualified, Seagate
Technology is continuing to depreciate the Thailand facility and the equipment
at this facility. When these assets are identified as available for sale, no
further depreciation will be recorded. Seagate Technology is marketing vacated
leased facilities for sublease unless the remaining lease term is so short as
to make a sublease impractical.
As a result of employee terminations and write-off or write-down of
equipment and facilities in connection with implementing the fiscal year 1998
restructuring plan, Seagate Technology estimates that annual salary and
depreciation expense will be reduced by approximately $170 million and $70
million, respectively. Certain lease termination and holding costs related to
vacated facilities continue to be incurred and charged against the
restructuring reserve until the leases expire or the facilities are subleased.
Amstrad PLC ("Amstrad") initiated a lawsuit against Seagate Technology in
1992 concerning Seagate Technology's sale of allegedly defective disc drives to
Amstrad. On November 6, 1997, Seagate Technology and Amstrad settled all of the
outstanding disputes. The settlement resulted in a $22 million reduction in
1998 against the $153 million charge recorded in 1997. The $22 million
reduction and the $153 million charge are included in unusual items in the
Consolidated Statements of Operations for 1998 and 1997, respectively.
Net other income in 1998 decreased by $51 million, compared with 1997,
primarily due to charges for mark-to-market adjustments in 1998 of $76 million
on certain of Seagate Technology's foreign currency forward exchange contracts
for the Thai baht and the Malaysian ringgit offset by $10 million of other
foreign currency transaction gains. Additionally there was an increase in
interest expense of $16 million due to higher average levels of long-term debt
outstanding. These decreases in net other income were partially offset by a
decrease of $10 million in the charge for minority interest as a result of
lower income in Seagate Technology's majority-owned subsidiary in Shenzhen,
China, an $8 million gain on sales of Seagate Technology's investment in
Overland Data, Inc. and a $6 million increase in interest income.
Seagate Technology recorded a $174 million benefit from income taxes at an
effective rate of 25% in 1998 compared with a $233 million provision for income
taxes at an effective rate of 26% in 1997. The change in income taxes was
primarily due to the loss from operations incurred in 1998. Excluding the
acquisition of Quinta, certain non-recurring restructuring costs and the
reversal of certain Amstrad litigation charges, the effective tax rate was
approximately 28% in 1998. Excluding the Amstrad litigation charge, the
effective tax rate was approximately 28% in 1997.
67
<PAGE>
Seagate Technology provided income taxes at the U.S. statutory rate of 35%
in 1998 on substantially all of its earnings from foreign subsidiaries compared
with approximately 66% of such earnings in 1997. A substantial portion of
Seagate Technology's Far East manufacturing operations at plant locations in
Singapore, Thailand, Malaysia and China operate under various tax holidays
which expire in whole or in part during fiscal years 1999 through 2005. The tax
holidays had no impact on the net loss in 1998. The net impact of these tax
holidays was to increase net income by approximately $71 million ($0.28 per
share, diluted) in 1997.
Other
For 1999, the net loss resulting from the remeasurement of foreign financial
statements into U.S. dollars was $4 million. Such net gains (losses) did not
have a significant effect on the results of operations for 1998 or 1997. The
effect of inflation on operating results for 1999, 1998 and 1997 has been
insignificant. Seagate Technology believes this is due to the absence of any
significant inflation factors in the industry in which Seagate Technology
participates.
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130"). SFAS 130 requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. This statement is effective for fiscal years
beginning after December 15, 1997, and was adopted by Seagate Technology for
its fiscal year 1999. The adoption of SFAS 130 did not have a material impact
on Seagate Technology's financial statements.
Also in June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosures About Segments of an Enterprise and Related
Information ("SFAS 131"). SFAS 131 replaces Statement of Financial Accounting
Standards No. 14 and changes the way public companies report segment
information. This statement is effective for fiscal years beginning after
December 15, 1997 and was adopted by Seagate Technology for its fiscal year
1999. The adoption of SFAS 131 did not have a material impact on Seagate
Technology's financial statements.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities." This
statement establishes accounting and reporting standards for derivative
instruments and for hedging activities. It requires that derivatives be
recognized in the balance sheet at fair value and specifies the accounting for
changes in fair value. This statement is effective for all fiscal quarters of
fiscal years beginning after June 15, 2000. Seagate Technology is in the
process of assessing the impact of this pronouncement on its financial
statements.
In the second quarter of 1998, Seagate Technology implemented Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"). All
earnings per share amounts for all periods have been presented and, where
necessary, restated to conform to the requirements of SFAS 128. The adoption of
SFAS 128 did not have a material impact on Seagate Technology's earnings per
share.
Liquidity and Capital Resources
At July 2, 1999, Seagate Technology's cash, cash equivalents and short-term
investments totaled $1.623 billion, a decrease of $204 million from the prior
year-end balances. This decrease was primarily a result of expenditures of $603
million for property, equipment and leasehold improvements and the repurchase
of approximately 27 million shares of Seagate Technology's common stock for
nearly $860 million, partially offset by net cash provided by operating
activities. Seagate Technology'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.
68
<PAGE>
As of July 2, 1999, Seagate Technology had committed lines of credit of $84
million that can be used for standby letters of credit or bankers' guarantees.
At July 2, 1999, $67 million of these lines of credit were utilized.
Seagate Technology made investments in property and equipment in 1999
totaling $643 million. This amount comprised $273 million for manufacturing
facilities and equipment for the recording head operations in the United
States, Northern Ireland and Malaysia; $226 million for manufacturing
facilities and equipment related to Seagate Technology's subassembly and disc
drive final assembly and test facilities in the United States, Far East and the
United Kingdom; $85 million for expansion of Seagate Technology's thin-film
media operations in California, Singapore, Northern Ireland and Mexico; and $59
million for other purposes. Seagate Technology presently anticipates
investments of approximately $700 million in property and equipment in 2000.
Seagate Technology plans to finance these investments from existing cash
balances and future cash flows from operations.
During the year ended July 2, 1999, Seagate Technology acquired
approximately 27 million shares of its common stock for nearly $860 million.
The repurchase of a portion of these shares completed a stock repurchase
program announced in June 1997 in which up to $600 million of Seagate
Technology's common stock was authorized to be acquired in the open market. The
repurchase of the remainder of these shares was in connection with an amendment
to the June 1997 stock repurchase program announced in February 1999 in which
up to an additional $500 million worth of Seagate Technology's common stock was
authorized to be acquired in the open market. In April 1999, Seagate
Technology's Board of Directors approved an additional increase to its existing
stock repurchase program pursuant to which up to an additional 25 million
shares of Seagate Technology's common stock may be acquired in the open market.
During the year ended June 27, 1997, Seagate Technology issued senior debt
securities totaling $700 million principal amount with interest rates ranging
from 7.125% to 7.875% and maturities ranging from seven years to forty years.
Seagate Technology believes that its cash balances together with cash flows
from operations and its borrowing capacity will be sufficient to meet its
working capital needs for the foreseeable future.
On June 9, 1999, Seagate Technology completed an exchange offer pursuant to
which it had offered to acquire from Seagate Software stockholders all
outstanding shares of Seagate Software common stock in exchange for shares of
Seagate Technology common stock pursuant to an Information Circular/Prospectus
dated April 26, 1999. On the day the NSMG combination closed, employees of the
NSMG business became employees of VERITAS and ceased to be employees of Seagate
Software or Seagate Technology, as the case may be. As a result, employees of
Seagate Software who became VERITAS employees and who exchanged their Seagate
Software options for VERITAS options have the ability to sell their shares in a
public market. Seagate Technology wished to provide a similar opportunity for
all Seagate Software stockholders and holders of vested options, including the
significant number of such persons who remained employees of IMG and therefore
were not be eligible for the VERITAS option exchange offer. Based on
information provided by the exchange agent, approximately 3,267,255 shares of
Seagate Software common stock were tendered of which approximately 3,104,735
were exchanged into 5,272,040 shares of Seagate Technology common stock. Giving
effect to the shares of Seagate Software common stock tendered in the exchange
offer, Seagate Technology beneficially owned, as of June 10, 1999,
approximately 57,962,988 shares of Seagate Software common stock, or 99.96 % of
the shares of Seagate Software common stock outstanding as of that date.
Directors and officers of Seagate Technology exchanged an aggregate of 278,329
shares of Seagate Software common stock.
Pursuant to a registration statement declared effective by the Securities
and Exchange Commission on August 9, 1999, Seagate Technology's Seagate
Software subsidiary sold an aggregate of 8,232,667 shares of VERITAS common
stock for proceeds of $396.8 million, net of underwriting discounts and
commissions and before expenses. Seagate Software acquired such shares in
connection with the contribution of the NSMG business to VERITAS. The
underwriters have an option to acquire an additional 909,833 shares of VERITAS
69
<PAGE>
common stock to cover over-allotments from Seagate Software prior to September
8, 1999 at a per share price of $48.1925 (net of underwriting discounts and
commissions). In connection with the sale of the VERITAS shares, Seagate
Software agreed that it would not sell or otherwise dispose of any additional
shares of VERITAS common stock prior to November 7, 1999. Certain exceptions to
this limitation apply, including transfers to affiliated entities and the sale
of the remaining over-allotment option noted above.
On August 17, 1999, SanDisk Corporation, a company in which Seagate
Technology holds an equity interest, filed a registration statement with the
Securities and Exchange Commission in connection with a public offering of
3,000,000 shares of its common stock. Of the 3,000,000 shares, 2,750,000 will
be sold by SanDisk and 250,000 will be sold by Seagate Technology.
Concurrent with the equity offering, Seagate Technology will enter into a
prepaid forward contract with the SanDisk PEPS Trust in connection with a
public offering of an aggregate of $200 million of Premium Exchangeable
Participating Shares, or PEPS, of the Trust. The SanDisk PEPS Trust will offer
the underwriters an option to purchase an additional $30 million of PEPS to
cover any over-allotments in connection with the PEPS offering.
In addition, Thomas F. Mulvaney, senior vice president, general counsel and
secretary of Seagate Technology, resigned from SanDisk's board of directors on
August 13, 1999.
Disclosures About Market Risk
Interest Rate Risk--Seagate Technology's exposure to market risk for changes
in interest rates relates primarily to Seagate Technology's investment
portfolio and long-term debt obligations. Seagate Technology does not use
derivative financial instruments in its investment portfolio. Seagate
Technology places its investments with high credit quality issuers and, by
policy, limits the amount of credit exposure to any one issuer. As stated in
its policy, Seagate Technology is averse to principal loss and ensures the
safety and preservation of its invested funds by limiting default risk, market
risk and reinvestment risk.
Seagate Technology mitigates default risk by investing in only the highest
credit quality securities and by constantly positioning its portfolio to
respond appropriately to a significant reduction in a credit rating of any
investment issuer, guarantor or depository. The portfolio includes only
marketable securities with active secondary or resale markets to ensure
portfolio liquidity.
Seagate Technology has no cash flow exposure due to rate changes for long-
term debt obligations. Seagate Technology primarily enters into debt
obligations to support general corporate purposes including capital
expenditures and working capital needs.
70
<PAGE>
The table below presents principal (or notional) amounts and related
weighted average interest rates by year of maturity for Seagate Technology's
investment portfolio and debt obligations. All investments mature, by policy,
in three years or less, except for certain types of investments that may mature
in more than three years but whose weighted average maturity is three years or
less.
<TABLE>
<CAPTION>
Fair Value
July 2,
2000 2001 2002 2003 2004 Thereafter Total 1999
Dollars in millions ---- ---- ---- ---- ---- ---------- ----- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Cash equivalents
Fixed rate............ $350 $ -- $ -- $-- $ -- $ -- $ 350 $ 350
Average interest
rate............... 5.29% -- -- -- -- -- 5.29%
Short-term investments
Fixed rate............ 202 364 432 -- -- -- 998 994
Average interest
rate............... 5.48% 6.02% 6.61% -- -- -- 6.17%
Variable rate........... 233 -- -- -- -- -- 233 233
Average interest
rate............... 5.03% -- -- -- -- -- 5.03%
Total investment
securities............. 785 364 432 -- -- -- 1,581* 1,577
Average interest
rate............... 5.26% 6.02% 6.61% -- -- -- 5.80%
Long-Term Debt
Fixed rate............ -- -- -- -- 200 500 700 663
Average interest
rate............... -- -- -- -- 7.03% 7.45% 7.33%
</TABLE>
- --------
* Includes $4 million of accreted interest to be received at maturity.
Foreign Currency Risk--Seagate Technology transacts business in various
foreign countries. Its primary foreign currency cash flows are in emerging
market countries in Asia and in certain European countries. During 1998,
Seagate Technology employed a foreign currency hedging program utilizing
foreign currency forward exchange contracts and purchased currency options to
hedge local currency cash flows from payroll, inventory, other operating
expenditures and fixed asset purchases in Singapore, Thailand, Malaysia, and
Ireland. Under this program, increases or decreases in Seagate Technology's
local currency operating expenses and other cash outflows, as measured in U.S.
dollars, partially offset realized gains and losses on the hedging instruments.
The goal of this hedging program was to economically guarantee or lock in the
exchange rates on Seagate Technology's foreign currency cash outflows rather
than to eliminate the possibility of short-term earnings volatility. Based on
uncertainty in the Southeast Asian foreign currency markets, Seagate Technology
has temporarily suspended purchasing foreign currency forward exchange and
option contracts for the Thai baht, Malaysian ringgit and Singapore dollar.
Seagate Technology does not use foreign currency forward exchange contracts or
purchased currency options for trading purposes.
Under Seagate Technology's foreign currency hedging program, gains and
losses related to qualified hedges of firm commitments and anticipated
transactions were deferred and recognized in income or as adjustments of
carrying amounts when the hedged transaction occurred. All other foreign
currency hedge contracts were marked-to-market and unrealized gains and losses
were included in current period net income. Because not all economic hedges
qualified as accounting hedges, certain unrealized gains and losses were
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 mismatch resulted in a pre-tax charge of $76
million for the year ended July 3, 1998.
71
<PAGE>
The table below provides information as of July 2, 1999 about Seagate
Technology's derivative financial instruments, comprised of foreign currency
forward exchange contracts and purchased currency options. The information is
provided in U.S. dollar equivalent amounts, as presented in Seagate
Technology's financial statements. For foreign currency forward exchange
contracts, the table presents the notional amounts (at the contract exchange
rates) and the weighted average contractual foreign currency exchange rates. As
of July 3, 1998, Seagate Technology had effectively closed out all of its
foreign currency forward exchange contracts by purchasing offsetting contracts.
The amounts listed below represent forward exchange contracts and offsets for
which Seagate Technology did not have a legal right of offset. Seagate
Technology would not have incurred any incremental accounting loss as of July
3, 1998 if any party had failed to perform. This was because the estimated fair
value of the offsetting forward sales contracts was effectively zero. As of
July 2, 1999, Seagate Technology had no outstanding foreign currency forward
exchange or purchased currency option contracts.
<TABLE>
<CAPTION>
Average Estimated
Notional Contract Fair
Amount Rate Value*
In millions, except average contract rate -------- -------- ---------
<S> <C> <C> <C>
As of July 3, 1998
Foreign currency forward exchange contracts:
Malaysian ringgit:
Forward purchase contracts................... $ 40 3.10 $(11)
Forward sales contracts...................... (29) 4.24 --
---- ----
$ 11 $(11)
Singapore dollar:
Forward purchase contracts................... $ 52 1.51 $ (7)
Forward sales contract....................... (45) 1.73 --
---- ----
$ 7 $ (7)
Irish punt:
Forward purchase contracts................... $ 9 1.43 $ 0
Forward sales contracts...................... 9 1.46 0
---- ----
$-- $--
</TABLE>
- --------
* Equivalent to the unrealized net gain (loss) on existing contracts.
72
<PAGE>
BUSINESS OF SEAGATE SOFTWARE
Overview
The Company
Seagate Software develops and markets software products and provides related
services enabling business users and information technology professionals to
store, access and manage enterprise information. Headquartered in Scotts
Valley, California, Seagate Software has over 30 offices and operations in 16
countries worldwide. Seagate Software is a majority-owned and consolidated
subsidiary of Seagate Technology. As of August 25, 1999, Seagate Technology
held approximately 99.93% of all outstanding shares of Seagate Software. The
remaining shares of Seagate Software are held by current and former employees,
directors and consultants of Seagate Software, Seagate Technology and their
subsidiaries. In addition, options to purchase 4,002,326 shares of Seagate
Software common stock were outstanding as of August 25, 1999.
Prior to May 28, 1999, Seagate Software was comprised of two operating
groups, the Information Management Group and the Network & Storage Management
Group. Each operating group provides products in distinct segments of the
business software market. The Network & Storage Management Group was
contributed to VERITAS Software Corporation ("VERITAS") on May 28, 1999 for
69,148,208 shares of VERITAS Software Corporation common stock, or
approximately 42% of outstanding shares on that date. While a division of
Seagate Software, the Network and Storage Management Group offered network and
storage management software solutions, which focus on the availability
component of enterprise information management by enabling information
technology professionals to manage distributed network resources and to secure
and protect enterprise data. After the closing of the contribution of the
Network & Storage Management Group business to VERITAS, Seagate Software has
continued to operate its Information Management Group business.
Seagate Software's products permit analysis and interpretation of data in
order to make business decisions. An important component of these products is
technology that enables the user to create reports that present analysis and
interpretation to others. In fiscal 1999 and fiscal 1998, the Information
Management Group's revenue represented approximately 41% and 40% of Seagate
Software's total revenue, respectively.
Seagate Software offers a breadth of business software products:
. Seagate Crystal Reports for Microsoft BackOfficeTM--Generates a set of
top-requested reports to ease systems administration functions for the
Microsoft BackOffice family of software products.
. Seagate Crystal InfoTM--Provides decision-makers with shared access to
reporting and analysis capabilities, so users get fast access to data
without having to interact with the database. Whether using
a Web browser or Windows, users can schedule, view and analyze reports
or create multiple views of data to expose trends and provide
comparative information. This product contains an enterprise-friendly
multi-tier architecture to lower network traffic and increase user
productivity.
. Seagate Crystal ReportsTM--Provides query and report writing functions
for Windows. A developer and end-user tool, Seagate Crystal Reports
allows users to access most types of personal computer and structured
query language data and design a variety of reports and integrate them
into database applications.
. Seagate Holos(R)--Provides multiple views of data to expose trends and
provides comparative information to focus on key business issues and
accurately reflect business processes. These applications allow
enterprises to analyze the increasing volumes of data and guide users to
the information to improve decision making.
. Seagate AnalysisTM-Based on Seagate Crystal Reports, Seagate Analysis
adds ad hoc query, OLAP, and Microsoft Excel integration capabilities
all in one integrated interface.
Seagate Software also continues to offer network and storage management
products by virtue of ongoing agreements with VERITAS.
73
<PAGE>
Seagate Software provides its software products to customers under non-
exclusive, non-transferable license agreements including shrink-wrap licenses
for certain products. As is customary in the software industry, in order to
protect its intellectual property rights, Seagate Software does not sell or
transfer title to its software products to customers.
Seagate Software enters into both object-code only and source-code licenses
of its products. Under Seagate Software's current standard end-user license
agreement, licensed software may be used solely for the customers' internal
operations and only at specified sites, which may be comprised of a stand-alone
computer, a single network server with multiple terminals or multiple network
servers with multiple terminals.
Sales and Marketing
Seagate Software utilizes a direct sales force and certain indirect sales
channels, such as distributors and original equipment manufacturer
relationships, for sales of its selected products to end users. These
distributors and original equipment manufacturers may also sell other products
that are complementary to or compete with those of Seagate Software. Seagate
Software provides sales and marketing programs to encourage the sale of its
products, but there can be no assurance that its distributors and original
equipment manufacturers will not place a higher priority on competing products.
Agreements with its distributors and original equipment manufacturers are
generally non-exclusive and may be terminated by either party without cause.
Seagate Software generally markets its products domestically and overseas
through a network of subsidiaries. These subsidiaries utilize authorized
distributors and direct sales forces. Seagate Software adapts certain products
for foreign markets, including translation and documentation, and Seagate
Software prepares marketing and sales support programs accordingly. Seagate
Software has organized its sales management into geographical regions to
increase the effectiveness of its sales efforts.
Seagate Software's marketing efforts are designed to increase awareness and
consideration of, and to generate leads for, its products. Marketing activities
include print advertising in trade and technical publications, on-line
advertising on the World Wide Web, cooperative marketing with distributors and
resellers, participation in seminars and tradeshows, mailings to end users and
other public relations efforts. Seagate Software's marketing groups produce or
oversee the production of substantially all of the on-line and print product
literature, brochures, advertising and similar marketing and promotional
material.
Revenue from one customer, Ingram Micro Inc. ("Ingram"), accounted for 22%,
22% and 18% of the Seagate Software's total revenues in fiscal 1999, 1998 and
1997, respectively. Indirect revenues, which include sales to distributors and
original equipment manufacturers ("OEMs"), were 70%, 69% and 63% of total
revenues during fiscal 1999, 1998 and 1997, respectively. Revenues outside of
the Americas were 34%, 32% and 30% of total revenues during fiscal 1999, 1998
and 1997, respectively.
During fiscal 1999, 1998 and 1997, Seagate Software generated export
revenues from the United States of approximately $83.3 million, $66.3 million
and $44.1 million, respectively. The Information Management Group's revenues
outside of the Americas were primarily denominated in the U.S. dollar, and
accordingly Seagate Software believes that its exposure to foreign currency
fluctuations is not material and it does not engage in foreign currency hedging
programs.
Technical Support and Maintenance
Seagate Software operates its own technical support groups. The technical
support groups are located at various sites around the world, including the
U.S., Canada and Europe, and provide pre-sale, installation and post-sale
support to current users and potential customers evaluating Seagate Software's
products. Certain technical support groups also offer seven-day, 24-hour toll-
free telephone services. Seagate Software believes that effective technical
support during product evaluation substantially contributes to product
acceptance, and that post-sale support has been and will continue to be a
substantial factor in maintaining customer satisfaction.
74
<PAGE>
Seagate Software offers maintenance programs for certain of its software
products, which may consist of product enhancements, updated products and
technical support. Generally, customers renew maintenance and support on an
annual basis by paying a maintenance fee. Maintenance revenue implicit in new
product sales and recurring maintenance charges are recognized ratably over the
period the maintenance and support services are to be provided.
Strategic Relationships
Seagate Software has developed original equipment manufacturer and other
strategic relationships with over 150 application software developers and
computer hardware manufacturers that sell and support Seagate Software's
products as well as integrate Seagate Software's products into their products.
Such strategic relationships have been established with companies including
Compaq, IBM, Informix, Microsoft, Netscape, Oracle, PeopleSoft, SAP and Sun.
Seagate Software's strategic relationship with Microsoft includes the
bundling of its range of information management products with selected
Microsoft products. Seagate Crystal Reports is bundled with several Microsoft
BackOffice products and with developer tools such as Microsoft Visual Basic.
Seagate Info is bundled in the current BackOffice Server suite.
Research and Development
Seagate Software incurred research and development expenses of $51,524,000,
$47,173,000 and $42,842,000 in fiscal 1999, 1998 and 1997, respectively.
Certain of the research and development expenses, which have not been material
to date, are funded by Seagate Software's customers. Seagate Software is
pursuing its product development objectives by continuing its emphasis on
internally developing new software products and product enhancements, acquiring
products, technologies and businesses complementary to Seagate Software's
existing product lines and forming alliances with leading technology companies.
Competition
The segment of the software market in which Seagate Software competes is
comprised of numerous competitors and Seagate Software expects competition to
increase. Seagate Software has recently experienced increased competition from
additional entrants into its market, including companies that specialize in the
development, marketing and support of software products that assist users to
analyze and interpret data to make business decisions. Many of Seagate
Software's current and prospective competitors have significantly greater
financial, technical and marketing resources than Seagate Software. In
addition, many prospective customers may have the internal capability to
implement software solutions that assist users to analyze and interpret data to
make business decisions.
The competitive factors affecting the market for Seagate Software's software
products include the following:
. product functionality,
. performance and reliability,
. demonstrable cost effective benefits for users relative to cost,
. price,
. quality of customer support and user documentation,
. ease of installation,
. vendor reputation,
. experience and
. financial stability.
75
<PAGE>
Seagate Software believes that it currently competes effectively with
respect to these factors. Seagate Software's ability to remain competitive will
depend to a great extent upon its ongoing performance in the areas of product
development and customer support. To be successful in the future, Seagate
Software must respond promptly and effectively to the challenges of
technological change and its competitors' innovations by continually enhancing
its own product offerings. Performance in these areas will in turn depend upon
Seagate Software's ability to attract and retain highly qualified technical
personnel in a competitive market for experienced and talented software
developers.
Patents and Intellectual Property Rights
Due to the rapidly changing nature of applicable technologies, Seagate
Software believes that the improvement of existing products, reliance upon
trade secrets and unpatented proprietary know-how and development of new
products are generally more important than patent protection. Seagate Software
has no U.S. or foreign patents, has one patent application pending in the U.S.,
and has no foreign patent applications pending.
Seagate Software's license agreements have restrictions in place to protect
and defend its intellectual property. Seagate Software realizes that although
it has incorporated these restrictions, there is a possibility for unauthorized
use of its software. In addition to relying on these contractual rights,
Seagate Software has an ongoing trademark registration program in which it
registers certain of its product names, slogans and logos in the U.S. and in
some foreign countries.
Employees
As of July 2, 1999, Seagate Software employs approximately 1,100 people.
Seagate Software's success is highly dependent on its ability to attract and
retain qualified employees. Competition for qualified employees is intense in
the software industry. None of Seagate Software's employees are represented by
a labor union or are the subject of a collective bargaining agreement. Seagate
Software has never experienced a work stoppage and believes that its employee
relations are good.
LEGAL PROCEEDINGS
On November 10, 1997, Vedatech Corporation commenced an action in the High
Court of Justice Chancery Division of the United Kingdom against Seagate
Software Information Management Group Ltd. claiming breach of an oral agreement
and infringement of a Vedatech U.K. copyright in the Japanese translation of
one of the Seagate Software products and seeking monetary and injunctive
relief. No specific damage amount has yet been claimed. Seagate Software has
hired local counsel in the U.K., reviewed documents and conducted interviews.
Seagate Software filed an initial response in the U.K. court on January 13,
1998 and is now in the discovery process. Seagate Software believes the
complaint has no merit and intends to vigorously defend the action. However, if
an unfavorable outcome were to arise, there can be no assurance that such
outcome would not have a material adverse effect on the Seagate Software's
liquidity, financial position or results of operations.
On December 22, 1998, a former employee commenced an action in the Superior
Court of Santa Cruz County, California, against Seagate Software claiming
promissory fraud and fraudulent inducement to enter a contract, breach of a
contract, constructive wrongful discharge and related claims and seeking
monetary and injunctive relief. Specifically, the former employee alleged that
a Seagate Software officer agreed to sell him a division of our Network and
Storage Management Group business. This action was dismissed with prejudice on
May 10, 1999 with no payment by either side.
In addition to the foregoing, the Seagate Software is engaged in legal
actions arising in the ordinary course of its business and believes that the
ultimate outcome of these actions will not have a material adverse effect on
Seagate Software's financial position, liquidity, or results of operations.
76
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT OF SEAGATE SOFTWARE
The following table sets forth information with respect to the beneficial
ownership of Seagate Software's outstanding common stock and preferred stock on
an as-converted basis, sum of which is the common equivalent shares, as of July
2, 1999 for:
. each person who we know holds more than 5% of Seagate Software's common
equivalent shares;
. Seagate Software's most highly compensated executive officers
individually;
. Seagate Software's directors individually; and
. Seagate Software's directors and executive officers as a group.
Seagate Software has determined beneficial ownership in accordance with the
rules of the Securities and Exchange Commission. To Seagate Software's
knowledge, the persons named in the table have sole voting and investment power
with respect to all shares shown as beneficially owned by them unless indicated
otherwise below and subject to community property laws where applicable.
Seagate Software has calculated percentage ownership based on 57,994,531
common equivalent shares of Seagate Software as of July 2, 1999. Seagate
Software has included in each person's beneficial ownership that person's
options to purchase Seagate Software common stock all of which will be vested
and exercisable as of the closing of the merger. However, Seagate Software has
not included any other person's options for the purpose of computing percentage
ownership.
To compute the number of common equivalent shares outstanding Seagate
Software has assumed that Seagate Software's Series A preferred stock is
converted on a 1:1 basis to Seagate Software common stock.
<TABLE>
<CAPTION>
Number of Percent of
Common Common
Equivalent Equivalent
Stockholder Shares Shares
- ----------- ---------- ----------
<S> <C> <C>
Seagate Technology, Inc. .............................. 57,962,988 99.95%
920 Disc Drive
Scotts Valley, CA 95066
Stephen J. Luczo ...................................... 57,984,863 99.98%
Donald L. Waite ....................................... 57,970,988 99.96%
Gary B. Filler ........................................ 57,966,217 99.95%
Lawrence Perlman ...................................... 57,966,217 99.95%
Gregory B. Kerfoot .................................... 68,749 *
Ellen E. Chamberlain .................................. 17,041 *
All Seagate Software directors and executive officers
as a group (6 persons)................................ 58,085,111 100%
</TABLE>
- --------
* Less than one percent.
Seagate Technology's beneficial ownership excludes 36,333 shares of Seagate
Software's common stock held by or issuable pursuant to options granted to Mr.
Luczo, Mr. Waite, Mr. Filler and Mr. Perlman over which Seagate Technology does
not possess sole or shared voting or investment control. Therefore Seagate
Technology disclaims beneficial ownership of those shares.
77
<PAGE>
Beneficial ownership for Mr. Luczo, Mr. Waite, Mr. Filler and Mr. Perlman
includes 57,962,988 common equivalent shares beneficially owned by Seagate
Technology to which each of them may be deemed to have shared power to vote or
dispose in his capacity as an officer and/or director of Seagate Technology.
However, each of Mr. Luczo, Mr. Waite, Mr. Filler and Mr. Perlman disclaim
beneficial ownership of those shares.
With respect to the beneficial ownership of the following persons, the
security ownership table above includes exercisable options expected to be
vested in full shortly before the merger in the following amounts:
<TABLE>
<CAPTION>
Name Options
---- -------
<S> <C>
Stephen J. Luczo..................................................... 145,211
Donald L. Waite...................................................... --
Gary B. Filler....................................................... 14,063
Lawrence Perlman..................................................... 14,063
Gregory B. Kerfoot .................................................. 455,209
Ellen E. Chamberlain................................................. 110,638
All directors and officers as a group (6 persons).................... 739,184
</TABLE>
Mr. Waite holds 5,000 shares of Seagate Software common stock that are
subject to repurchase by Seagate Software. Seagate Software's right to
repurchase those shares expires on various dates through 2000.
Based on the number of outstanding shares of Seagate Technology common stock
as of September , 1999 and after giving effect to the issuance of Seagate
Technology common stock and options in the merger, assuming that all
outstanding shares of Seagate Software common stock are exchanged for Seagate
Technology common stock pursuant to the merger, no director or executive
officers of Seagate Software or holder of 5% or more of Seagate Software's
common equivalent shares will beneficially own more than 1% of the outstanding
Seagate Technology common stock immediately after the merger.
The officers, directors and greater than five percent stockholders of
Seagate Technology have the following interests in shares of Seagate Software
stock and options that will be vested in full shortly before the merger.
<TABLE>
<CAPTION>
Shares and
Options held as of
Name and Title August 25, 1999
- -------------- ------------------
<S> <C>
Stephen J. Luczo........................................... 145,211
Chief Executive Officer, President and Director
Gary B. Filler............................................. 14,063
Co-Chairman of the Board of Directors
Lawrence Perlman........................................... 14,063
Co-Chairman of the Board of Directors
Kenneth Haughton........................................... 5,000
Director
Robert A. Kleist........................................... 5,000
Director
Thomas P. Stafford......................................... 5,000
Director
Laurel L. Wilkening........................................ 5,000
Director
Bernardo A. Carballo....................................... 5,000
Executive Vice President Worldwide Sales & Marketing
Don G. Colton.............................................. 9,500
Executive Vice President Corporate Quality
Thomas F. Mulvaney......................................... 2,000
Senior Vice President, General Counsel and Corporate
Secretary
Charles C. Pope............................................ 6,584
Executive Vice President Finance and Chief Financial
Officer
Townsend H. Porter, Jr. ................................... 12,250
Executive Vice President, Product Technology Development
And Chief Technical Officer
Donald L. Waite............................................ 8,000
Executive Vice President, Chief Administrative Officer And
Assistant Secretary
William D. Watkins......................................... 5,000
Executive Vice President And Chief Operating Officer
</TABLE>
78
<PAGE>
Executive Officers and Management
The directors and executive officers of Seagate Software and certain
information about them as of September , 1999, are as follows:
<TABLE>
<CAPTION>
Director or
Executive Officer
Name Age Position Since
---- --- -------- -----------------
<S> <C> <C> <C>
Stephen J. Luczo........ 42 Chairman of the Board of Directors 1996
Gary B. Filler.......... 58 Director 1996
Lawrence Perlman........ 61 Director 1996
Donald L. Waite......... 66 Director 1996
Gregory B. Kerfoot...... 39 President and Chief Operating Officer 1996
Ellen E. Chamberlain.... 42 Senior Vice President, Treasurer and 1996
Chief Financial Officer
</TABLE>
Mr. Luczo currently serves as Chairman of the Board of Directors of Seagate
Software and as Chief Executive Officer, President and Director of Seagate
Technology. Prior to becoming Seagate Software's Chairman in July 1997, Mr.
Luczo served as Seagate Software's Chief Operating Officer between March 1995
and July 1997. Mr. Luczo joined Seagate Technology in October 1993 as Senior
Vice President, Corporate Development and was promoted to Executive Vice
President, Corporate Development in March 1995, where he served until September
1997. He was promoted to President and Chief Operating Officer of Seagate
Technology in September 1997, serving in the latter capacity until July 1998.
In July 1998, Mr. Luczo was promoted to Chief Executive Officer and appointed
to the board of directors of Seagate Technology. Before joining Seagate
Technology in 1993, Mr. Luczo was Senior Managing Director and Co-head of the
Bear Stearns and Co. Global Technology Group from February 1992 to October
1993. Mr. Luczo also serves on the Boards of Directors of Gadzoox Microsystems,
Inc. and Dragon Systems, Inc.
Mr. Filler currently serves as a director of Seagate Software and as Co-
chairman of the board of directors of Seagate Technology. Mr. Filler has held
various positions on Seagate Technology's board of directors, including Vice
Chairman from October 1990 until September 1991, Chairman from September 1991
until October 1992, and Co-chairman since July 1998. Mr. Filler has been a
financial consultant since September 1996. He was Senior Vice President and
Chief Financial Officer of Diamond Multimedia Systems, Inc., a multimedia and
graphics company, from January 1995 to September 1996. From June 1994 to
January 1995, Mr. Filler was a business consultant and private investor. From
February 1994 until June 1994, he served as Executive Vice President and Chief
Financial Officer of ASK Group, Inc., a computer systems company. Mr. Filler
also serves on the Board of Directors of Sento Corporation.
Mr. Perlman currently serves as a director of Seagate Software and as Co-
chairman of the board of directors of Seagate Technology. He was appointed
Chairman of the board of directors of Ceridian Corporation (formerly Control
Data Corporation), a technology-based services company, in November 1992. Mr.
Perlman previously held several executive positions at Ceridian Corporation,
including President and Chief Executive Officer of Imprimis Technology
Incorporated, a subsidiary of Control Data Corporation. He was a regent of the
University of Minnesota from 1992 to 1995. Mr. Perlman also serves on the
boards of directors of Computer Network Technology Corporation, AMDOCS Limited,
and Valspar Corporation.
Mr. Waite currently serves as a director of Seagate Software and as
Executive Vice President, Chief Administrative Officer, and Assistant Secretary
of Seagate Technology. Since joining Seagate Technology in 1983, Mr. Waite has
served in various roles, including Chief Financial Officer from 1983 to
February 1998. He has served as Executive Vice President and Chief
Administrative Officer since March 1995 and as Assistant Secretary since July
1998. Mr. Waite also serves on the boards of directors of California Micro
Devices and CVC Holdings, Inc.
Mr. Kerfoot currently serves as Seagate Software's President and Chief
Operating Officer. He was named President, Chief Operating Officer and director
of Seagate Software upon consummation of the contribution of the Network &
Storage Management Group business to VERITAS in May 1999. Prior to May 1999,
79
<PAGE>
Mr. Kerfoot served as the Chief Strategic Officer and as Executive Vice
President and General Manager of IMG. He joined Crystal in September 1988 as
the Director of Research and Development and Chief Architect of Crystal
Reports. In May 1994 he joined Seagate Technology in connection with its
acquisition of Crystal and continued as Crystal's Director of Research and
Development until May 1996, when he was named President of IMG. Later in 1996,
he was named Executive Vice President and General Manager of IMG. Since fiscal
1998 Mr. Kerfoot has served as Chief Strategic Officer for Seagate Software as
well as Executive Vice President and General Manager of IMG. In his role as
President and Chief Operating Officer of Seagate Software, Mr. Kerfoot is
responsible for the day to day operations of Seagate Software and serves in a
role functionally equivalent to that of a chief executive officer of a
corporation.
Ms. Chamberlain currently serves as Seagate Software's Senior Vice
President, Treasurer, and Chief Financial Officer. She joined Seagate
Technology in March 1985 and served in various finance positions, including
Vice President and Treasurer between November 1994 and February 1996. In June
1995, Ms. Chamberlain began simultaneously supporting the development of
Seagate Software. She served as Seagate Software's Vice President between
November 1994 and March 1997, when she was promoted to Senior Vice President
and Chief Financial Officer. Ms. Chamberlain was also promoted to Treasurer of
Seagate Software in March 1997 after serving as its Assistant Treasurer since
April 1996.
80
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF SEAGATE SOFTWARE
Certain Forward-Looking Information
Certain statements in this Management's Discussion and Analysis of Financial
Condition and Results of Operations of Seagate Software and contained elsewhere
herein are forward-looking statements based on current expectations, and entail
various risks and uncertainties that could cause actual results to differ from
those projected in such forward-looking statements. Certain of these risks and
uncertainties are set forth below in the sections entitled "Liquidity and
Capital Resources" and "Factors Affecting Seagate Software's Future Operating
Results."
Overview
Seagate Software develops and markets software products and provides related
services enabling business users and information technology professionals to
manage enterprise information. Seagate Software was comprised of two operating
groups, the Information Management Group and the Network & Storage Management
Group. Headquartered in Scotts Valley, California, Seagate Software has over 30
offices and operations in 16 countries worldwide. Seagate Software is a
majority-owned and consolidated subsidiary of Seagate Technology, Inc.
("Seagate Technology"), a data technology company that provides products for
storing, managing and accessing digital information on computer systems. As of
July 2, 1999, Seagate Technology and one of its subsidiaries held 99.96% of
Seagate Software's outstanding capital stock. On a fully converted basis the
outstanding minority interests of Seagate Software amounted to approximately
6.2%, which consisted of common stock and options to purchase its common stock
issued pursuant to the 1996 Stock Option Plan (the "Option Plan") and common
stock subject to repurchase. Such options and stock are held by certain current
and former employees, directors and consultants of Seagate Software and Seagate
Technology.
Seagate Software was incorporated in Delaware in November 1993 and commenced
operations in May 1994 pursuant to Seagate Technology's merger with Crystal
Computer Services, Inc., a company engaged in developing and marketing report
writing software. From August 1994 to June 1996, Seagate Technology acquired
eight software companies, which were engaged in developing and marketing
business intelligence ("BI") or network and/or storage management software
products. In February 1996, Seagate Technology merged with Conner Peripherals,
Inc. in a transaction accounted for as a pooling-of-interests. In connection
with the merger, Seagate Technology purchased the outstanding minority
interests in Conner's storage management software operations under Arcada
Holdings, Inc. ("Arcada").
In April 1996, the Parent Company consolidated its software operations into
Seagate Software. In June 1998, Seagate Software acquired all of the
outstanding capital stock of Eastman Software Storage Management Group, Inc., a
company engaged in developing, producing and marketing hierarchical storage
management products for the Windows NT platform.
On May 28, 1999, Seagate Software contributed its Network and Storage
Management Group business ("NSMG") and related assets and liabilities to a
newly formed company, VERITAS Holding Corporation, now known as VERITAS
Software Corporation combining this business with that of VERITAS Operating
Corporation, formerly VERITAS Software Corporation. The NSMG business comprised
approximately 58.9% of revenues and 63.8% of gross profits in fiscal 1999
(59.7% and 62.5% in 1998, respectively). In connection
with the contribution of the NSMG business to VERITAS, Seagate Software
recorded a gain of $1,670 million, net of certain related compensation expense
and transaction related costs. In addition, Seagate Software recorded the
write-off of in-process research and development totaling approximately $87.1
million, of which $84.7 million was charged against "Activity relating to
investment in VERITAS" and $2.4 million was charged directly to write-off of
in-process research and development for amounts associated with the acquisition
of the minority interests of Seagate Software.
81
<PAGE>
Seagate Software operates and reports financial results on a fiscal year of
52 or 53 weeks ending on the Friday closest to June 30. Accordingly, fiscal
1999 ended on July 2, 1999, fiscal 1998 ended on July 3, 1998 and fiscal 1997
ended on June 27, 1997. Fiscals 1999 and 1997 were comprised of 52 weeks and
fiscal 1998 was comprised of 53 weeks. All references to years in this Form 10-
K represent fiscal years unless otherwise noted.
Business Combinations
Seagate Software has a history of business combinations and during the three
most recent fiscal years these included the contribution of its Network &
Storage Management Group to VERITAS in fiscal 1999 and the acquisition of
Eastman Storage Software Management Group in fiscal 1998. No business
combinations occurred in fiscal 1997. In connection with these business
combinations, Seagate Software has recognized significant write-offs of in-
process research and development. The completion of the underlying in-process
projects acquired within each business combination was the most significant and
uncertain assumption utilized in the valuation analysis of the in-process
research and development. Such uncertainties could give rise to unforeseen
budget over runs and/or revenue shortfalls in the event that Seagate Software
is unable to successfully complete a certain R&D project. Seagate Software is
primarily responsible for estimating the fair value of the purchased R&D in all
business combinations accounted for under the purchase method. The nature of
research and development projects acquired, the estimated time and costs to
complete the projects and significant risks associated with the projects are
described below.
Valuation Methodology
In accordance with the provisions of APB Opinion 16, all identifiable
assets, including identifiable intangible assets, were assigned a portion of
the cost of the acquired enterprise (purchase price) on the basis of their
respective fair values. This included the portion of the purchase price
properly attributed to incomplete research and development projects that should
be expensed according to the requirements of Interpretation 4 of SFAS No. 2.
Intangible assets were identified through (i) analysis of the acquisition
agreement, (ii) consideration of Seagate Software's intentions for future use
of the acquired assets, and (iii) analysis of data available concerning
products, technologies, markets, historical financial performance, estimates of
future performance and the assumptions underlying those estimates. The economic
and competitive environment in which Seagate Software operates was also
considered in the valuation analysis.
The Income Approach, which includes an analysis of the markets, cash flows,
and risks associated with achieving such cash flows, was the primary technique
utilized in valuing each purchased research and development project. A portion
of the purchase price was allocated to the developmental projects based on the
appraised fair values of such projects. A summary of Seagate Software's most
recent business combinations activities is as follows:
Contribution of the Network & Storage Management Group to New VERITAS and
the purchase of outstanding shares of Seagate Software by Seagate Technology.
Contribution of the Network & Storage Management Group to New VERITAS
On May 28, 1999, Seagate Software, its subsidiary Seagate Software Network &
Storage Management Group, Inc., and its parent company Seagate Technology,
closed the Agreement and Plan of Reorganization (the "Plan") dated October 5,
1998 with VERITAS Holding Corporation ("New VERITAS") and VERITAS Software
Corporation ("VERITAS"). The Plan provided for the contribution by Seagate
Software, Seagate
Technology, and certain of its respective subsidiaries to New VERITAS of (a)
the outstanding stock of the Network & Storage Management Group and certain
other subsidiaries of Seagate Software and (b) those assets used primarily in
the network and storage management business of Seagate Software (the "NSMG
business"),
82
<PAGE>
in consideration for the issuance of shares of Common Stock of New VERITAS to
Seagate Software and the offer by New VERITAS to grant options to purchase
Common Stock of New VERITAS to certain of Seagate Software's employees who
become employees of New VERITAS or its subsidiaries. As part of the Plan, New
VERITAS assumed certain liabilities of the NSMG business. The Plan was
structured to qualify as a tax-free exchange.
Subsequent to the consummation, all outstanding securities of New VERITAS
were assumed and converted into common stock of VERITAS with identical rights,
preferences and privileges, on a share for share basis. As a result of the
contribution of the NSMG business to New VERITAS, Seagate Software received a
total of 69,148,208 shares of VERITAS common stock and former employees of the
NSMG business received options to purchase an aggregate of 6,945,048 shares of
VERITAS common stock. Share and option amounts for VERITAS have been adjusted
to reflect the two-for-one stock split by VERITAS effected July 9, 1999.
VERITAS common stock is publicly traded and is quoted by the Nasdaq National
Market under the symbol "VRTS".
Seagate Software has accounted for the contribution of NSMG to New VERITAS
as a non-monetary transaction using the fair value of the assets and
liabilities exchanged. After the transaction, Seagate Software owns
approximately 41.63% (69,148,208 shares) of the outstanding shares of VERITAS
on May 28, 1999. Because Seagate Software still owns a portion of the NSMG
business through its ownership of VERITAS, Seagate Software did not recognize
100% of the gain on the exchange. The gain recorded is equal to the difference
between 58.37% of the fair value of the VERITAS common stock received and
58.37% of Seagate Software's basis in the NSMG assets and liabilities
exchanged. Seagate Software is accounting for its on going investment in
VERITAS using the equity method. The difference between the recorded amount of
Seagate Software's investment in VERITAS and the amount of its underlying
equity in the net assets of VERITAS has been allocated based upon the fair
value of the underlying tangible and intangible assets and liabilities of
VERITAS. The intangible assets included amounts allocated to in-process
research and development and resulted in a $84,707,000 write-off included in
"Activity related to equity interests in VERITAS" in the accompanying statement
of operations. Intangible assets including goodwill are being amortized over 4
years.
Seagate Software will include in its financial results its share of the net
income or loss of VERITAS, excluding certain NSMG purchase accounting related
amounts recorded by VERITAS, but including Seagate Software's amortization of
the difference between the recorded investment and the underlying assets and
liabilities of VERITAS. Because of practicality considerations, the net income
or loss of VERITAS will be included in the results of Seagate Software on a one
quarter lag basis.
Seagate Technology exchange offer
In a separate but related transaction, on June 9, 1999, Seagate Technology
exchanged 5,275,772 shares of Seagate Technology common stock for 3,267,155 of
the outstanding shares of Seagate Software common stock owned by employees,
directors and consultants of Seagate Software. The exchange ratio was
determined based on the estimated value of Seagate Software common stock
divided by the fair market value of Seagate Technology common stock.
The estimated value of Seagate Software common stock was determined based
upon the sum of the fair value of the NSMG business, as measured by the fair
value of the shares received from VERITAS, plus the estimated fair value of the
Information Management Group ("IMG") as determined by Seagate Software's Board
of Directors, plus the assumed proceeds from the exercise of all outstanding
stock options, divided by the number of fully converted shares of Seagate
Software. The Board of Directors of Seagate Software considered a number of
factors in determining the estimated fair value of the IMG business, including
historical and projected revenues, earnings and cash flows, as well as other
factors and consultations with financial advisors.
83
<PAGE>
The fair value of the shares purchased less the original purchase price paid
by the employees was recorded as compensation expense for those shares
outstanding and vested less than six months. The purchase of shares outstanding
and vested more than six months was accounted for as the purchase of a minority
interest and, accordingly, the fair value of the shares exchanged was allocated
to all of the identifiable tangible and intangible assets and liabilities of
Seagate Software. Seagate Software recorded the acquisition of its common stock
by Seagate Technology as a capital contribution from Seagate Technology, and as
a result Seagate Software recorded compensation expense amounting to $123.8
million and wrote-off in-process research and development amounting to $2.4
million in the fourth quarter of fiscal 1999. Associated intangible assets and
goodwill are being amortized to operations over four years.
The value allocated to projects identified as in-process research and
development at VERITAS and for Seagate Software, for the minority interest
acquired by Seagate Technology, were charged to expense in the fourth quarter
of fiscal 1999. These write-offs were necessary because the acquired
technologies had not reached technological feasibility at the date of purchase
and have no future alternative uses. Seagate Software expects the acquired in-
process research and development will be successfully developed, but there can
be no assurance that commercial viability of these products will be achieved.
The nature of the efforts required to develop the purchased in-process
technology into commercially viable products principally relate to the
completion of all planning, designing, prototyping, verification and testing
activities that are necessary to establish that the product can be produced to
meet its design specifications, including functions, features and technical
performance requirements. The value of the purchased in-process technology for
VERITAS was estimated as the projected net cash flows related to such products,
including costs to complete the development of the technology and the future
revenues to be earned upon commercialization of the products, excluding
revenues attributable to future development efforts. These cash flows from such
projects were based on management's estimates of revenues and operating profits
related to such projects.
As of the date of the contribution of NSMG to New VERITAS, the estimated
costs to complete the in-process research and development projects at VERITAS
(including NSMG) was approximately $50 million.
Overview of purchase price allocation
In accordance with the provisions of Accounting Principles Board Opinions
No. 16 and 17, all identifiable assets acquired were analyzed to determine
their Fair Market Values. As the basis for identifying the in-process research
and development ("R&D"), the development projects were evaluated in the context
of Interpretation 4 of Financial Accounting Standards Board Statement No. 2. In
accordance with these provisions, the developmental projects were examined to
determine if there were any alternative future uses. Such evaluation consisted
of a specific review of the efforts, including the overall objectives of the
project, progress toward the objectives, and the uniqueness of the developments
of these objectives. Further, each in-process research and development project
was reviewed to determine if technological feasibility had been achieved.
Description of methodology
Tangible net assets of VERITAS (including NSMG) principally included cash
and investments, accounts receivable, fixed assets and other current assets.
Liabilities principally included accounts payable, accrued compensation, and
other accrued liabilities. Tangible assets and liabilities were recorded at
their fair value which was equal to book value. Intangible assets included
developed technology, distribution networks, original equipment manufacturer
agreements, trademarks, assembled workforce, and in-process research and
development. The fair value of intangible assets was determined as follows:
To estimate the value of the developed technology, the expected future cash
flows attributable to all existing technology was discounted, taking into
account risks related to the characteristics and applications of
84
<PAGE>
the technology, existing and future markets, and assessments of the life cycle
stage of the technology. The developed technology is being amortized on the
straight-line basis over its estimated useful life (four years) which is
expected to exceed the ratio of current revenues to the total of current and
anticipated revenues.
The value of the distribution networks and original equipment manufacturer
agreements was estimated by considering, among other factors, the size of the
current and potential future customer bases, the quality of existing
relationships with customers, the historical costs to develop customer
relationships, the expected income and associated risks. Associated risks
included the inherent difficulties and uncertainties in transitioning business
relationships and risks related to the viability of and potential changes to
future target markets.
The value of trademarks was estimated by considering, among other factors,
the assumption that in lieu of ownership of a trademark, a company would be
willing to pay a royalty in order to exploit the related benefits of such
trademark.
The value of the assembled workforce was estimated as the costs to replace
the existing employees, including recruiting, hiring, and training costs for
each category of employee.
The value allocated to projects identified as in-process technology at
VERITAS and at Seagate Software for the minority interest acquired by Seagate
Technology, were charged to expense in the fourth quarter of fiscal 1999. These
write-offs were necessary because the acquired technologies had not reached
technological feasibility at the date of purchase and have no future
alternative uses. Seagate Software expects that the acquired in-process
research and development will be successfully developed, but there can be no
assurance that commercial viability of these products will be achieved.
The nature of the efforts required to develop the purchased in-process
research and development into commercially viable products principally relate
to the completion of all planning, designing, prototyping, verification and
testing activities that are necessary to establish that the product can be
produced to meet its design specifications, including functions, features and
technical performance requirements. The value of the purchased in-process
technology for VERITAS was estimated as the projected net cash flows related to
such products, including costs to complete the development of the technology
and the future revenues to be earned upon commercialization of the products,
excluding revenues attributable to future development efforts. These cash flows
were then discounted back to their net present value. The projected net cash
flows from such projects were based on management's estimates of revenues and
operating profits related to such projects.
Goodwill was calculated as the residual difference between the estimated
amount paid and the values assigned to identified tangible and intangible
assets and liabilities.
Valuation assumptions
Revenue
Revenue estimates were based on (i) aggregate revenue growth rates for the
businesses as a whole, (ii) growth rates for the storage management software
market, (iii) the aggregate size of the storage management software market,
(iv) anticipated product development and introduction schedules, (v) product
sales cycles, and (vi) the estimated life of a product's underlying technology.
Future revenue estimates were generated based on the worldwide storage
management software market and the backup, restore and archive market. The
overall storage management software market is forecasted to increase at a
compound annual growth rate of 14.2%, from a 1997 value of $2,543 million to a
2002 value of $4,941 million. The backup, restore and archive software segment
of storage management software and in particular the Windows NT segment, in
which NSMG competes, is expected to grow much faster than other segments.
Revenue for Windows 95 and Windows NT is projected to grow at a 43.3% compound
annual growth rate from 1997 through 2002.
85
<PAGE>
Revenue for NSMG was forecasted by product line for the years 1999 through
2001. Revenue was expected to be $350 million for the 1999 calendar year.
Thereafter, NSMG is expected to grow slightly greater than the 43.3% industry
average through 2003. The revenue by product was allocated between existing,
in-process, and future technology; indicating a four-year life cycle for
revenue contribution from technology which is consistent with NSMG's historical
experience with technology life cycles.
VERITAS is an open systems supplier. The market for open systems suppliers
grew 101.2% between 1996 and 1997.
Revenue for VERITAS was forecasted by product line for the years 1999
through 2001. Revenue was expected to be $270 million for the 1999 calendar
year. Thereafter, VERITAS is expected to grow at 67.9% and 58.4% for years 2000
and 2001, respectively, a rate greater than the 43.3% industry average. For
years 2002 through 2005, revenues are expected to level off at a 40% growth
rate. The revenue by product was allocated between existing, in-process, and
future technology indicating a four-year life cycle (revenue contribution from
technology) for Windows NT based products and a three-year life cycle for Unix
based products which is consistent with VERITAS' past experience with
technology life cycles.
Operating expenses
Estimated operating expenses used in the valuation analysis of NSMG and
VERITAS included (i) cost of goods sold, (ii) general and administrative
expense, (iii) sales and marketing expense, and (iv) research and development
expense. In developing future expense estimates, an evaluation of both NSMG and
VERITAS's overall business models, specific product results, including both
historical and expected direct expense levels (as appropriate), and an
assessment of general industry metrics was conducted.
Cost of goods sold. Cost of goods sold, for the developed and in-process
technologies was estimated to be approximately 8.6% of revenues from 2000 to
2006 for NSMG. Cost of goods sold, for the developed and in-process
technologies was estimated to be approximately 14.7% of revenues from 2000 to
2005 for VERITAS.
General and administrative ("G&A") expense. G&A expense, expressed as a
percentage of revenue, for the developed and in-process technologies was 9.2%
in 1999 and expected to be reduced to 6.7% by 2002 for NSMG. G&A expense for
VERITAS, expressed as a percentage of revenue, for the developed and in-process
technologies was held constant at 4.4% of revenues for the forecast period of
2000 to 2005.
Selling and marketing ("S&M") expense. S&M expense, expressed as a
percentage of revenue, for the developed and in-process technologies was
estimated to be 37.4% for years 2000 to 2006 related to NSMG. S&M expense for
VERITAS, expressed as a percentage of revenue, for the developed and in-process
technologies was estimated to be 34.7% for years 2000 to 2005.
Research and development ("R&D") expense. R&D expense consists of the costs
associated with activities undertaken to correct errors or keep products
updated with current information (also referred to as "maintenance" R&D).
Maintenance R&D includes all activities undertaken after a product is available
for general release to customers to correct errors or keep the product updated
with current information. These activities include routine changes and
additions. The maintenance R&D expense was estimated to be 2% of revenue for
the developed and in-process technologies for the years 2000 to 2006 for NSMG.
R&D expense for VERITAS was estimated as 18.2% of revenue in 1999 and was
reduced to 16% by 2002, continuing at that rate until 2005.
As of the date of the contribution of NSMG to New VERITAS, the estimated
costs to complete the in-process research and development projects at VERITAS
(including NSMG) was approximately $50 million.
86
<PAGE>
Effective tax rate
The effective tax rate utilized in the analysis of developed and in-process
technologies was 33%, which reflects VERITAS's combined effective federal and
state statutory income tax rates, exclusive of non-recurring charges at the
time of the contribution and estimated for future years.
Discount rate
The discount rates selected for Seagate Software's developed and in-process
technologies were 12% and 17%, respectively. In the selection of the
appropriate discount rates, consideration was given to (i) the Weighted Average
Rate of Return (the "WARR", approximately 14% at the date of contribution) and
(ii) the Weighted Average Return on Assets (approximately 18% at the date of
contribution) that investors expect for companies with similar anticipated
growth rates and other characteristics as the NSMG and VERITAS businesses. The
discount rate utilized for the in-process research and development was
determined to be higher than the WARR due to the fact that the technology had
not yet reached technological feasibility as of the date of valuation. In
utilizing a discount rate greater than the WARR, management has reflected the
risk premium associated with achieving the forecasted cash flows associated
with these projects. The discount rate was adjusted downward from the WARR for
the developed technologies to reflect less technological and market risk
associated with forecasted sales of the existing products.
Eastman Software Storage Management Group.
Overview
Eastman's two primary products were OPEN/stor for Windows NT and AvailHSM
for NetWare. By integrating Eastman's product line, NSMG planned to convert
Eastman's Storage Migrator product into a stand-alone HSM application for
Windows NT environments. As of the date of acquisition, Seagate Software
determined that it would abandon the AvailHSM product and technology due to
dated features and functionality; and accordingly, the valuation analysis did
not include a fair value for the AvailHSM product.
As for OPEN/stor at the date of acquisition, NSMG planned to phase out the
product over the following 12 to 15 months. NSMG's purpose for the acquisition
was for the next generation technologies that were underway at Eastman,
referenced by project names Sakkara and Phoenix. These projects were complete
re-writes of Eastman's prior generation technology that would allow the product
to be sold stand-alone upon completion.
In accordance with SFAS 86, paragraph 38 ("Accounting for the Costs of
Computer Software to be Sold, Leased, or Otherwise Marketed"), "the cost of
software purchased to be integrated with another product or process will be
capitalized only if technological feasibility was established for the software
component and if all research and development activities for the other
components of the product or process were completed at the time of the
purchase." Although Seagate Software purchased existing products from Eastman,
the existing products did not operate on a stand-alone basis. Therefore, as
mentioned above, all of the original underlying code and base technology for
the next generation products were in the process of being completely re-written
as date of acquisition.
Assumptions
Revenue
Future revenue estimates were generated for the following technologies: (i)
OPEN/stor, (ii) Sakkara, and (iii) Phoenix. Aggregate revenue for existing
Eastman products was estimated to be approximately $167,000 for the one month
ending June 30, 1998. Revenues were estimated to increase to approximately $3.9
million and $7.1 million for fiscal years 1999 and 2000 when most of the in-
process projects were expected to be complete
87
<PAGE>
and shipping. Thereafter, revenue was estimated to increase at rates ranging
from 20% to 30% for fiscal years 2001 through 2006. Revenue estimates were
based on (i) aggregate revenue growth rates for the business as a whole, (ii)
individual product revenues, (iii) growth rates for the storage management
software market, (iv) the aggregate size of the storage management software
market, (v) anticipated product development and introduction schedules, (vi)
product sales cycles, and (vii) the estimated life of a product's underlying
technology.
Operating expenses
Operating expenses used in the valuation analysis of Eastman included (i)
cost of goods sold, (ii) general and administrative expense, (iii) selling and
marketing expense, and (iv) research and development expense. In developing
future expense estimates, an evaluation of both Seagate and Eastman's overall
business model, specific product results, including both historical and
expected direct expense levels (as appropriate), and an assessment of general
industry metrics was conducted.
Cost of goods sold. Cost of goods sold, expressed as a percentage of
revenue, for the developed and in-process technologies was estimated to be
approximately 5% throughout the estimation period. Seagate Software's cost of
goods sold was 20% for fiscal 1996 and 22% for fiscal 1997.
General and administrative ("G&A") expense. G&A expense, expressed as a
percentage of revenue, for the developed and in-process technologies was
estimated to be approximately 10% throughout the estimation period.
Selling and marketing ("S&M") expense. S&M expense, expressed as a
percentage of revenue, for the developed and in-process technologies was
estimated to be 27% throughout the estimation period.
Research and development ("R&D") expense. R&D expense consists of the costs
associated with activities undertaken to correct errors or keep products
updated with current information (also referred to as "maintenance" R&D).
Maintenance R&D includes all activities undertaken after a product is available
for general release to customers to correct errors or keep the product updated
with current information. These activities include routine changes and
additions. The maintenance R&D expense was estimated to be 5% of revenue for
the developed and in-process technologies throughout the estimation period.
In addition, as of the date of acquisition, Seagate Software's management
anticipated the costs to complete the in-process research and development at
approximately $1.8 million.
Effective tax rate
The effective tax rate utilized in the analysis of developed and in-process
research and development was 38%, which reflects Seagate's combined federal and
state statutory income tax rates, exclusive of non-recurring charges at the
time of the acquisition and estimated for future years.
Discount rate
The discount rates selected for Eastman's developed and in-process
technologies were 15% and 20%, respectively. In the selection of the
appropriate discount rates, consideration was given to (i) the Weighted Average
Cost of Capital (the "WACC", approximately 15% at the date of acquisition) and
(ii) the Weighted Average Return on Assets (approximately 18% at the date of
acquisition). The discount rate utilized for the in-process technology was
determined to be higher than Seagate's WACC due to the fact that the technology
had not yet reached technological feasibility as of the date of valuation. In
utilizing a discount rate greater than Seagate's WACC, management has reflected
the risk premium associated with achieving the forecasted cash flows associated
with these projects.
88
<PAGE>
Results of Operations
Fiscal Year 1999 versus Fiscal Year 1998
Results of operations for the fiscal year 1999 include eleven months of NSMG as
compared to twelve months in the fiscal year 1998 due to the May, 1999
contribution of NSMG to VERITAS. Increases in operating expenses were partially
offset by the reduction in spending due to the NSMG contribution to VERITAS.
Revenues. Total revenues increased 17% to $343,473,000 in 1999 from
$293,226,000 in 1998. License revenues grew 13% to $274,431,000 in 1999 from
$243,285,000 in 1998 due primarily to increased sales of
Seagate Backup Exec, a product sold by NSMG and transferred to VERITAS in the
NSMG contribution. License revenue growth was also due to increased sales of
Seagate Crystal Reports and Seagate Crystal Info. Seagate Software continued to
expand both its indirect and direct sales channels. Indirect revenues, which
include distribution and OEM sales, increased 18% to $239,205,000 in 1999 from
$203,273,000 in 1998 while direct revenues, which include corporate licensing
and other direct sales to users, increased 16% to $104,268,000 in 1999 from
$89,953,000 in 1998. Revenues increased within the Americas 13% to $225,247,000
in 1999 from $198,819,000 in 1998 and internationally 25% to $118,226,000 in
1999 from $94,407,000 in 1998, which was due in part to Seagate Software's
continued expansion of its European distribution channel. Revenues from Seagate
Technology remained at 2% of total revenue for 1999 and 1998. Total
maintenance, support and other revenues grew 38% to $61,304,000 in 1999 from
$44,472,000 in 1998 primarily due to increases in the sales of maintenance
agreements and training and consulting services resulting from a larger
installed customer base.
During 1999 Seagate Software generated export revenues from the United
States of approximately $83,309,000 as compared to $66,250,000 in 1998. Seagate
Software believes that its exposure to foreign currency fluctuations is not
material and it does not engage in foreign currency hedging programs.
Cost of Revenues. The decrease in the cost of license revenues to
$12,597,000 in 1999 from $16,963,000 in 1998, representing 5% and 7% of related
license revenues, respectively, and the decrease in the cost of license
revenues from Seagate Technology was due primarily to reductions in product
packaging and documentation costs resulting from a shift in mix to CD-ROMs from
disks and increased sales of higher-margin server products. The increase in the
cost of maintenance, support and other revenues to $27,522,000 in 1999 from
$19,687,000 in 1998, representing 45% and 44% of related service revenues,
respectively, was primarily due to expansion of Seagate Software's professional
services workforce necessary to support the growth in training and consulting
revenues. The lower service revenue margins in 1999 were primarily due to
increased spending for additional personnel and new facilities to support
higher levels of customer support services, such as training, consulting and
preferred technical support. The decrease in the amortization of developed
technology to $12,196,000 in 1999 from $13,271,000 in 1998, representing 4% and
5% of total revenues, respectively, was primarily due to intangible assets that
were fully amortized during or at the start of the first quarter of fiscal
1999, partially offset by a $1,100,000 write-down of certain developed
technologies.
Sales and Marketing. The increase in sales and marketing expenses to
$159,938,000 in 1999 from $129,343,000 in 1998, representing 47% and 44% of
total revenues, respectively, was primarily due to expansion of Seagate
Software's sales force and increases in advertising, promotion, including
allocations from Seagate Technology for the proportional cost of television and
newspaper advertisements and technical support costs.
Research and Development. The increase in research and development expenses
to $51,524,000 in 1999 from $47,173,000 in 1998, representing 15% and 16% of
total revenues, respectively, was primarily due to increases in personnel and
related expenses, new product development and localization costs, partially
offset by facility consolidations.
89
<PAGE>
General and Administrative. The decrease in general and administrative
expenses to $34,055,000 in 1999 from $37,124,000 in 1998, representing 10% and
13% of total revenues, respectively, was primarily due to management's efforts
to reduce management and administrative costs.
Write-off of In-Process Research and Development. As a result of its
acquisitions, the most recent of which are described below, Seagate Software
has acquired a number of projects and products that were considered in-process
research and development on the date of acquisition. Seagate Software
determined that purchased in-process technology had not reached technological
feasibility as no working model or detail program design existed at the time of
purchase, and no alternative uses had been identified. Accordingly, in-process
research and development was expensed when acquired. During 1999, $2,353,000 of
in-process research and development was written off in connection with the
purchase of the minority interests of Seagate Software. During 1998, total
write-offs of in-process research and development were $6,800,000 incurred in
connection with the June 1998 purchase of Eastman.
Amortization of Goodwill and Other Intangibles. The decrease in the
amortization of goodwill and other intangibles to $14,917,000 in 1999 from
$16,201,000 in 1998, representing 4% and 6% of total revenues, respectively,
was primarily due to decreases in amortization expense based on lower levels of
intangible assets and write-downs and write-offs of the carrying value of
intangibles of $0 in 1999 versus $1,900,000 in 1998 as a result of asset values
that had become impaired based on reductions in estimated future cash flows.
Long-lived assets other than developed technology, including associated
goodwill, are assessed for impairment under the guidance of Statement of
Financial Accounting Standards Board No. 121 ("SFAS 121"), and any write-offs
or write-downs are included in amortization of goodwill and other intangibles.
Goodwill not within the scope of SFAS 121 is assessed for impairment under the
guidance of Accounting Principles Board No. 17, and any write-offs or write-
downs are also included in amortization of goodwill and other intangibles.
Developed technology acquired in business combinations is assessed for
impairment under the guidance of Statement of Financial Accounting Standards
Board No. 86, and any related write-offs or write-downs are included in costs
of revenues.
Seagate Software capitalizes the acquired assembled workforce in most of its
acquisitions. When Seagate Software reviews the carrying value of its
intangibles, if there remains less than 5% of the original assembled workforce
the related intangible assets is deemed impaired. In fiscal 1998, Seagate
Software wrote-off a total of $1.9 million relating to the capitalized
assembled workforces and the associated goodwill for Network Computing, Inc.,
Netlabs, Inc. and Creative Interaction Technologies, Inc. because less than 5%
of the original assembled workforces remained.
Interest and Other, Net. Total interest and other, net increased to a net
income of $1,552,972,000 in 1999 from a net expense of $10,000 in 1998. The
increase in net other income was substantially all due to the net gain of
$1,670,301,000 on the contribution of Seagate Software's NSMG business to
VERITAS Software Corporation ("VERITAS") partially offset by the charge related
to Seagate Software's equity interest in VERITAS of $118,888,000 in the fourth
quarter of 1999. The net gain of $1,670,301,000 consisted of a gain of
$1,806,165,000, net of compensation expense of $123,839,000 and merger related
expenses of $12,025,000.
Income Taxes. Seagate Software recorded a $641,920,000 provision for income
taxes at an effective rate of 41% in 1999 compared with a $15,385,000 provision
for income taxes at an effective rate of 252% for 1998. The effective rate used
to record the provision for income taxes in 1999 was greater than the statutory
rate primarily due to state taxes on U.S. taxable income, foreign taxes in
excess of U.S. statutory tax rate, increases in the valuation allowance for
deferred tax assets and goodwill amortization for certain acquisitions that
were not deductible for tax purposes. The effective rate used to record the
provision for income taxes in 1998 was greater than the statutory rate
primarily due to foreign taxes in excess of U.S. statutory tax rate, increases
in the valuation allowance for deferred tax assets and goodwill amortization
for certain acquisitions that were not deductible for tax purposes.
90
<PAGE>
Fiscal Year 1998 versus Fiscal Year 1997
Revenues. Total revenues increased 35% to $293,226,000 in 1998 from
$216,950,000 in 1997. License revenues grew 33% to $243,285,000 in 1998 from
$183,556,000 in 1997 due primarily to increased sales of Seagate Backup Exec.
License revenue growth was also due to increased sales of Seagate Crystal
Reports and
Seagate Crystal Info. Seagate Software continued to expand both its indirect
and direct sales channels. Indirect revenues, which include distribution and
OEM sales, increased 37% to $203,273,000 in 1998 from $147,991,000 in 1997
while direct revenues, which include corporate licensing and other direct sales
to users, increased 30% to $89,953,000 in 1998 from $68,959,000 in 1997.
Revenues increased within the Americas 30% to $198,820,000 in 1998 from
$153,368,000 in 1997 and internationally 48% to $94,407,000 in 1998 from
$63,582,000 in 1997, which was due in part to Seagate Software's continued
expansion of its European distribution channel. Revenues from Seagate
Technology decreased 5% primarily due to fewer unit shipments to Seagate
Technology's OEM tape drive operations. Total maintenance, support and other
revenues grew 61% to $44,472,000 in 1998 from $27,632,000 in 1997 primarily due
to increases in the sales of maintenance agreements and training and consulting
services resulting from a larger installed customer base.
During 1998 Seagate Software generated export revenues from the United
States of approximately $66,250,000 as compared to $44,129,000 for 1997 Seagate
Software believes that its exposure to foreign currency fluctuations is not
material and does not engage in foreign currency hedging programs.
Cost of Revenues. The decrease in the cost of license revenues to
$16,963,000 in 1998 from $17,535,000 in 1997, representing 7% and 10% of
related license revenues, respectively, and the decrease in the cost of license
revenues from Seagate Technology was due primarily to reductions in product
packaging and documentation costs resulting from a shift in mix to CD-ROMs from
disks and increased sales of higher-margin server products. The increase in the
cost of maintenance, support and other revenues to $19,687,000 in 1998 from
$6,560,000 in 1997, representing 44% and 24% of related service revenues,
respectively, was primarily due to expansion of Seagate Software's professional
services workforce necessary to support the growth in training and consulting
revenues. The lower service revenue margins in 1998 were primarily due to
increased spending for additional personnel and new facilities to support
higher levels of customer support services, such as training, consulting and
preferred technical support. The decrease in the amortization of developed
technology to $13,271,000 in 1998 from $21,860,000 in 1997, representing 5% and
10% of total revenues, respectively, was primarily due to write-downs of
certain developed technologies amounting to approximately $6,918,000 during
1997 as a result of asset values that had become impaired based on reductions
in estimated future cash flows.
Unamortized software costs for developed technology were reviewed under the
guidance of SFAS No. 86 for potential impairment. Seagate Software compares the
undiscounted future cash flows on a product by product basis to the unamortized
costs. Unamortized costs in excess of undiscounted future cash flows are
recorded as an impairment loss. Impairment losses in 1997 were caused by a
number of factors including Seagate Software's business decision to stop
selling products or technologies such as DOS, new acquisitions, or new product
designs. Additionally in 1997, Seagate Software incurred a write-off related to
the decision to close down and sell one of its acquisitions, Calypso Software
Systems, Inc. The write-off was to the expected net realizable value. Seagate
Software is not currently generating any revenues from any products for which
the related developed technology has been impaired.
Sales and Marketing. The increase in sales and marketing expenses to
$129,343,000 in 1998 from $107,706,000 in 1997, representing 44% and 50% of
total revenues, respectively, was primarily due to expansion of Seagate
Software's sales force and increases in advertising, promotion, including
allocations from Seagate Technology for the proportional cost of television and
newspaper advertisements and technical support costs. Such increases were
partially offset by reductions in workforce in 1997 within the Network &
Storage Management Group business unit due to facility consolidations.
91
<PAGE>
Research and Development. The increase in research and development expenses
to $47,173,000 in 1998 from $42,842,000 in 1997, representing 16% and 20% of
total revenues, respectively, was primarily due to increases in personnel and
related expenses, new product development and localization costs, partially
offset by facility consolidations and reductions in workforce in 1997 within
the NSMG business unit.
General and Administrative. The increase in general and administrative
expenses to $37,124,000 in 1998 from $36,861,000 in 1997, representing 13% and
17% of total revenues, respectively, was primarily due to increases in
personnel and related expenses and legal costs, partially offset by facility
consolidations and reductions in workforce in 1997 within the NSMG business
unit.
Write-off of In-Process Research and Development. As a result of its
acquisitions, Seagate Software has acquired a number of projects and products
that were considered in-process research and development on the date of
acquisition. Seagate Software determined that purchased in-process technology
had not reached technological feasibility as no working model or detail program
design existed at the time of purchase, and no alternative uses had been
identified. Accordingly, in-process research and development was expensed when
acquired. During 1998, $6,800,000 of in-process research and development was
written off in connection with the purchase of Eastman Software Storage
Management Group, Inc. During 1997, total write-offs of in-process research and
development were $2,613,000. Seagate Software incurred this charge in
connection with additional amounts paid with respect to the June 1996
acquisition of Holistic.
Amortization of Goodwill and Other Intangibles. The decrease in the
amortization of goodwill and other intangibles to $16,201,000 in 1998 from
$23,465,000 in 1997, representing 6% and 11% of total revenues, respectively,
was primarily due to decreases in amortization expense based on lower levels of
intangible assets and write-downs and write-offs of the carrying value of
developed technology of approximately $1,900,000 in 1998 versus $6,173,000 in
1997 as a result of asset values that had become impaired based on reductions
in estimated future cash flows.
Long-lived assets other than developed technology, including associated
goodwill, are assessed for impairment under the guidance of Statement of
Financial Accounting Standards Board No. 121 ("SFAS 121"), and any write-offs
or write-downs are included in amortization of goodwill and other intangibles.
Goodwill not within the scope of SFAS 121 is assessed for impairment under the
guidance of Accounting Principles Board No. 17, and any write-offs or write-
downs are also included in amortization of goodwill and other intangibles.
Developed technology acquired in business combinations is assessed for
impairment under the guidance of Statement of Financial Accounting Standards
Board No. 86, and any related write-offs or write-downs are included in costs
of revenues. During fiscal 1997 and 1998, Seagate Software recorded impairment
charges for write-offs and write-downs of acquired intangible assets and
goodwill, exclusive of amounts relating to developed technology included in
costs of revenues, as follows:
In 1997, Seagate Software determined that it would abandon and discontinue
selling substantially all of the current and future products and technologies
obtained in the 1994 acquisition of Palindrome Corporation in favor of selling
and supporting the current and future products and technologies obtained in the
1996 acquisition of Arcada Holdings, Inc. Additionally, in 1997, Seagate
Software decided to close down and sell Calypso Software Systems, Inc. and to
abandon and discontinue sales of the developed and future DOS products and
technologies acquired from Frye Computer Systems, Inc. In connection with these
determinations, Seagate Software recorded impairment charges to write-off and
write-down goodwill amounting to approximately $6.2 million.
In 1998, Seagate Software capitalized the acquired assembled workforce in
most of its acquisitions. When Seagate Software reviews the carrying value of
its intangibles, if there remains less than 5% of the original assembled
workforce the related intangible assets is deemed impaired. In fiscal 1998,
Seagate Software wrote-off a total of $1.9 million relating to the capitalized
assembled workforces and the associated goodwill for Network Computing, Inc.,
Netlabs, Inc. and Creative Interaction Technologies, Inc. because less than 5%
of the original assembled workforces remained.
92
<PAGE>
Restructuring. Restructuring charges were $2,524,000 in 1997, representing
1% of total revenues. The restructuring charges were incurred as a result of
reorganizations and closures within NSMG for the reduction of personnel, write-
off or write-down of equipment, intangibles and other assets, closure of
duplicate facilities, fees for legal and accounting services, contract
cancellations and other related expenses.
Unusual Items. Unusual items of $13,446,000 were recognized during 1997,
representing 6% of total revenues. In connection with the June 1996 acquisition
of Holistic, $18,000,000 of funds were placed in escrow pending the outcome of
certain purchase price contingencies. Prior to the expiration of the
contingency period, Seagate Software elected to release the funds to the
Holistic shareholders even though certain contingencies had not been met. Of
the $18,000,000 total contingency payment, the Company recorded $13,446,000 as
compensation expense for amounts paid to former Holistic shareholders who were
employees of Seagate Software and recorded the remaining $4,554,000 paid to
non-employee shareholders as additional purchase price.
Seagate Software released the funds prior to the expiration of the
contingency period, because in order to position the Information Management
Group business unit for future growth and product development, Seagate Software
needed to begin an aggressive plan to integrate the operations of Holistic.
These activities resulted in the diversion of the attention of certain Holistic
employees from their responsibilities at Holistic. As such, Holistic's ability
to achieve the purchase price contingencies necessary to trigger the
$18,000,000 contingency payment was impaired. Seagate Software believed that
the Holistic employees should not be penalized, because they had sacrificed
achievement of their individual goals in order to meet the overall needs of
Seagate Software. Accordingly, Seagate Software elected to make the full
payment of $18,000,000.
Interest and Other, Net. Total interest and other, net decreased to a net
expense of $10,000 in 1998 from a net expense of $2,381,000 in 1997,
representing less than 1% and 1% of total revenues, respectively. The decrease
in interest and other, net was primarily due to lower interest expense on a
lower level of outstanding borrowings from Seagate Technology and an increase
in foreign exchange gains.
Income Taxes. Seagate Software recorded a $15,385,000 provision for income
taxes at an effective rate of 252% in 1998 compared with a $8,714,000 benefit
from income taxes at an effective rate of 14% for 1997. The effective rate used
to record the provision for income taxes in 1998 was greater than the statutory
rate primarily due to foreign tax rates that were in excess of the U.S.
statutory tax rate, increases in the valuation allowance for deferred tax
assets and goodwill amortization for certain acquisitions that were not
deductible for tax purposes. The effective rate used to record the benefit from
income taxes in 1997 was less than the statutory rate primarily due to
increases in the valuation allowance for deferred tax assets and goodwill
amortization for certain acquisitions that were not deductible for tax
purposes.
Liquidity and Capital Resources
Seagate Software's total cash was $25,201,000 and $15,130,000 as of July 2,
1999 and July 3, 1998, respectively. The increase in cash was primarily due to
loan borrowings from Seagate Technology of $319 million, cash provided by
operating activities and the sale of common stock under the Option Plan,
partially offset by a reduction in Seagate Software's loan repayments to the
parent company of $345 million, purchases of property and equipment and
purchases of intangible assets. Seagate Software's cash is maintained in highly
liquid operating accounts and primarily consists of bank deposits.
Seagate Software's operations have been financed by cash flows from
operating activities and borrowings from Seagate Technology. Such borrowings
are available to Seagate Software under a Revolving Loan Agreement, between
Seagate Software and Seagate Technology, which was renewed on July 4, 1998 on
substantially the same terms and conditions as the prior agreement which was
dated June 28, 1996. Under the Revolving Loan Agreement, Seagate Technology
finances certain of Seagate Software's working capital requirements. The
Revolving Loan Agreement, which provides for maximum borrowings of up to
$60,000,000, is renewable every two years and expires on July 3, 2000.
Beginning in fiscal year 1999, Seagate Software paid
93
<PAGE>
interest at the LIBOR rate plus 2% per annum on such borrowings. The interest
rate and the loan balance as of July 2, 1999 were 7.31% and $11,801,000,
respectively.
In addition to the Revolving Loan Agreement with Seagate Technology, certain
foreign subsidiaries have line of credit facilities with third party financial
institutions. These line of credit facilities provide for additional borrowings
of up to an equivalent of approximately $794,000 at July 2, 1999. Interest
rates payable on borrowings are based on local bank prime interest rates. At
July 2, 1999, there were no outstanding borrowings under any of these lines of
credit.
During the year ended July 2, 1999, Seagate Software made investments in
property and equipment totaling approximately $12,790,000 for new office
facilities, leasehold improvements, computers, furniture and office equipment.
Seagate Software anticipates it will make investments in 2000 of approximately
$5,400,000 in property and equipment. Additionally, product development
activities may include cash used to acquire technology. Seagate Software
expects that such investments will be funded from existing cash balances and
cash flows from operations.
In August 1999, Seagate Software sold 8,232,667 shares of VERITAS common
stock for net proceeds of $396.8 million after underwriting discounts and
commissions. Seagate Software may sell additional shares of VERITAS common
stock in the future, but has agreed not to do so prior to November 7, 1999
except to the extent the underwriters in the August 1999 offering exercise
their overallotment option for an additional 909,833 shares prior to September
8, 1999.
Seagate Software believes its current cash balances, its proceeds from the
sale of VERITAS common stock, its available borrowings from Seagate Technology
and cash flows generated from Seagate Software's operations will be sufficient
to meet its anticipated cash needs for working capital and capital expenditures
for at least the next 12 months. Furthermore, Seagate Software anticipates that
future operating and investing activities may be financed by additional
borrowings from Seagate Technology, equity financing or other sources. Seagate
Software believes that additional financing from Seagate Technology will be
available at a reasonable cost.
New Accounting Pronouncements
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 provides
guidance on capitalization of the costs incurred for computer software
developed or obtained for internal use. It also provides guidance for
determining whether computer software is internal-use software and on
accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold to the public. Seagate
Software has not yet determined the impact, if any, of adopting this statement.
The disclosures prescribed by SOP 98-1 will be effective for Seagate Software's
consolidated financial statements for the fiscal year ending June 30, 2000.
In June 1998, FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). This statement establishes accounting and reporting standards for
derivative instruments and for hedging activities. It requires that derivatives
be recognized in the balance sheet at fair value and specifies the accounting
for changes in fair value. In June 1999, the FASB issued SFAS 137, "Accounting
for Derivative Instruments and Hedging Activities--Deferral of the Effective
Date of FASB No. 133" to defer the effective date of SFAS 133 until fiscal
years beginning after June 15, 2000. Seagate Software generally does not use
derivative financial instruments and the impact of SFAS 133 is not anticipated
to be material when adopted.
94
<PAGE>
Year 2000 Readiness
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. This could result in a system failure or
miscalculation causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in normal business activities.
Seagate Software considers a product to be "Year 2000 Ready" if the
product's performance and functionality are unaffected by the processing of
dates prior to, during and after the year 2000, but only if all products (for
example hardware, firmware, and software) used with the products properly
exchange accurate date data with it.
Seagate Software's Products
Seagate Software's products are used in numerous operating environments.
Seagate Software has assessed its products to determine whether or not they are
Year 2000 Ready. Although Seagate Software believes certain of its software
products are Year 2000 Ready, they have determined that certain of their
software products are not and will not be Year 2000 Ready. Seagate Software's
products that are not Year 2000 Ready are not material to their business,
financial condition or results of operations. The inability of one or more of
their products to properly manage and manipulate dates related to the Year 2000
could result in a material adverse effect on their business, financial
condition or results of operations, including increased warranty costs,
customer satisfaction issues and potential lawsuits. Seagate Software is taking
measures to inform its customers that those products are not and will not be
Year 2000 Ready. To assist their customers in evaluating their Year 2000
issues, they have developed a list of those products that are Year 2000 Ready
as stand-alone products. The list is located on Seagate Software's World Wide
Web page and is periodically updated when we make additional product
assessments.
Seagate Software anticipates that substantial litigation may be brought
against vendors, including Seagate Software, of all software components of
systems in which another vendor's component products are unable to properly
manage data related to the Year 2000. Seagate Software's customer agreements
typically contain provisions designed to limit their liability for such claims.
As a result of existing or future federal, state or local laws or ordinances or
unfavorable judicial decisions, it is possible that these measures will not
provide Seagate Software with protection from liability claims. If any such
claims are brought against Seagate Software, 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 Software's Systems
Seagate Software has also initiated a comprehensive program to address Year
2000 readiness in its internal systems and in those of their customers and
suppliers. Seagate Software's program has been designed to address its most
critical internal systems first and to gather information regarding the Year
2000 compliance of products supplied to Seagate Software and into which its
products are integrated. The scope of Seagate Software's internal Year 2000
readiness project includes information technology, non-information technology
and embedded technology for all critical systems, and includes all offices
worldwide, critical vendors, suppliers, customers and partners. Seagate
Software currently expect to be Year 2000 ready by December 31, 1999.
Seagate Software is using the following phased approach to Year 2000
readiness: inventory, assessment, testing, remediation and contingency
planning. Anticipated dates of completion are as follows:
<TABLE>
<S> <C>
1. Inventory Complete
2. Assessment Complete
3. Testing September 30, 1999
4. Remediation December 1, 1999
5. Contingency Planning Complete
</TABLE>
95
<PAGE>
These activities are intended to encompass all major categories of systems
in use by Seagate Software, including operations, technical support,
engineering, sales, finance and human resources. To date, Seagate Software has
not incurred material costs related to assessment and remediation of Year 2000
readiness. Seagate Software is still in the process of conducting our Year
2000 audit. Seagate Software currently estimates the cost of internal Year
2000 issues will be less than $3.0 million. However, if the costs of future
remediation exceed such amount, then the costs required to address the Year
2000 issue could have a material adverse effect on their business, financial
condition or results of operations.
Seagate Software's material third party relationships include relationships
with fulfillment houses, banks, payroll services vendors, utilities,
distribution partners and key customers. These relationships have been
inventoried, and Seagate Software is now assessing the risks relating to these
relationships. Seagate Software believes that certain of these relationships
are of significant importance to its future operations. Seagate Software has
contacted its significant suppliers and have received assurances of Year 2000
compliance from a number of those contacted. However, most of Seagate
Software's suppliers are under no contractual obligation to provide such
information to it. Seagate Software does not currently have reason to believe
that any such third parties have significant internal Year 2000 problems that
will not be remediated. However, in the event any such third parties were to
have an unremediated Year 2000 problem, it could have a material adverse
effect on Seagate Software's business, financial condition or results of
operations.
Customer Purchasing Patterns
Seagate Software believes that the purchasing patterns of customers and
potential customers may be affected by Year 2000 issues as companies expend
significant resources to correct or patch their current software systems for
Year 2000 readiness or defer purchases of new systems to avoid encountering
additional unforeseen Year 2000 problems. Additional short-term expenditures
for remediation of existing Year 2000 problems may result in reduced funds
available to purchase products such as those offered by Seagate Software,
which could have a material adverse effect on its business, operating results
or financial condition.
Seagate Software believes that a most likely worst case Year 2000 scenario
would result in a disruption of infrastructure, including the possible loss of
power and disruption of transportation systems. Seagate Software believes that
no effective contingency planning for such disruption is possible. Seagate
also believe that additional elements of the most likely worst case Year 2000
scenario include the loss of fulfillment services, banking services, and/or
distribution services. Seagate Software could experience material adverse
effects on its business if it fails to successfully implement its contingency
plan. Those material adverse effects could include delays in the delivery or
sale of its products.
Factors Affecting Future Operating Results
Potential Fluctuations in Annual and/or Quarterly Operating Results.
Seagate Software often experiences a high volume of sales at the end of its
fiscal quarter. Therefore, it may be late in the quarter before Seagate
Software is able to determine that its costs are too high in relation to
actual sales. If this were to happen, Seagate Software would not be able to
reduce these costs and, consequently, net income would be reduced or its net
loss increased. In addition, Seagate Software'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,
primarily distributors such as Ingram;
. Seagate Software's ability to develop, introduce, and market new
products and product enhancements in a timely fashion, particularly with
respect to Seagate Info and Seagate Crystal Reports;
. changes in the prices of Seagate Software's products and its
competitors' products;
96
<PAGE>
. Seagate Software's customers' preference for competing technologies in
lieu of its products such as Seagate Info and Seagate Crystal Reports;
. Seagate Software's inability to reduce its costs in relation to its
revenues (because Seagate Software ships its products shortly after it
receives orders and operates with no backlog);
. the impact of changes in foreign currency exchange rates on the cost of
Seagate Software's products and the effective price of such products to
foreign consumers; and
. competition and consolidation in Seagate Software's industry.
Revenue Concentration.
Seagate Software's new products must be accepted by customers in order for
it to be successful. If Seagate Software's products are not purchased as a
result of competition, technological change or other factors, then its
business, operating results and financial condition would be materially
adversely affected.
Seagate Software's software products have a fixed life cycle that is
difficult to estimate. If Seagate Software does not develop and introduce new
products before its existing products have completed their life cycles, then
Seagate Software will be unable to sustain or increase their level of sales.
Seagate Software cannot be sure that it will continue to be successful in
marketing its key products or any new products, applications, or product
enhancements.
Seagate Software currently obtains most of its revenue from a limited
number of software products and anticipates this to be the case in the
foreseeable future. Sales from a small number of customers generate a
disproportionate amount of Seagate Software's revenues . For example, IMG and
Seagate Software derived 11% and 22%, respectively, of its revenues from sales
to Ingram for the fiscal year ended July 2, 1999. If Ingram, or any other
significant customer, reduces it purchases from Seagate Software, its
business, financial condition, and results of operations would be materially
adversely affected unless Seagate Software substantially increased its sales
to other customers. Because Seagate Software's contracts with Ingram (or any
other customer) do not require Seagate Software to purchase any specified
number of software licenses from Seagate Software, Seagate Software cannot be
sure that its significant customers will continue to purchase at their current
levels.
Reliance on Sales Staff, Channel Partners, and Strategic Relationships.
Seagate Software sells and supports its products through: its sales staff,
third party distributors, and OEMs. Seagate Software also has a strategic
relationship with Microsoft that enables Seagate Software to bundle its
products with Microsoft's products, and Seagate Software has developed and is
developing certain utilities and products to be a part of Microsoft's
products. If Microsoft reduces the nature and quantity of its relationship
with Seagate Software, Seagate Software's business, operating results, and
financial condition would be materially adversely affected.
Seagate Software has made significant expenditures in recent years to
expand its sales and marketing force. Seagate Software's future success will
depend in part upon the productivity of its sales and marketing force. During
the fourth quarter of 1999, Seagate Software experienced significant turnover
in its sales personnel. Seagate Software believes that its ability to continue
to attract, integrate, train, motivate and retain new sales and marketing
personnel will also affect its success. Seagate Software faces intense
competition for sales and marketing personnel in the software industry, and
Seagate Software cannot be sure that it will be successful in hiring and
retaining such personnel in accordance with its plans. Even if Seagate
Software hires and trains sufficient numbers of sales and marketing personnel,
Seagate Software cannot be sure that its recent and other planned expenses
will generate enough additional revenue to exceed costs.
Seagate Software generates a substantial portion of its revenue by selling
its products through distributors and OEMs. Seagate Software's distributors
and OEMs decide whether or not to include its products with those
97
<PAGE>
they sell and generally can carry and sell product lines that are competitive
with Seagate Software's. Because OEMs and distributors carry other product
lines and are not required to make a specified level of purchases from Seagate
Software, Seagate Software cannot be sure that it will prioritize selling its
products. These distributors and OEMs are also generally entitled to terminate
their relationship with Seagate Software without cause. Seagate Software's
business, financial results and operating condition would be materially
adversely affected if some or all of its current distributors and OEMs
discontinued selling its products and Seagate Software failed to find
comparable replacements.
New Product Development and Technological Change.
Seagate Software's products are used in combination with other software and
computer hardware systems. The market for Seagate Software's products is
characterized by rapidly changing technology, changing customer needs, evolving
industry standards and frequent new product introductions. Seagate Software's
future success will therefore depend on its ability to design, develop, test
and support new software products and enhancements on a timely and cost
effective basis.
If Seagate Software does not respond to changing market conditions and
customer requirements by developing and introducing new products in a timely
manner, then its business, operating results or financial condition could be
materially, adversely affected.
Competition.
Seagate Software's industry is intensely competitive and is characterized by
rapidly changing technology and evolving standards. Seagate Software expects
additional competition from other established and/or emerging companies and as
a result of future software industry consolidations. Seagate Software expects
that its competitors will offer new and existing products at lower prices, if
necessary to gain or retain market share and customers. Seagate Software has
experienced and expects to continue to experience intense competition from a
number of domestic and foreign companies. Increased competition can be expected
to cause price reductions, reduced gross margins and loss of market share, any
of which could have a material adverse effect on its business, operating
results or financial condition. Current and potential competitors may be able
to respond more quickly to new or emerging technologies and changes in customer
requirements, to devote greater resource to the development, promotion, sale
and support of their products than Seagate Software is able to do.
It is possible that new competitors or alliances among Seagate Software's
competitors may emerge and rapidly acquire significant market share. In
addition, network operating system vendors could introduce new or upgrade
existing operating systems or environments that could render Seagate Software's
products obsolete and unmarketable.
In connection with the contribution of Seagate Software's NSMG business to
VERITAS, Seagate Software agreed not to re-enter some of the segments in which
NSMG participates for a specified period of time. Seagate Software may not be
able to compete effectively with other companies that can offer solutions in
the business intelligence software segment and the areas in which it has agreed
not to re-enter.
Seagate Software also faces indirect competition from present and potential
customers, including Microsoft or other strategic partners, who continuously
evaluate whether to develop their own software products and components
internally or obtain them from outside sources. If Seagate Software's strategic
partners decide to develop the utilities and other products Seagate Software
has in the past provided, it could have a material adverse effect on Seagate
Software's business, results of operations and financial condition.
There can be no assurance that Seagate Software will be able to compete
successfully against current or future competitors. If Seagate Software fails
to compete successfully, its business, operating results and financial
condition could be materially adversely affected.
98
<PAGE>
Acquisition Related Accounting Charges Will Reduce Profits.
Seagate Software intends to continue its expansion through internal growth
as well as acquisition. Acquisitions involve numerous risks including:
. the difficulties of integrating the operations and products of the
acquired businesses, and
. the potential loss of key employees or customers of the acquired
business.
Seagate Software expects that it will continue to incur substantial
expenses as it acquires other businesses including charges for the write-off
of in-process research and development. Seagate Software's operating results
have fluctuated in the past, and may fluctuate in the future because of the
timing of such write-offs. For example, Seagate Software incurred charges to
operations in the fourth quarter of fiscal 1999 of approximately $84,707,000
and $2,353,000 for the write-off of in-process research and development
related to their contribution of NSMG to VERITAS and the acquisition of the
minority interests in Seagate Software by Seagate Technology, respectively.
Risks of Systems Failures.
Seagate Software's operations are dependent on its ability to protect its
computer equipment and the information stored in their databases from damage
by catastrophic events such as fire, natural disaster, power loss,
telecommunications failures, and unauthorized intrusion. Seagate Software
believes that it has taken prudent measures to reduce the risk of interruption
in its operations. However, Seagate Software cannot be sure that these
measures are sufficient. Any damage or failure that causes interruptions in
Seagate Software's operations could have a material adverse effect on its
business, results of operations and financial condition.
Risks from International Operations.
Seagate Software has significant offshore operations including development
facilities, sales personnel and customer support operations. Seagate
Software's offshore operations are subject to certain inherent risks
including:
. fluctuations in currency exchange rates;
. lack of acceptance of localized products;
. longer payment cycles for sales in foreign countries;
. difficulties in staffing and managing international operations;
. seasonal reductions in business activity in the summer months in Europe
and certain other countries;
. increases in tariffs, duties, price controls, other restrictions on
foreign currencies or trade barriers imposed by foreign countries;
. the burden of complying with a wide variety of foreign laws; and
. political unrest, particularly in areas in which it has facilities.
These factors could have a material adverse effect on Seagate Software's
business, operating results and financial condition in the future.
Seagate Software's 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 its products more expensive than products
sold by other manufacturers that are priced in one of the effected currencies.
Therefore, foreign customers may reduce purchases of Seagate Software's
products. Seagate Software anticipates that the recent turmoil in financial
markets and the recent deterioration of the underlying economic conditions in
certain
99
<PAGE>
countries, including those in Asia and the Far East, 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 Seagate
Software's products;
. restrictions on government spending imposed by the International
Monetary Fund in those countries receiving the International Monetary
Fund's assistance;
. customers' reduced access to working capital to fund software purchases
such as Seagate Software'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 banks' financial condition; or
. the inability to access other financing.
Dependence on Proprietary Technology
Seagate Software's success will be heavily dependent on its proprietary
technology. Seagate Software relies primarily on the following to protect its
proprietary rights:
. patents;
. copyrights;
. trademarks and trade secret rights;
. confidentiality procedures;
. employee and third party nondisclosure agreements; and
. licensing restrictions.
Such efforts provide only limited protection.
Seagate Software also relies, in part, on shrink-wrap licenses that are not
signed by end users and, therefore, may be unenforceable under the laws of
certain jurisdictions.
Even though Seagate Software take these steps, someone may be able to copy
or otherwise obtain and use Seagate Software products and technology without
authorization. Policing unauthorized use of Seagate Software products is
difficult. Although Seagate Software cannot determine the extent of existing
piracy of its products, Seagate Software expects that software piracy will be
a persistent problem. Third parties may also develop similar technology
independently. Seagate Software believes that effective protection of
intellectual property rights is unavailable or limited in certain foreign
countries.
Seagate Software's competitors may successfully challenge the validity or
scope of its patents, copyrights and trademarks. Seagate Software cannot be
sure that its patents, copyrights, and trademarks will provide it with a
competitive advantage or that its competitors will not design around any
patents issued to it. Seagate Software is not aware that any of its products
infringe upon the proprietary rights of third parties, but, in the future,
third parties may claim that Seagate Software's current or future products
infringe that party's rights. Seagate Software believes that software product
developers will be increasingly subject to claims of infringement as the
functionality of products in its industry segment overlaps. If Seagate
Software were subject to a claim of infringement, regardless of its merit,
such claim would have the following impacts on it that could have a material
adverse effect on Seagate Software's business, operating results or financial
condition:
. require costly litigation to resolve;
100
<PAGE>
. absorb significant management time; or
. require Seagate Software to enter into unfavorable royalty or license
agreements.
Potential Litigation/Liability Related to Year 2000 Readiness.
It is likely that, commencing in the Year 2000, the functionality of
certain operating environments will be adversely affected when one or more
component products of the environment is unable to process four-digit
characters representing years. This could result in a system failure or
miscalculation causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or
engage in normal business activities. The Year 2000 problem is pervasive and
complex as virtually every computer operation will be affected in some way by
the rollover of the two-digit year value to 00.
Seagate Software's products are used in numerous operating environments.
Seagate Software considers a product Year 2000 Ready if the product's
performance and functionality are unaffected by processing dates prior to,
during, and after the Year 2000, but only if all products (for example
hardware, firmware, and software) used with the product properly exchange
accurate date data with it. Seagate Software has determined that certain of
its software products are not and will not be Year 2000 Ready and is taking
measures to inform its customers of that fact. The inability of one or more of
Seagate Software's products to properly manage and manipulate data related to
the Year 2000 could result in a material adverse effect on Seagate Software's
business, financial condition or results of operations, including increased
warranty costs, customer satisfaction issues and potential lawsuits.
Even if Seagate Software successfully brings certain of its products into
Year 2000 readiness and publicizes the non-readiness of its other products,
Seagate Software anticipates that substantial litigation may be brought
against vendors of all component products of noncompliant operating
environments, including Seagate Software. Seagate Software's agreements with
its customers typically contain provisions designed to limit Seagate
Software'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. Seagate Software believes that any such claims, with or
without merit, could result in costly litigation (and possible adverse
judgment) that could absorb significant management and product development
time and potentially result in significant liability to Seagate Software,
which could have a material adverse effect on Seagate Software's business,
operating results or financial condition.
Software Product Errors or Defects.
Software products as complex as those Seagate Software offers frequently
contain errors or defects, especially when first introduced or when new
versions or enhancements are released. Despite product testing, Seagate
Software's products may contain defects or software errors. If Seagate
Software's products have errors, the errors could:
. cause a negative customer reaction that could reduce future sales;
. generate negative publicity regarding Seagate Software and its products;
. harm their reputation;
. reduce or limit customer's adoption of Seagate Software's products;
. require Seagate Software to make extensive changes to the product; or
. result in customer's delaying their purchase until the errors or defect
have been remedied, which would cause Seagate Software's revenues to be
reduced or delayed.
Any of these occurrences could have a material adverse effect upon Seagate
Software's business, operating results or financial condition.
101
<PAGE>
Seagate Software's license agreements with its customers typically contain
provisions designed to limit Seagate Software's exposure to potential product
liability claims. Existing or future federal, state or local laws or
ordinances or unfavorable judicial decisions may make these provisions
ineffective. Because its products are used in system management, resource
optimization and business intelligence applications, Seagate Software's
liability could be substantial if it receives an unfavorable judgement, which
could have a material adverse effect upon Seagate Software's business,
operating results or financial condition.
Dependence on Key Personnel.
Seagate Software's future performance depends to a significant degree upon
the continued service of its key members of management as well as marketing,
sales, and product development personnel. The loss of one or more of its key
personnel would have a material adverse effect on Seagate Software's business,
operating results, and financial condition. Seagate Software believes its
future success will also depend in large part upon its ability to attract and
retain highly skilled management, marketing, sales, and product development
personnel. Seagate Software has experienced intense competition for such
personnel and there can be no assurance that it will be able to retain its key
employees or that it will be successful in attracting, assimilating and
retaining them in the future.
Seagate Software Faces Risks of Litigation.
Seagate Software is subject to litigation arising in the ordinary course of
its business. While Seagate Software believes that the ultimate outcome of
these actions will not have a material adverse effect on it, the outcome of
these actions is not determinable, and negative outcomes may adversely effect
its financial position, liquidity, or results of operations. See Part I, Item
3 of this Form 10-K for a description of legal proceedings.
Seagate Software Faces Risks from the Contribution of its Network & Storage
Management Group to VERITAS.
Seagate Software faces a number of risks from the closing of the NSMG
combination including:
. Information Management Group employees may be distracted by concerns
about whether Seagate Software will continue to operate that business or
spin it off, and may not meet critical deadlines in their assigned
tasks,
. the ongoing original equipment manufacturer relationship with VERITAS
and Seagate Technology's tape drive operations may be disrupted and
Seagate Software may not be able to meet its customers' order deadlines
or needs as a result,
. Seagate Software has agreed not to compete in certain storage management
software markets for a specified period of time after the closing of the
NSMG combination and may not be able to benefit from future
opportunities in those markets,
. Seagate Software does not have significant control over the management
of VERITAS, although currently Seagate Software has two representatives
on its board of directors, but Seagate Software's financial statements
and results of operations will reflect Seagate Software's then current
ownership % of New VERITAS' operations which may impact its stock price,
and
. Seagate Software is only permitted to sell its interest in VERITAS in
limited increments.
Risks From Conversion to Single European Currency.
On January 1, 1999, certain member states of the European Economic
Community fixed their respective currencies to a new currency, the Single
European Currency. On that day the Single European Currency
102
<PAGE>
became 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 Deutshe Mark, as well as the Single European Currency. Companies operating
in or conducting business in these countries, will need to ensure that their
financial and other software systems are capable of processing transaction and
properly handling the existing currencies and the Single European Currency.
Seagate Software is still assessing the impact of the introduction and use
of the Single European Currency on its internal systems. Seagate Software will
take corrective actions based on such assessment but do not presently expect
that introduction and use of the Single European Currency will materially
effect its foreign exchange and hedging activities or use of derivative
instruments or will result in any material increase in its costs. While Seagate
Software will continue to evaluate the impact of the Single European Currency
introduction over time, based on currently available information, to date the
introduction of the Single European Currency has not had a material adverse
impact on Seagate Software's financial condition or overall trends in results
of operations.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Seagate Software develops products in the United States, Canada and the
United Kingdom and sells its products in North America, Asia, Japan and Europe.
As a result, Seagate Software's financial results could be affected by various
factors, including changes in foreign currency exchange rates or weak economic
conditions in foreign markets. Sales are primarily made in U.S. dollars.
Accordingly, a strengthening of the dollar could make its products less
competitive in foreign markets. Seagate Software's foreign and domestic cash is
held in short-term (less than 90 days) interest bearing deposits in banks. Due
to the nature of the cash deposits, Seagate Software has concluded there is no
material market exposure. Therefore, no quantitative disclosures are required.
103
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Seagate Software was recapitalized in April 1996 to integrate the business
conducted by the software divisions of Seagate Technology. Seagate Software
entered into a Restructuring and Contribution Agreement, dated April 4, 1996,
affecting the reorganization and defining the relationship between Seagate
Technology and Seagate Software. Pursuant to this Contribution Agreement and
subsequent amendments, all of the software divisions have been transferred to
Seagate Software or its subsidiaries in exchange for 54,633,333 shares of
Series A preferred stock (including 7,200,000 shares of Series A preferred
stock upon cancellation of one share of Special Voting preferred stock) and
62,500 shares of common stock.
Prior to December 1996, Seagate Technology International Holdings Ltd. or
STIHL, a wholly owned subsidiary of Seagate Technology, owned all outstanding
capital stock of Seagate Software Information Management Group (Canada), Inc.,
which is defined herein as IMG Vancouver. Pursuant to an agreement among STIHL,
Seagate Software and IMG Vancouver dated December 19, 1996, STIHL surrendered
the stock it held in IMG Vancouver, which was subsequently cancelled by IMG
Vancouver, in exchange for 7,200,000 convertible preference shares of IMG
Vancouver. On December 26, 1996, the Convertible Preference Shares were
exchanged for 7,200,000 Class B exchangeable shares of IMG Vancouver. These
Class B exchangeable shares do not have voting rights except as required by
law, but can be exchanged at STIHL's sole discretion for 7,200,000 shares of
Seagate Software Series A preferred stock upon the cancellation of one share of
Seagate Software's Special voting preferred stock that was issued to STIHL
concurrently. In connection with the issuance of the Class B exchangeable
shares described above, STIHL received one share of Seagate Software's Special
Voting preferred stock, which gives STIHL voting rights in Seagate Software
equivalent to 7,200,000 shares of Series A preferred stock. Also on December
26, 1996, IMG Vancouver issued 10,000 Class A common shares, which carry the
right to vote, to Seagate Software. Seagate Software therefore now owns all
voting shares of IMG Vancouver. For financial reporting purposes, the 7,200,000
shares of Series A preferred stock of Seagate Software, which STIHL could elect
to receive upon cancellation of the Special Voting preferred stock and
surrendered the Class B exchangeable shares of IMG Vancouver, have been treated
as issued and outstanding shares of Series A preferred stock of Seagate
Software. Prior to the merger, STIHL will distribute the special voting
preferred stock and the Class B exchangeable shares to Seagate Technology, who
will surrender such shares in exchange for 7,200,000 shares of Seagate Software
series A preferred stock.
Pursuant to a General Services Agreement between Software Seagate and
Seagate Technology dated June 28, 1997, Seagate Technology provides
administrative, accounting and similar services requested by Seagate Software.
The services provided by Seagate Technology may include, but are not limited
to:
. providing general accounting services, budgeting, forecasting, cost
control and other financial planning services;
. assisting with employee benefits administration, hiring and payroll
administration;
. providing legal and government relations services such as preparing
applications for export licenses, tax analysis, documentation, reporting
and withholding for customs duties, import taxes, value-added taxes, and
any other charges or taxes imposed on Seagate Software's products;
. assisting Seagate Software with federal, state, and international tax
planning, provisions, audits, and compliance, including income, sales
and use, property, VAT, and similar taxes;
. providing assistance relating to the marketing, promotion, and sale of
Seagate Software's products;
. providing services and support relating to information technology and
facilities; and
. managerial oversight, including screening of potential acquisitions
partnerings, joint ventures, or similar transactions.
During 1999, 1998 and 1997 Seagate Technology charged Seagate Software
$1,313,000, $1,773,000 and $1,958,000, respectively, for various corporate
services. Seagate Software pays service fees to Seagate
104
<PAGE>
Technology each fiscal year that represent a reasonable estimate of Seagate
Technology's direct and indirect costs incurred in performing services for
Seagate Software. Service fees are to be paid in equal monthly installments
within 30 days after the end of the month. Additionally, Seagate Software and
Seagate Technology are required to review, on an annual basis, the actual level
of services provided and the corresponding reasonably determinable direct and
indirect costs incurred by Seagate Technology pursuant to the General Services
Agreement. If the reasonably determinable costs are greater than or less than
the service fees paid, the difference will be charged to or refunded to Seagate
Software, as the case may be, within 30 days after such review.
The service fees assessed to Seagate Software and the end of period
adjustments thereto are intended by Seagate Software and Seagate Technology to
allocate costs for those services provided on a basis no less favorable than
Seagate Software could obtain from an unaffiliated third party. Seagate
Software has audit rights with respect to the computation and analysis of
service fees pursuant to the General Services Agreement. In addition, Seagate
Technology is required to indemnify, defend and hold Seagate Software harmless
against any and all claims, suits, actions, demands, proceedings, losses,
damages, liabilities, costs and expenses, including, without limitation,
interest and reasonable attorneys' fees, arising out of, relating to, or
resulting from services performed by Seagate Technology pursuant to the General
Services Agreement, other than those liabilities that would not have arisen but
for any act, error and/or omission of Seagate Software and/or any of its
officers, directors, employees and/or agents.
Additionally, on July 4, 1998, Seagate Software and Seagate Technology
renewed their Intercompany Revolving Loan Agreement on substantially the same
terms and conditions as the prior agreement which was dated June 28, 1996.
Under the Revolving Loan Agreement, Seagate Technology finances certain of
Seagate Software's working capital requirements. The Loan Agreement provides
for maximum borrowings of up to $60,000,000 and is renewable every two years.
Borrowings from Seagate Technology were $11,801,000, $16,054,000 and
$28,971,000 at July 2, 1999, July 3, 1998 and June 27, 1997, respectively.
Borrowings from Seagate Technology consist primarily of funding Seagate
Software's operating activities. During fiscal 1999, gross borrowings and gross
repayments under the Loan Agreement were $319,017,000 and $323,270,000,
respectively. Seagate Software pays interest at the LIBOR rate plus 2% per
annum (7.3% at July 2, 1999) on such borrowings. Prior to fiscal 1999, Seagate
Software previously paid interest at 6%.
Revenues from Seagate Technology were $7,738,000, $5,469,000 and $5,762,000
in fiscal 1999, 1998 and 1997, respectively. This revenue primarily consisted
of shipments to Seagate Technology's original equipment manufacturer tape drive
divisions located in Costa Mesa, California and Scotland. Additionally, this
revenue is supported by license agreements, which have comparable terms and
pricing as those agreements between Seagate Software and third party customers.
Seagate Software is included in the consolidated federal and certain
combined and consolidated foreign and state income tax returns of Seagate
Technology. Seagate Technology and Seagate Software have entered into a Tax
Allocation Agreement pursuant to which Seagate Software computes hypothetical
tax returns as if Seagate Software was not joined in consolidated or combined
returns with Seagate Technology. Seagate Software must pay Seagate Technology
the positive amount of any such hypothetical taxes. If the hypothetical tax
returns show entitlement to refunds, including any refunds attributable to a
carryback, then Seagate Technology will pay Seagate Software the amount of such
refunds. At year end for both 1999 and 1998, [there were no outstanding
intercompany tax-related balances between Seagate Software and Seagate
Technology.]
105
<PAGE>
LEGAL OPINION
The validity of the shares of Seagate Technology common stock offered by
this proxy statement/prospectus will be passed upon for Seagate Technology by
Wilson Sonsini Goodrich & Rosati, Professional Corporation.
EXPERTS
The consolidated financial statements of Seagate Technology, Inc. at July 2,
1999 and July 3, 1998, and for each of the three years in the period ended July
2, 1999, included in the Proxy Statement of Seagate Software, Inc., which is
referred to and made part of this Prospectus and Registration Statement of
Seagate Technology, Inc., have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report appearing elsewhere herein, and are
included in reliance upon such report given on the authority of such firm as
experts in accounting and auditing.
The consolidated financial statements of Seagate Software, Inc. at July 2,
1999 and July 3, 1998, and for each of the three years in the period ended July
2, 1999, included in the Proxy Statement of Seagate Software, Inc., which is
referred to and made part of this Prospectus and Registration Statement of
Seagate Technology, Inc., have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report appearing elsewhere herein, and are
included in reliance upon such report given on the authority of such firm as
experts in accounting and auditing.
106
<PAGE>
INDEX TO FINANCIAL STATEMENTS OF SEAGATE TECHNOLOGY
<TABLE>
<CAPTION>
Page
----
<S> <C>
Consolidated Balance Sheets................................................ F-2
Consolidated Statements of Operations...................................... F-3
Consolidated Statements of Cash Flows...................................... F-4
Consolidated Statements of Stockholders' Equity............................ F-5
Notes to Consolidated Financial Statements................................. F-6
Report of Ernst & Young LLP, Independent Auditors.......................... F-40
</TABLE>
F-1
<PAGE>
SEAGATE TECHNOLOGY
CONSOLIDATED BALANCE SHEETS
(In millions, except share data)
<TABLE>
<CAPTION>
July 2, July 3,
1999 1998
------- -------
<S> <C> <C>
Assets
Cash and cash equivalents.................................... $ 396 $ 666
Short-term investments....................................... 1,227 1,161
Accounts receivable, net..................................... 872 799
Inventories.................................................. 451 508
Deferred income taxes........................................ 252 243
Other current assets......................................... 114 238
------ ------
Total Current Assets....................................... 3,312 3,615
------ ------
Property, equipment and leasehold improvements, net.......... 1,687 1,669
Investment in VERITAS Software, net.......................... 1,745 --
Goodwill and other intangibles, net.......................... 144 169
Other assets................................................. 184 192
------ ------
Total Assets............................................... $7,072 $5,645
====== ======
Liabilities
Accounts payable............................................. $ 714 $ 577
Accrued employee compensation................................ 205 175
Accrued expenses............................................. 414 405
Accrued warranty............................................. 163 197
Accrued income taxes......................................... 43 20
Current portion of long-term debt............................ 1 1
------ ------
Total Current Liabilities.................................. 1,540 1,375
------ ------
Deferred income taxes........................................ 1,103 435
Accrued warranty............................................. 126 161
Other liabilities............................................ 37 33
Long-term debt, less current portion......................... 703 704
------ ------
Total Liabilities.......................................... 3,509 2,708
------ ------
Commitments and Contingencies
Stockholders' Equity
Preferred stock, $.01 par value 1,000,000 shares authorized;
none issued or outstanding.................................. -- --
Common stock, $.01 par value 600,000,000 shares authorized;
shares issued
251,890,019 in 1999 and 1998................................ 3 3
Additional paid-in capital................................... 1,991 1,929
Retained earnings............................................ 2,355 1,298
Accumulated other comprehensive income (loss)................ (7) --
Deferred compensation........................................ (43) (55)
Treasury common stock at cost; 23,172,130 shares in 1999 and
7,132,867 shares in 1998.................................... (736) (238)
------ ------
Total Stockholders' Equity................................. 3,563 2,937
------ ------
Total Liabilities and Stockholders' Equity................. $7,072 $5,645
====== ======
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE>
SEAGATE TECHNOLOGY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share data)
<TABLE>
<CAPTION>
For The Years Ended
------------------------
July July
2, 3, June 27,
1999 1998 1997
------ ------ --------
<S> <C> <C> <C>
Revenue................................................ $6,802 $6,819 $8,940
Cost of sales.......................................... 5,250 5,830 6,918
Product development.................................... 581 585 459
Marketing and administrative........................... 534 502 493
Amortization of goodwill and other intangibles......... 39 40 50
In-process research and development.................... 2 223 3
Restructuring.......................................... 60 347 (7)
Unusual items.......................................... 78 (22) 166
------ ------ ------
Total Operating Expenses............................. 6,544 7,505 8,082
------ ------ ------
Income (Loss) from Operations........................ 258 (686) 858
Interest income........................................ 102 98 92
Interest expense....................................... (48) (51) (35)
Gain on contribution of NSMG to VERITAS, net........... 1,670 -- --
Activity related to equity interest in VERITAS......... (119) -- --
Other, net............................................. 10 (65) (24)
------ ------ ------
Other Income (Expense), net.......................... 1,615 (18) 33
Income (loss) before income taxes...................... 1,873 (704) 891
Benefit (provision) for income taxes................... (697) 174 (233)
------ ------ ------
Net Income (Loss).................................... $1,176 $ (530) $ 658
====== ====== ======
Net income (loss) per share:
Basic................................................ $ 4.94 $(2.17) $ 2.82
Diluted.............................................. 4.53 (2.17) 2.62
Number of shares used in per share computations:
Basic................................................ 237.9 243.6 233.6
Diluted.............................................. 243.1 243.6 257.9
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
SEAGATE TECHNOLOGY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
<TABLE>
<CAPTION>
For The Years Ended
--------------------------
July 2, July 3, June 27,
1999 1998 1997
------- ------- --------
<S> <C> <C> <C>
Operating Activities
Net income (loss).................................. $1,176 $ (530) $ 658
Adjustments to reconcile net income (loss) to net
cash provided
by operating activities:
Depreciation and amortization.................... 696 664 607
Deferred income taxes............................ 661 (33) 96
In-process research and development.............. 2 223 3
Non-cash portion of restructuring charge......... 35 203 --
Activity related to equity interest in VERITAS... 119 -- --
Gain on contribution of NSMG to VERITAS, net..... (1,670) -- --
Amstrad litigation charge........................ -- -- 153
Other, net....................................... 36 41 79
Changes in operating assets and liabilities:
Accounts receivable............................ (114) 242 30
Inventories.................................... 29 213 (84)
Accounts payable............................... 104 (278) 169
Accrued expenses, employee compensation and
warranty...................................... (124) (262) (63)
Accrued income taxes........................... 52 (37) 72
Other assets and liabilities................... 198 54 160
------ ------ ------
Net cash provided by operating activities.......... 1,200 500 1,880
Investing Activities
Acquisition of property, equipment and leasehold
improvements, net................................. (603) (709) (941)
Purchases of short-term investments................ (6,596) (4,810) (4,473)
Maturities and sales of short-term investments..... 6,519 4,889 3,907
Acquisitions of businesses, net of cash acquired... -- (204) --
Equity investments................................. (5) (27) (44)
Other, net......................................... (21) 13 19
------ ------ ------
Net cash used in investing activities............ (706) (848) (1,532)
Financing Activities
Issuance of long-term debt......................... -- -- 699
Repayment of long-term debt........................ -- (1) (8)
Sale of common stock............................... 98 67 84
Purchase of treasury stock......................... (859) (105) (582)
------ ------ ------
Net cash provided by (used in) financing
activities........................................ (761) (39) 193
Effect of exchange rate changes on cash and cash
equivalents....................................... (3) 6 2
------ ------ ------
Increase (decrease) in cash and cash equivalents... (270) (381) 543
Cash and cash equivalents at the beginning of the
year.............................................. 666 1,047 504
------ ------ ------
Cash and cash equivalents at the end of the year... $ 396 $ 666 $1,047
====== ====== ======
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
SEAGATE TECHNOLOGY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended July 2, 1999, July 3, 1998, and June 27, 1997
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Other Treasury
------------- Paid-In Retained Comprehensive Deferred Common
Shares Amount Capital Earnings Income Compensation Stock Total
------ ------ ---------- -------- ------------- ------------ -------- -------
In millions
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 28,
1996................... 213 2 1,133 1,390 (1) (58) - 2,466
Comprehensive income
Net income............. 658 658
Unrealized gain on
marketable
securities............ 1 1
Foreign currency
translation........... -- --
-------
Comprehensive income... 659
Purchase of treasury
stock at cost.......... (582) (582)
Sale of stock........... 4 42 (71) 113 84
Issuance of restricted
stock, net of
cancellations.......... 7 (7) (7) 7 --
Amortization of deferred
compensation........... 8 8
Income tax benefit from
stock options
exercised.............. 52 52
Conversion of debentures
to common stock........ 35 1 669 (24) 143 789
- ---------------------------------------------------------------------------------------------------------
Balance at June 27,
1997................... 252 3 1,903 1,946 -- (57) (319) 3,476
Comprehensive income
Net loss............... (530) (530)
Unrealized gain on
marketable
securities............ 1 1
Foreign currency
translation........... (1) (1)
-------
Comprehensive income
(loss)................ (530)
Purchase of treasury
stock at cost.......... (105) (105)
Sale of stock........... (98) 166 68
Issuance of restricted
stock, net of
cancellations.......... 6 (20) (6) 20 --
Amortization of deferred
compensation........... 8 8
Income tax benefit from
stock options
exercised.............. 12 12
Other stock-based
compensation........... 8 8
- ---------------------------------------------------------------------------------------------------------
Balance at July 3,
1998................... 252 3 1,929 1,298 -- (55) (238) 2,937
Comprehensive income
Net income............. 1,176 1,176
Unrealized gain on
marketable
securities............ (6) (6)
Foreign currency
translation........... (1) (1)
-------
Comprehensive income... 1,169
Purchase of treasury
stock at cost.......... (859) (859)
Sale of stock........... (106) 204 98
Issuance of restricted
stock, net of
cancellations.......... (2) (6) 2 6 --
Amortization of deferred
compensation........... 10 10
Income tax benefit from
stock options
exercised.............. 26 26
Other stock-based
compensation........... 38 (7) 151 182
--- --- ------- ------- ---- ----- ------ -------
Balance at July 2,
1999................... 252 $ 3 $ 1,991 $ 2,355 $ (7) $ (43) $ (736) $ 3,563
=== === ======= ======= ==== ===== ====== =======
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
SEAGATE TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Summary of Significant Accounting Policies
Nature of Operations--Seagate Technology, Inc. (the "Company" or "Seagate")
designs, manufactures and markets products for storage, retrieval and
management of data on computer and data communications systems. The Company has
three operating segments, disc drives, software and tape drives, however, only
the disc drive and software businesses are reportable segments under the
criteria of SFAS No. 131. The Company sells its products to original equipment
manufacturers ("OEM") for inclusion in their computer systems or subsystems,
and to distributors who typically sell to small OEMs, dealers, system
integrators and other resellers.
Accounting Estimates--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ materially from
those estimates.
The actual results with regard to warranty expenditures could have a
material unfavorable impact on the Company if the actual rate of unit failure
or the cost to repair a unit is greater than what the Company has used in
estimating the warranty expense accrual.
The actual results with regard to restructuring charges could have a
material unfavorable impact on the Company if the actual expenditures to
implement the restructuring plan are greater than what the Company estimated
when establishing the restructuring accrual.
Given the volatility of the markets in which the Company participates, the
Company makes adjustments to the value of inventory based on estimates of
potentially excess and obsolete inventory after considering forecasted demand
and forecasted average selling prices. However, forecasts are subject to
revisions, cancellations, and rescheduling. Actual demand will inevitably
differ from such anticipated demand, and such differences may have a material
effect on the financial statements.
Basis of Consolidation--The consolidated financial statements include the
accounts of the Company and its wholly-owned and majority-owned subsidiaries
after eliminations. Total outstanding minority interests are not material for
any period presented.
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 1999
ended on July 2, 1999, fiscal 1998 ended on July 3, 1998 and fiscal 1997 ended
on June 27, 1997. Fiscal year 1999 comprised 52 weeks, fiscal year 1998
comprised 53 weeks and fiscal year 1997 comprised 52 weeks. All references to
years in these notes to consolidated financial statements represent fiscal
years unless otherwise noted.
Certain amounts in prior year financial statements and notes thereto have
been reclassified to conform to current year presentation.
Foreign Currency Translation--The U.S. dollar is the functional currency for
most of the Company's foreign operations. Gains and losses on the translation
into U.S. dollars of amounts denominated in foreign currencies are included in
net income for those operations whose functional currency is the U.S. dollar
and as a separate component of stockholders' equity for those operations whose
functional currency is the local currency.
Derivative Financial Instruments--Seagate transacts business in various
foreign countries. Its primary currency cash flows are in emerging market
countries in Asia and in certain European countries. During 1998 and 1997,
Seagate employed a foreign currency hedging program utilizing foreign currency
forward exchange
F-6
<PAGE>
SEAGATE TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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. These local currency cash flows were
designated as either firm commitments or as anticipated transactions depending
upon the contractual or legal nature of local currency commitments in
Singapore, Thailand, Malaysia and Northern Ireland. Anticipated transactions
were hedged with purchased currency options and with foreign currency forward
exchange contracts; firm commitments were hedged with foreign currency forward
exchange contracts.
The Company may enter into foreign currency forward exchange and option
contracts to manage exposure related to certain foreign currency commitments,
certain foreign currency denominated balance sheet positions and anticipated
foreign currency denominated expenditures. The Company does not enter into
derivative financial instruments for trading purposes. Foreign currency forward
exchange contracts designated and effective as hedges of firm commitments and
option contracts designated and effective as hedges of firm commitments or
anticipated transactions are treated as hedges for accounting purposes. Gains
and losses related to qualified accounting hedges of firm commitments or
anticipated transactions are deferred and are recognized in income or as
adjustments to the carrying amounts when the hedged transaction occurs. All
other foreign currency forward exchange contracts are marked-to-market and
unrealized gains and losses are included in current period net income as a
component of other income (expense).
Premiums on foreign currency option contracts used to hedge firm commitments
and anticipated transactions are amortized on a straight-line basis over the
life of the contract. Forward points on foreign currency forward exchange
contracts which qualify as hedges of firm commitments are recognized in income
as adjustments to the carrying amounts when the hedged transaction occurs.
The Company may, from time to time, adjust its foreign currency hedging
position by taking out additional contracts or by terminating or offsetting
existing foreign currency forward exchange and option contracts. These
adjustments may result from changes in the Company's underlying foreign
currency exposures of from fundamental shifts in the economics of particular
exchange rates, as occurred in the first and second quarters of fiscal 1998
with respect to the Thai baht, Malaysian ringgit and Singapore dollar. For
foreign currency forward exchange and option contracts qualifying as accounting
hedges, gains or losses on terminated contracts and offsetting contracts are
deferred and are recognized in income as adjustments to the carrying amount of
the hedged item in the period the hedged transaction occurs. For foreign
currency forward exchange and option contracts not qualifying as accounting
hedges, gains and losses on terminated contracts, or on contracts that are
offset, are recognized in income in the period of contract termination or
offset.
Revenue Recognition and Product Warranty--Revenue from sales of products is
generally recognized upon shipment to customers. The Company warrants its
products against defects in design, materials and workmanship generally for
three to five years depending upon the capacity category of the disc drive,
with the higher capacity products being warranted for the longer periods. A
provision for estimated future costs relating to warranty expense is recorded
when products are shipped.
The Company's software revenue is primarily derived from the sale of product
licenses, software maintenance, technical support, training and consulting.
During the first quarter of fiscal 1999, the Company began recognizing license
revenue in accordance with the American Institute of Certified Public
Accountant's Statement of Position 97-2, "Software Revenue Recognition."
Revenue from software license agreements is primarily recognized at the time of
product delivery, provided that fees are fixed or determinable, evidence of an
arrangement exists, collectibility is probable and the Company has vendor-
specific objective evidence of fair value. Revenue from resellers, including
VARs, OEMs and distributors, are primarily recognized at the time of product
delivery to the reseller. The Company's policy is to defer such revenue if
resale contingencies exist. Some of the factors that are considered to
determine the existence of such contingencies include payment
F-7
<PAGE>
SEAGATE TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
terms, collectiblity and past history with the customer. Product returns are
reserved for in accordance with SFAS 48. Such returns are estimated based on
historical return rates. The Company considers other factors such as fixed and
determinable fees, resale contingencies, arms length contract terms and the
ability to reasonably estimate returns to ensure compliance with SFAS 48.
Service revenue from customer maintenance fees for ongoing customer support and
product updates is recognized ratably over the maintenance term, which is
typically 12 months. Service revenue from training and consulting is recognized
when such services are performed.
Inventory--Inventories are valued at the lower of standard cost (which
approximates actual cost using the first-in, first-out method) or market.
Property, Equipment, and Leasehold Improvement--Land, equipment, buildings
and leasehold improvements are stated at cost. Equipment and buildings are
depreciated using the straight-line method over the estimated useful lives of
the assets. Leasehold improvements are amortized using the straight-line method
over the shorter of the estimated life of the asset or the remaining term of
the lease.
Advertising Expense--The cost of advertising is expensed as incurred.
Advertising costs were $56 million, $68 million and $41 million in 1999, 1998
and 1997, respectively.
Stock-Based Compensation--The Company accounts for employee stock-based
compensation under Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APBO 25") and related interpretations. Pro forma
net income and net income per share are disclosures required by Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123") and are included in the Stock-Based Benefit Plans--
Pro Forma Information note to the consolidated financial statements.
Impact of Recently Issued Accounting Standards--In June 1997, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. SFAS 130 is effective for fiscal years beginning after December 15,
1997 and was adopted by the Company for its fiscal 1999. The adoption of SFAS
130 did not have a material impact on the Company's financial statements.
Also in June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosures About Segments of an Enterprise and Related
Information" ("SFAS 131"). SFAS 131 replaces Statement of Financial Accounting
Standards No. 14 and changes the way public companies report segment
information. SFAS 131 is effective for fiscal years beginning after December
15, 1997 and was adopted by the Company for its fiscal 1999 which commenced
July 4, 1998. The adoption of SFAS 131 did not have a material impact on the
Company's financial statements.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). This statement establishes accounting and reporting standards for
derivative instruments and for hedging activities. It requires that derivatives
be recognized in the balance sheet at fair value and specifies the accounting
for changes in fair value. SFAS 133 is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999 and will be adopted by the Company
for its fiscal year 2000. The Company is in the process of assessing the impact
of this pronouncement on its financial statements.
F-8
<PAGE>
SEAGATE TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 provides
guidance on capitalization of the costs incurred for computer software
developed or obtained for internal use. It also provides guidance for
determining whether computer software is internal-use software and on
accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold to the public. SOP 98-1
will be effective for Seagate's fiscal year ending June 30, 2000. The Company
is in the process of assessing the impact of this pronouncement on its
financial statements.
In December 1998, the AICPA issued SOP 98-9, Modification of SOP 97-2,
Software Revenue Recognition, with Respect to Certain Transactions. SOP 98-9
amends SOP 97-2 Software Revenue Recognition to require recognition of revenue
using the "residual method" when certain criteria are met. Seagate Technology
will be required to implement these provisions of SOP 98-9 for its fiscal year
ending June 30, 2000. SOP 98-9 also amends SOP 98-4, an earlier amendment to
SOP 97-2, which extended the deferral of the application of certain passages of
SOP 97-2 provided by SOP 98-4. The Company is in the process of assessing the
impact of this pronouncement on its financial statements.
Cash, Cash Equivalents and Short-Term Investments--The Company considers all
highly liquid investments with a remaining maturity of 90 days or less at the
time of purchase to be cash equivalents. Cash equivalents are carried at cost,
which approximates fair value. The Company's short-term investments primarily
comprise readily marketable debt securities with remaining maturities of more
than 90 days at the time of purchase. The Company has classified its entire
investment portfolio as available-for-sale. Available-for-sale securities are
classified as cash equivalents or short-term investments and are stated at fair
value with unrealized gains and losses included in stockholders' equity. The
amortized cost of debt securities is adjusted for amortization of premiums and
accretion of discounts to maturity. Such amortization and accretion are
included in interest income. Realized gains and losses are included in other
income (expense). The cost of securities sold is based on the specific
identification method.
Concentration of Credit Risk--The Company's customer base for disc drive
products is concentrated with a small number of systems manufacturers and
distributors. Financial instruments which potentially subject the Company to
concentrations of credit risk are primarily accounts receivable, cash
equivalents and short-term investments. The Company performs ongoing credit
evaluations of its customers' financial condition and, generally, requires no
collateral from its customers. The allowance for noncollection of accounts
receivable is based upon the expected collectibility of all accounts
receivable. The Company places its cash equivalents and short-term investments
in investment grade, short-term debt instruments and limits the amount of
credit exposure to any one commercial issuer.
F-9
<PAGE>
SEAGATE TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Financial Instruments
The following is a summary of the fair value of available-for-sale
securities at July 2, 1999 and July 3, 1998:
<TABLE>
<CAPTION>
July July
2, 3,
1999 1998
------ ------
In millions
<S> <C> <C>
Money market mutual funds.................................. $ 74 $ 71
U.S. government and agency obligations..................... 310 398
Repurchase agreements...................................... -- 81
Auction rate preferred stock............................... 222 167
Municipal bonds............................................ 109 102
Corporate securities....................................... 514 612
Mortgage-backed and asset-backed securities................ 300 152
Euro time deposits......................................... 48 149
------ ------
$1,577 $1,732
====== ======
Included in short-term investments......................... $1,227 $1,161
Included in cash and cash equivalents...................... 350 571
------ ------
$1,577 $1,732
====== ======
</TABLE>
The fair value of all available-for-sale securities approximates amortized
cost. Gross realized and unrealized gains and losses on the sale of available-
for-sale securities were not material for each of the three years in the period
ended July 2, 1999.
The fair value of the Company's investment in debt securities, by
contractual maturity, is as follows:
<TABLE>
<CAPTION>
July July
2, 3,
1999 1998
------ ------
In millions
<S> <C> <C>
Due in less than 1 year.................................... $ 486 $ 771
Due in 1 to 3 years........................................ 794 723
------ ------
$1,280 $1,494
====== ======
</TABLE>
Fair Value Disclosures--The carrying value of cash and cash equivalents
approximates fair value. The fair values of short-term investments, notes,
debentures (see Long-Term Debt and Lines of Credit footnote) and foreign
currency forward exchange and option contracts are estimated based on quoted
market prices.
The carrying values and fair values of the Company's financial instruments
are as follows:
<TABLE>
<CAPTION>
July 2, 1999 July 3, 1998
------------------ ------------------
Estimated Estimated
Carrying fair Carrying fair
amount value amount value
-------- --------- -------- ---------
In millions
<S> <C> <C> <C> <C>
Cash and cash equivalents......... $ 396 $ 396 $ 666 $ 666
Short-term investments............ 1,227 1,227 1,161 1,161
7.125% senior notes, due 2004..... (200) (194) (200) (199)
7.37% senior notes, due 2007...... (200) (189) (200) (198)
7.45% senior debentures, due
2037............................. (200) (188) (200) (198)
7.875% senior debentures, due
2017............................. (100) (92) (100) (98)
Italian Lira debentures, 14.65% to
15.25%........................... -- -- (1) (1)
Foreign currency forward exchange
and option contracts............. -- -- (18) (18)
</TABLE>
F-10
<PAGE>
SEAGATE TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Derivative Financial Instruments--The Company may enter into foreign
currency forward exchange and option contracts to manage exposure related to
certain foreign currency commitments, certain foreign currency denominated
balance sheet positions and anticipated foreign currency denominated
expenditures. The Company does not enter into derivative financial instruments
for trading purposes. Based on uncertainty in the Southeast Asian foreign
currency markets, beginning in the second quarter of 1998 the Company
temporarily suspended its hedging program. At July 3, 1998, the Company had
effectively closed out all of its foreign currency forward exchange contracts
by purchasing offsetting contracts. As of July 2, 1999, the Company had no
outstanding foreign currency forward exchange or purchased currency option
contracts.
Net foreign currency transaction losses included in the determination of net
income (loss) were $1 million, $252 million and $2 million for 1999, 1998, and
1997, respectively. The Company transacts business in various foreign
countries. Its primary foreign currency cash flows are in emerging market
countries in Asia and in certain European countries. During 1998 and 1997, the
Company employed a foreign currency hedging program utilizing foreign currency
forward exchange contracts and purchased currency options to hedge local
currency cash flows for payroll, inventory, other operating expenditures and
fixed asset purchases in Singapore, Thailand and Malaysia. During fiscal 1998
the Singapore dollar, Thai baht, and Malaysian ringgit declined in value
relative to the U.S. dollar. The transaction loss of $252 million for fiscal
1998 primarily included losses incurred on closing out these foreign currency
forward exchange contracts.
Accounts Receivable
Accounts receivable are summarized below:
<TABLE>
<CAPTION>
1999 1998
----- ----
In
millions
<S> <C> <C>
Accounts receivable.......................................... $ 925 $853
Less allowance for noncollection............................. (53) (54)
----- ----
$ 872 $799
===== ====
Inventories
Inventories are summarized below:
<CAPTION>
1999 1998
----- ----
In
millions
<S> <C> <C>
Components................................................... $ 143 $172
Work-in-process.............................................. 54 87
Finished goods............................................... 254 249
----- ----
$ 451 $508
===== ====
</TABLE>
Property, Equipment and Leasehold Improvements
Property, equipment and leasehold improvements consisted of the following:
<TABLE>
<CAPTION>
Estimated Useful Life 1999 1998
------------------------ ------- -------
In millions
<S> <C> <C> <C>
Land............................... $ 40 $ 33
Equipment.......................... 1 1/2-4 years 2,365 2,187
Building and leasehold
improvements...................... Life of lease - 30 years 932 854
Construction in progress........... 196 168
------- -------
3,533 3,242
Less accumulated depreciation and
amortization...................... (1,846) (1,573)
------- -------
$ 1,687 $ 1,669
======= =======
</TABLE>
F-11
<PAGE>
SEAGATE TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Equipment and leasehold improvements include assets under capitalized
leases. Amortization of leasehold improvements is included in depreciation
expense. Depreciation expense was $574 million, $549 million and $451 million
in 1999, 1998 and 1997, respectively.
Goodwill and Other Intangibles
Goodwill represents the excess of the purchase price of acquired companies
over the estimated fair value of the tangible and specifically identified
intangible net assets acquired. Other intangible assets consist of trademarks,
assembled workforces, distribution networks, developed technology, customer
bases, and covenants not to compete related to acquisitions accounted for by
the purchase method. Amortization of purchased intangibles, other than acquired
developed technology, is provided on the straight-line basis over the
respective useful lives of the assets ranging from 36 to 60 months for
trademarks, 24 to 48 months for assembled workforces and distribution networks,
12 to 36 months for customer bases and 18 to 24 months for covenants not to
compete. In-process research and development without alternative future use is
expensed when acquired.
In accordance with SFAS 121, the carrying value of other intangibles and
related goodwill is reviewed if the facts and circumstances suggest that they
may be permanently impaired. If this review indicates these assets' carrying
value will not be recoverable, as determined based on the undiscounted net cash
flows of the entity acquired over the remaining amortization period, the
Company's carrying value is reduced to its estimated fair value, first by
reducing goodwill, and second by reducing long-term assets and other
intangibles (generally based on an estimate of discounted future net cash
flows). Goodwill and other intangibles are being amortized on a straight-line
basis over periods ranging from two to fifteen years. Accumulated amortization
was $177 million and $201 million as of July 2, 1999 and July 3, 1998,
respectively.
Developed Technology
The Company applies Statement of Financial Accounting Standards No. 86
("SFAS 86", "Accounting for the Costs of Computer Software to Be Sold, Leased,
or Otherwise Marketed," to software technologies developed internally, acquired
in business acquisitions, and purchased.
Internal development costs are included in research and development and are
expensed as incurred. SFAS 86 requires the capitalization of certain internal
development costs once technological feasibility is established, which based on
the Company's development process generally occurs upon the completion of a
working model. As the time period between the completion of a working model and
the general availability of software has been short, capitalization of internal
development costs has not been material to date. Capitalized costs are
amortized based on the greater of the straight-line basis over the estimated
product life (generally 30 to 48 months) or the ratio of current revenue to the
total of current and anticipated future revenue.
Purchased developed technology is amortized based on the greater of the
straight-line basis over the estimated useful life (30 to 48 months) or the
ratio of current revenue to the total of current and anticipated future
revenue. The recoverability of the carrying value of purchased developed
technology is reviewed periodically. The carrying value of developed technology
is compared to the estimated future gross revenue from that product reduced by
the estimated future costs of completing and disposing of that product,
including the costs of performing maintenance and customer support (net
undiscounted cash flows) and to the extent that the carrying value exceeds the
undiscounted cash flows the difference is written off.
F-12
<PAGE>
SEAGATE TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Long-Term Debt and Lines of Credit
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
1999 1998
---- ----
In
millions
<S> <C> <C>
7.125% senior notes, due 2004.................................. $200 $200
7.37% senior notes, due 2007................................... 200 200
7.45% senior debentures, due 2037.............................. 200 200
7.875% senior debentures, due 2017............................. 100 100
Italian lira debentures, 14.65% to 15.25% notes and
loans due through 1999........................................ -- 1
Capitalized lease obligations with interest at 14% to 19.25%
collateralized by certain manufacturing equipment and
buildings..................................................... 4 4
---- ----
704 705
Less current portion........................................... 1 1
---- ----
$703 $704
==== ====
</TABLE>
At July 2, 1999, future minimum principal payments on long-term debt and
capitalized lease obligations were as follows:
<TABLE>
<CAPTION>
In millions
<S> <C>
2000....................................... $ 1
2001....................................... --
2002....................................... 1
2003....................................... 1
2004....................................... 201
After 2004................................. 500
----
$704
====
</TABLE>
The Company's 7.125% senior notes due 2004, 7.37% senior notes due 2007 and
7.875% senior debentures due 2017 are redeemable at the option of the Company
at any time, at a redemption price equal to the greater of (i) 100% of their
principal amount plus accrued interest or (ii) the sum of the present values of
the remaining scheduled payments of principal and interest discounted to the
date of redemption at a discount rate (the "discount rate") as set forth in the
indenture governing the notes and debentures plus 10 basis points. The
Company's 7.45% senior debentures due 2037 are redeemable at the option of the
Company at any time, at a redemption price equal to the greater of (i) 100% of
their principal amount plus accrued interest, (ii) the sum of the present
values of the remaining scheduled payments of principal and interest discounted
to the date of redemption at the discount rate plus 10 basis points, calculated
as if the principal amount were payable in full on March 1, 2009, or (iii) the
sum of the present values of the remaining scheduled payments of principal and
interest discounted to the date of redemption at the discount rate plus 10
basis points. In addition, the Company's 7.45% senior debentures due 2037 will
be redeemable on March 1, 2009, at the option of the holders thereof, at 100%
of their principal amount, together with interest payable to the date of
redemption. The Company's 7.125% senior notes due 2004, 7.37% senior notes due
2007 and 7.875% senior debentures due 2017 will not be redeemable at the option
of the holders thereof prior to maturity. These securities were issued in
February 1997 in an offering registered under the Securities Act of 1933, as
amended.
As of July 2, 1999, the Company had committed lines of credit of $84 million
that can be used for standby letters of credit or bankers' guarantees. At July
2, 1999, $67 million of these lines of credit were utilized.
F-13
<PAGE>
SEAGATE TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Net Income Per Share
The following table sets forth the computation of basic and diluted net
income (loss) per share.
<TABLE>
<CAPTION>
For the years ended
----------------------------------------
July 2, July 3, June 27,
1999 1998 1997
----------- ----------- --------------
In millions, except per share data
<S> <C> <C> <C>
Basic Net Income (Loss) Per Share
Computation
Numerator:
Net income (loss).................. $ 1,176 $ (530) $ 658
----------- ----------- ----------
Denominator:
Weighted average number of common
shares outstanding during the
period............................ 237.9 243.6 233.6
----------- ----------- ----------
Basic net income (loss) per share.... $ 4.94 $ (2.17) $ 2.82
=========== =========== ==========
Diluted Net Income (Loss) Per Share
Computation
Numerator:
Net income (loss).................. $ 1,176 $ (530) $ 658
Add convertible subordinated
debentures interest, net of
income tax effect................. -- -- 17
Adjustment to net income for
dilutive effect of subsidiary
Seagate Software, Inc.'s
outstanding stock options......... (75) -- --
----------- ----------- ----------
Total............................ $ 1,101 $ (530) $ 675
----------- ----------- ----------
Denominator:
Weighted average number of common
shares outstanding during the
period............................ 237.9 243.6 233.6
Incremental common shares
attributable to exercise of
outstanding options (assuming
proceeds would be used to purchase
treasury stock)................... 5.2 -- 7.4
Incremental common shares
attributable to conversion of
convertible subordinated
debentures........................ -- -- 16.9
----------- ----------- ----------
Total............................ 243.1 243.6 257.9
----------- ----------- ----------
Diluted net income (loss) per share.. $ 4.53 $ (2.17) $ 2.62
=========== =========== ==========
</TABLE>
Options to purchase 6.2 million, 9.7 million and 1.3 million shares of
common stock were outstanding during 1999, 1998 and 1997, respectively, but
were not included in the computation of diluted net income per share because
the options' exercise price was greater than the average market price of the
common shares and, therefore, the effect would be antidilutive.
Employee Profit Sharing and Executive Bonus Plans
The Company allocates a certain percentage of adjusted quarterly pretax
profits to its Employee Profit Sharing Plan which is currently distributed to
employees, excluding officers, employed for the full quarter. The Company also
allocates a certain percentage of adjusted quarterly pretax profits to its
Executive Bonus Plan. Distributions to corporate officers under this plan are
subject to the discretion of the Board of Directors. Charges to operations for
distributions to employees and/or corporate officers under these Plans during
1999, 1998 and 1997 were $27 million, $3 million and $115 million,
respectively.
F-14
<PAGE>
SEAGATE TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Tax-Deferred Savings Plan
The Company has a tax-deferred savings plan, the Seagate Technology, Inc.
Savings and Investment Plan ("the 40l(k) plan"), for the benefit of qualified
employees. The 40l(k) plan is designed to provide employees with an
accumulation of funds at retirement. Qualified employees may elect to make
contributions to the 401(k) plan on a monthly basis. The Company may make
annual contributions to the 401(k) plan at the discretion of the Board of
Directors. During the fiscal year ended July 2, 1999, the Company made
contributions totaling approximately $14 million to the 401(k) plan. No
material contributions were made by the Company during fiscal years 1998 and
1997.
Stock-Based Benefit Plans
Stock Option Plans--Options granted under the Company's stock option plans
are granted at fair market value, expire ten years from the date of the grant
and generally vest in four equal annual installments, commencing one year from
the date of the grant.
Following is a summary of stock option activity for the three years ended
July 2, 1999:
<TABLE>
<CAPTION>
Options Outstanding
--------------------------
Number Weighted Average
of Shares Exercise Price
--------- ----------------
Shares in millions
<S> <C> <C>
Balance June 28, 1996.......................... 23.7 $16.91
Granted...................................... 6.0 36.31
Exercised.................................... (5.2) 12.15
Canceled..................................... (2.5) 20.42
----- ------
Balance June 27, 1997.......................... 22.0 22.92
Granted...................................... 18.3 27.10
Exercised.................................... (2.4) 13.34
Canceled..................................... (11.9) 32.62
----- ------
Balance July 3, 1998........................... 26.0 22.30
Granted...................................... 14.1 23.98
Exercised.................................... (4.3) 15.15
Canceled..................................... (1.9) 25.49
----- ------
Balance July 2, 1999........................... 33.9 $23.73
===== ======
</TABLE>
In fiscal 1998, the Company offered to all optionees below the level of
Senior Vice President, who held options with an exercise price higher than the
prevailing fair market value of the Company's common stock the right to
exchange their options for new options exercisable at such fair market value.
In connection with this transaction, 8.4 million options were exchanged. The
number of options shown as granted and canceled in the above table reflects
this exchange of options. Such options had a weighted average exercise price
before repricing of $34.20 and the new options were granted at a weighted
average price of $24.45.
Options available for grant were 5.0 million at July 2, 1999; 13.6 million
at July 3, 1998; and 5.1 million at June 27, 1997. On October 30, 1997, the
stockholders approved an amendment to the 1991 Incentive Stock Option Plan to
increase the number of shares of common stock reserved for issuance thereunder
by 15 million.
F-15
<PAGE>
SEAGATE TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information about options outstanding at July
2, 1999.
<TABLE>
<CAPTION>
Outstanding Options Exercisable Options
------------------------------------------- ------------------------
Weighted Average Weighted
Shares in millions Number Contractual Life Weighted Average Number Average
Range of exercise prices of Shares (in years) Exercise Price of Shares Exercise Price
- ------------------------ --------- ---------------- ---------------- --------- --------------
<S> <C> <C> <C> <C> <C>
$ .00 --
$16.63 3.6 4.42 $10.76 3.6 $10.69
16.82 --
23.88 12.2 8.60 21.85 1.4 21.99
23.94 --
28.94 14.1 8.12 25.37 5.4 24.95
29.00 --
51.50 4.0 8.20 35.48 1.3 35.79
---- ---- ------ ---- ------
$ .00 --
$51.50 33.9 7.90 $23.74 11.7 $21.41
</TABLE>
On March 4, 1998, the Board of Directors approved the adoption of the 1998
Nonstatutory Stock Option Plan and the reservation of 3.5 million shares of
common stock for issuance thereunder.
Executive Stock Plan--The Company has an Executive Stock Plan under which
senior executives of the Company are granted the right to purchase shares of
the Company's common stock at $.01 per share. The difference between the fair
market value of the shares on the measurement date and the exercise price is
recorded as deferred compensation and is charged to operations over the vesting
period of five or ten years. The Company has the right to repurchase the
restricted stock from an executive upon his or her voluntary or involuntary
termination of employment with the Company for any reason at the same price
paid by the executive. If an executive voluntarily resigns at or above age 65,
the Company may release from the repurchase option, or if his or her employment
terminates as a result of death, disability, termination by the Company other
than for cause or constructive termination within the two-year period following
a change of control, the Company will release from the repurchase option a pro
rata number of shares based on the number of months that have passed since the
grant date divided by the number of months in the vesting period. The following
is a summary of restricted stock activity under the Executive Stock Plan for
the three years ended July 2, 1999:
<TABLE>
<CAPTION>
Restricted Shares
Outstanding
-------------------
Shares in thousands
<S> <C>
Balance June 28, 1996................................. 2,021
Granted............................................. 249
Repurchased......................................... (85)
-----
Balance June 27, 1997................................. 2,185
Granted............................................. 454
Repurchased......................................... (254)
-----
Balance July 3, 1998.................................. 2,385
Granted............................................. 145
Repurchased......................................... (216)
-----
Balance July 2, 1999.................................. 2,314
=====
</TABLE>
At July 2, 1999, 186,000 shares were available for future grants. In
addition, the Company has a Restricted Stock Plan which also has a deferred
compensation component. Under this plan the deferred compensation is amortized
over a period of seven years. There are two employees remaining in the plan and
no shares are available for future grant. The aggregate amount charged to
operations for amortization of deferred compensation under both plans was $10
million, $8 million and $8 million in 1999, 1998 and 1997, respectively.
F-16
<PAGE>
SEAGATE TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock Purchase Plan--The Company also maintains an Employee Stock Purchase
Plan. A total of 19,600,000 shares of common stock have been authorized for
issuance under the Purchase Plan. The Purchase Plan permits eligible employees
who have completed thirty days of employment prior to the inception of the
offering period to purchase common stock through payroll deductions generally
at the lower of 85% of the fair market value of the common stock at the
beginning or at the end of each six-month offering period. Under the plan,
1,604,000; 1,348,000 and 1,054,000 shares of common stock were issued in 1999,
1998 and 1997, respectively.
Common stock reserved for future issuance under the Company's Employee Stock
Purchase Plan aggregated 5,822,000 shares at July 2, 1999.
Pro Forma Information--The Company has elected to follow APBO 25 and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under SFAS
123 requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APBO 25, the Company generally recognized
no compensation expense with respect to such options.
Pro forma information regarding net income and earnings per share is
required by SFAS 123 for stock options granted after June 30, 1995 as if the
Company had accounted for its stock options under the fair value method of SFAS
123. The fair value of the Company's stock options was estimated using a Black-
Scholes option valuation model. The Black-Scholes option valuation model was
developed for use in estimating the fair value of traded options which have no
vesting restrictions and are fully transferable. In addition, the Black-Scholes
model requires the input of highly subjective assumptions, including the
expected stock price volatility. Because the Company's stock options granted to
employees have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
stock options granted to employees.
The fair value of the Company's stock options granted to employees was
estimated assuming no expected dividends and the following weighted average
assumptions:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Stock Option Plan Shares
Expected life (in years).............................. 3.8 3.2 3.5
Risk-free interest rate............................... 5.3% 5.5% 6.2%
Volatility............................................ .56 .45 .45
Employee Stock Purchase Plan Shares
Expected life (in years).............................. .5 .6 .5
Risk-free interest rate............................... 4.6% 5.5% 5.4%
Volatility............................................ .80 .63 .46
</TABLE>
The weighted average fair value of stock options granted under the Company's
Stock Option Plans was $11.09, $10.05 and $14.57 per share in 1999, 1998 and
1997, respectively. The weighted average fair value of shares granted under the
Company's Employee Stock Purchase Plan was $10.18, $12.03 and $8.89 per share
in 1999, 1998 and 1997, respectively. The weighted average purchase price of
shares granted under the Company's Employee Stock Purchase Plan was $22.72,
$26.99 and $27.95 per share in 1999, 1998 and 1997, respectively.
F-17
<PAGE>
SEAGATE TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized over the options' vesting period (for stock options) and
the six month purchase period for stock purchases under the Stock Purchase
Plan. The Company's pro forma information follows:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ -----
In millions,
except per share
data
<S> <C> <C> <C>
Pro forma net income (loss)......................... $1,018 $ (600) $ 610
Pro forma basic net income (loss) per share......... 4.60 (2.46) 2.61
Pro forma diluted net income (loss) per share....... 4.27 (2.46) 2.45
</TABLE>
The effects on pro forma disclosures of applying SFAS 123 are not likely to
be representative of the effects on pro forma disclosures of future years.
Because SFAS 123 is applicable only to options granted subsequent to June 30,
1995, the pro forma effect was not fully reflected in fiscal years prior to
1999.
Income Taxes
The provision for (benefit from) income taxes consisted of the following:
<TABLE>
<CAPTION>
1999 1998 1997
----- ------ -----
In millions
<S> <C> <C> <C>
Current Tax Expense (Benefit)
Federal............................................ $ 20 $ (157) $ 122
State.............................................. 1 -- 6
Foreign............................................ 15 16 9
----- ------ -----
36 (141) 137
----- ------ -----
Deferred Tax Expense (Benefit)
Federal............................................ 573 (19) 65
State.............................................. 86 (20) 14
Foreign............................................ 2 6 17
----- ------ -----
661 (33) 96
----- ------ -----
Provision for (Benefit from)
Income Taxes....................................... $ 697 $ (174) $ 233
===== ====== =====
</TABLE>
The income tax benefit related to the exercise of stock options reduces
taxes currently payable and is credited to additional paid-in capital. Such
amounts approximated $26 million, $12 million, and $52 million for 1999, 1998
and 1997, respectively.
Income (loss) before income taxes consisted of the following:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ -----
In millions
<S> <C> <C> <C>
Federal............................................ $1,547 $ (778) $ 41
Foreign............................................ 326 74 850
------ ------ -----
$1,873 $ (704) $ 891
====== ====== =====
</TABLE>
F-18
<PAGE>
SEAGATE TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The significant
components of the Company's deferred tax assets and liabilities were as
follows:
<TABLE>
<CAPTION>
July 2, 1999 July 3, 1998
------------ ------------
In millions
<S> <C> <C>
Deferred Tax Assets
Accrued warranty.............................. $ 114 $ 151
Inventory valuation accounts.................. 31 38
Receivable reserves........................... 28 29
Accrued compensation and benefits............. 31 27
Depreciation.................................. 32 37
Restructuring reserves........................ 17 25
Other reserves and accruals................... 42 40
Acquisition related items..................... 38 36
Net operating loss and tax credit carry-
forwards..................................... 69 87
Other assets.................................. 3 9
------- -----
Total Deferred Tax Assets................... 405 479
Valuation allowance........................... (56) (82)
------- -----
Net Deferred Tax Assets..................... 349 397
------- -----
Deferred Tax Liabilities
Unremitted income of foreign subsidiaries..... (558) (549)
Acquisition related items..................... (14) (19)
Deferred gain on VERITAS...................... (615) --
Other liabilities............................. (13) (21)
------- -----
Total Deferred Tax Liabilities.............. (1,200) (589)
------- -----
Net Deferred Tax Liabilities................ $ (851) $(192)
======= =====
As Reported on the Balance Sheet
Deferred Income Tax Assets.................... $ 252 $ 243
Deferred Income Tax Liabilities............... (1,103) (435)
------- -----
Net Deferred Tax Liability.................. $ (851) $(192)
======= =====
</TABLE>
The valuation allowance has been provided for deferred tax assets related to
certain foreign net operating loss carry-forwards, foreign tax credit carry-
forwards and future tax benefits associated with the acquisition of certain
software companies. The valuation allowance decreased in 1999 by $26 million,
and increased by $25 million and $20 million in 1998 and 1997, respectively.
The Company, as of July 2, 1999, has domestic, foreign and state net
operating loss carry-forwards of approximately $40 million, $22 million and
$500 million, respectively, expiring in 2003 through 2013 if not used to offset
future taxable income. The Company, as of July 2, 1999, also has tax credit
carry-forwards of approximately $26 million expiring in 2003 through 2013 if
not used to offset future tax liabilities.
F-19
<PAGE>
SEAGATE TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The differences between the provision for (benefit from) income taxes at the
U.S. statutory rate and the effective rate are summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ----- ----
In millions
<S> <C> <C> <C>
Provision (benefit) at U.S. statutory rate............ $656 $(246) $312
State income tax provision (benefit), net of federal
income tax benefit................................... 72 (15) 19
Benefit from net earnings of foreign subsidiaries
considered to be permanently invested in non-U.S.
operations........................................... (68) -- (97)
Write-off of in-process research and development...... 21 75 --
VERITAS............................................... (10) -- --
Valuation reserve..................................... 17 25 19
Other individually immaterial items................... 9 (13) (20)
---- ----- ----
Provision for (benefit from) income taxes............. $697 $(174) $233
==== ===== ====
</TABLE>
A substantial portion of the Company's Far East manufacturing operations in
Singapore, Thailand, Malaysia and China operate under various tax holidays
which expire in whole or in part during fiscal years 2001 through 2010. Certain
tax holidays may be extended if specific conditions are met. The net impact of
these tax holidays was to increase net income by approximately $35 million
($.14 per share, diluted) in 1999. The tax holidays had no impact on the net
loss in 1998. The net impact of these tax holidays was to increase net income
by approximately $71 million ($0.28 per share, diluted) in 1997. Cumulative
undistributed earnings of the Company's Far East subsidiaries for which no
income taxes have been provided aggregated approximately $1.634 billion at July
2, 1999. These earnings are considered to be permanently invested in non-U.S.
operations. Additional federal and state taxes of approximately $585 million
would have to be provided if these earnings were repatriated to the U.S.
The Company received a statutory notice of deficiency dated June 27, 1997
from the Internal Revenue Service relative to taxable years 1991 through 1993
assessing potential deficiencies approximating $39 million plus interest and
approximately $6 million of penalties. The Company petitioned the United States
Tax Court on September 24, 1997 for a re-determination of the deficiencies. The
Company believes that the likely outcome of this matter will not have a
material adverse effect on its financial position or results of operations.
The Company received a statutory notice of deficiency dated June 12, 1998
from the Internal Revenue Service relative to Conner's taxable years 1991 and
1992 assessing potential deficiencies approximating $11 million plus interest.
The Company petitioned the United States Tax Court on September 10, 1998 for a
re-determination of the deficiencies. The Company believes that the likely
outcome of this matter will not have a material adverse effect on its financial
position or results of operations.
Certain of the Company's foreign and state tax returns for various fiscal
years are under examination by taxing authorities. The Company believes that
adequate amounts of tax have been provided for any final assessments which may
result from these examinations.
Acquisitions
The Company has a history of acquisitions and during the three most recent
fiscal years significant acquisitions included Quinta Corporation and Eastman
Storage Software Management Group in fiscal 1998. No significant acquisitions
occurred in fiscal 1999 or 1997. The following details information specific to
these acquisitions including purchase price allocation, appraisal methods used
and significant assumptions used in valuing assets acquired.
F-20
<PAGE>
SEAGATE TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Valuation Methodology
In accordance with the provisions of APB Opinion 16, all identifiable
assets, including identifiable intangible assets, were assigned a portion of
the cost of the acquired enterprise (purchase price) on the basis of their
respective fair values. This included the portion of the purchase price
properly attributed to incomplete research and development projects expensed
according to the requirements of Interpretation 4 of SFAS No. 2.
Valuation of acquired intangible assets. Intangible assets were identified
through (i) analysis of the acquisition agreement, (ii) consideration of the
Company's intentions for future use of the acquired assets, and (iii) analysis
of data available concerning Quinta's and Eastman's (collectively referred to
as the "Targets") products, technologies, markets, historical financial
performance, estimates of future performance and the assumptions underlying
those estimates. The economic and competitive environment in which the Company
and the Targets operate was also considered in the valuation analysis.
To determine the value of in-process research and development, the Company
considered, among other factors, the state of development of each project, the
time and cost needed to complete each project, expected income, associated
risks which included the inherent difficulties and uncertainties in completing
each project and thereby achieving technological feasibility and risks related
to the viability of and potential changes to future target markets. This
analysis resulted in amounts assigned to in-process research and development
for projects that had not yet reached technological feasibility and which did
not have alternative future uses. The Income Approach, which includes analysis
of markets, cash flows, and risks associated with achieving such cash flows,
was the primary technique utilized in valuing each in-process research and
development project. The underlying in-process projects acquired were the most
significant and uncertain assumptions utilized in the valuation analysis of in-
process research and development projects.
To determine the value of developed technologies, the expected future cash
flows of existing product technologies were evaluated, taking into account
risks related to the characteristics and applications of each product, existing
and future markets and assessments of the life cycle stage of each product.
Based on this analysis, the existing technologies that had reached
technological feasibility were capitalized.
To determine the value of the distribution networks and customer bases,
Seagate Technology, considered, among other factors, the size of the current
and potential future customer bases, the quality of existing relationships with
customers, the historical costs to develop customer relationships, the expected
income and associated risks. Associated risks included the inherent
difficulties and uncertainties in transitioning the business relationships from
the acquired entity to Seagate and risks related to the viability of and
potential changes to future target markets.
To determine the value of trademarks, the Company considered, among other
factors, the assumption that in lieu of ownership of a trademark, Seagate would
be willing to pay a royalty in order to exploit the related benefits of such
trademark.
To determine the value of assembled workforces, the Company considered,
among other factors, the costs to replace existing employees including search
costs, interview costs and training costs.
Goodwill is determined based on the residual difference between the amount
paid and the values assigned to identified tangible and intangible assets. If
the values assigned to identified tangible and intangible assets exceed the
amounts paid, including the effect of deferred taxes, the values assigned to
long-term assets were reduced proportionately.
F-21
<PAGE>
SEAGATE TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The underlying in-process projects acquired within each acquisition was the
most significant and uncertain assumption utilized in the valuation analysis.
Such uncertainties could give rise to unforeseen budget over runs and/or
revenue shortfalls in the event that the Company is unable to successfully
complete a certain research and development project. Seagate management
recognizes that the Company is primarily responsible for estimating the fair
value of the purchased research and development in all acquisitions accounted
for under the purchase method. The following details specific information about
significant acquisitions including related assumptions used in the purchase
price allocation.
Acquisition of Quinta Corporation
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
Corporation ("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 charged to
operations in fiscal 1998. Of the $19 million charged to operations, $5 million
was paid 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 the first quarter of fiscal 1999, the Company
recorded a charge to operations for the remaining $77 million.
Quinta's research and development project revolves around an OAW technology.
OAW refers to Quinta's newly designed recording technology that, upon
completion, would be implemented into Winchester hard disk drives. OAW combines
traditional magnetic recording technology with Winchester hard disc drives and
optical recording capabilities; optical recording technology enables greater
data storage capacity. By integrating advanced optical features along with a
highly fine and sophisticated tracking and delivery system within the head
design, OAW would multiply the real density of disc drives.
Through August 8, 1997, the acquisition date, Quinta had demonstrated
significant achievements in developing its technology. However, further
technological milestones were required before technological feasibility could
be achieved. Quinta's development process consists of the following development
milestones: (i) route light (optical fiber), (ii) flying head use, (iii)
recording media, (iv) mirror creation and demonstration (two stage servo), (v)
complete assembly, (vi) form factor containment, (vii) design verification
test, (viii) customer qualification, and (ix) delivery.
Assumptions used in estimating the fair value of intangible assets:
Revenue
Future revenue estimates were generated for the following product that the
OAW technology would be utilized in: (i) fixed drives, (ii) removable drive,
(iii) fixed/removable drives, and (iv) cartridges. No revenue was expected
through fiscal 1998 since the underlying technology was anticipated not to be
technologically feasible until fiscal 1999. Revenue was estimated to be
approximately $26.6 million in fiscal 1999 and to increase to approximately
$212 million for fiscal year 2000 when the in-process project was expected to
be complete and shipping. Revenue growth was expected to decline to a
sustainable 20% growth by fiscal 2005. The estimated revenue growth is
consistent with the introduction of new technology. Revenue estimates were
F-22
<PAGE>
SEAGATE TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
based on (i) aggregate revenue growth rates for the business as a whole, (ii)
individual product revenue, (iii) growth rates for the disc drive market, (iv)
the aggregate size of the disc drive market, (v) anticipated product
development and introduction schedules, (vi) product sales cycles, and (vii)
the estimated life of a product's underlying technology. Quinta's development
cycle, in total, is expected to take approximately 18 to 24 months.
Operating expenses
Estimated operating expenses used in the valuation analysis of Quinta
included (i) cost of goods sold, (ii) general and administrative expense, (iii)
selling and marketing expense, and (iv) research and development expense. In
developing future expense estimates, an evaluation of Seagate's overall
business model, specific product results, including both historical and
expected direct expense levels (as appropriate), and an assessment of general
industry metrics was conducted. Due to Quinta's limited operating history, an
analysis of Quinta's historical performance was not meaningful.
Cost of goods sold. Estimated cost of goods sold, expressed as a percentage
of revenue, for the in-process technologies ranged from approximately 65% to
80%.
General and administrative ("G&A") expense. Estimated G&A expense, expressed
as a percentage of revenue, for the in-process technologies ranged from 2.6% in
fiscal 2000 to a sustainable 3.5% in fiscal 2001 and beyond. For fiscal 1999,
however, when the OAW technology would become commercially available, G&A
expense was estimated to be 6.4% due to the relatively low revenue expectation
in the initial commercialization period.
Selling and marketing ("S&M") expense. Estimated S&M expense, expressed as a
percentage of revenue, for the in-process technologies ranged from 3.3% in
fiscal 2000 to a sustainable 3.5% in fiscal 2001 and beyond. For fiscal 1999,
however, when the OAW technology would become commercially available, S&M
expense was estimated to be 8.7% due to the relatively low revenue expectation
in the initial commercialization period.
Research and development ("R&D") expense. Estimated R&D expense consists of
the costs associated with activities undertaken to correct errors or keep
products updated with current information (also referred to as "maintenance"
R&D). Maintenance R&D includes all activities undertaken after a product is
available for general release to customers to correct errors or keep the
product updated with current information. These activities include routine
changes and additions. The maintenance R&D expense was estimated to be 0.5% of
revenue for the in-process technologies throughout the estimation period.
Effective tax rate
The effective tax rate utilized in the analysis of the in-process
technologies was 38%, which reflects the Company's combined federal and state
statutory income tax rates, exclusive of non-recurring charges at the time of
the acquisition and estimated for future years.
Discount rate
The discount rates selected for Quinta's in-process technology was 25%. In
the selection of the appropriate discount rates, consideration was given to (i)
the Weighted Average Cost of Capital (WACC) of approximately 15% at the date of
acquisition and (ii) the Weighted Average Return on Assets of approximately
25%. The discount rate utilized for the in-process technology was determined to
be higher than Seagate's WACC due to the fact that the technology had not yet
reached technological feasibility as of the date of valuation. In utilizing
F-23
<PAGE>
SEAGATE TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
a discount rate greater than the Company's WACC, management has reflected the
risk premium associated with achieving the forecasted cash flows associated
with these projects.
As a result of this acquisition, the Company incurred a one-time write-off
of in-process research and development of approximately $214 million.
Intangible assets 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, accordingly, the results of operations of Quinta have been
included in the Company's consolidated financial statements from the date of
acquisition.
The following is a summary of the purchase price allocation (in millions):
<TABLE>
<S> <C>
Tangible assets less liabilities assumed........................... $ 34
In-process research and development................................ 214
Assembled workforce................................................ 2
----
$250
====
</TABLE>
Acquisition of Eastman Software Storage Management Group, Inc.
In June 1998, the Company acquired Eastman Software Storage Management
Group, Inc.("Eastman"), a subsidiary of Eastman Kodak Company, the developer of
storage migration software technology for distributed networks, for $10
million.
Eastman Software SMG's two primary products are OPEN/stor for Windows NT and
AvailHSM for NetWare. By integrating Eastman's product line, Seagate will be
able to convert their Storage Migrator product into a stand-alone HSM
application for Windows NT environments. As of the date of acquisition, the
Company abandoned the AvailHSM product and technology due to dated features and
functionality; the valuation analysis did not include a fair value for the
AvailHSM product.
As for OPEN/stor at the date of acquisition, the Company planned to phase
out the product over the following 12 to 15 months. The Company's purpose for
the acquisition was for the next generation technologies that were underway at
Eastman, referenced by project names Sakkara and Phoenix. These projects were
complete re-writes of Eastman's prior generation technology that would allow
the product to be sold stand-alone upon completion.
In accordance with SFAS 86, paragraph 38 ("Accounting for the Costs of
Computer Software to be Sold, Leased, or Otherwise Marketed"), "the cost of
software purchased to be integrated with another product or process will be
capitalized only if technological feasibility was established for the software
component and if all research and development activities for the other
components of the product or process were completed at the time of the
purchase." Although Seagate purchased existing products from Eastman, the
existing products did not operate on a stand-alone basis. Therefore, as
mentioned above, all of the original underlying code and base technology for
the next generation products were in the process of being completely re-written
as date of valuation.
Assumptions used in estimating the fair value of intangible assets:
Revenue
Future revenue estimates were generated for the following technologies: (i)
OPEN/stor, (ii) Sakkara, and (iii) Phoenix. Aggregate revenue for existing
Eastman products was estimated to be approximately $167,000 for
F-24
<PAGE>
SEAGATE TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the one month ending June 30, 1998. Revenue was estimated to increase to
approximately $3.9 million and $7.1 million for fiscal years 1999 and 2000 when
most of the in-process projects were expected to be complete and shipping.
Thereafter, revenue was estimated to increase at rates ranging from 20% to 30%
for fiscal years 2001 through 2006. Revenue estimates were based on (i)
aggregate revenue growth rates for the business as a whole, (ii) individual
product revenue, (iii) growth rates for the storage management software market,
(iv) the aggregate size of the storage management software market, (v)
anticipated product development and introduction schedules, (vi) product sales
cycles, and (vii) the estimated life of a product's underlying technology.
Operating expenses
Estimated operating expenses used in the valuation analysis of Eastman
included (i) cost of goods sold, (ii) general and administrative expense, (iii)
selling and marketing expense, and (iv) research and development expense. In
developing future expense estimates, an evaluation of both Seagate's and
Eastman's overall business model, specific product results, including both
historical and expected direct expense levels, and an assessment of general
industry metrics was conducted.
Cost of goods sold. Cost of goods sold, expressed as a percentage of
revenue, for the developed and in-process technologies was estimated to be
approximately 5% throughout the estimation period.
General and administrative ("G&A") expense. G&A expense, expressed as a
percentage of revenue, for the developed and in-process technologies was
estimated to be approximately 10% throughout the estimation period.
Selling and marketing ("S&M") expense. S&M expense, expressed as a
percentage of revenue, for the developed and in-process technologies was
estimated to be 27% throughout the estimation period.
Research and development ("R&D") expense. R&D expense consists of the costs
associated with activities undertaken to correct errors or keep products
updated with current information (also referred to as "maintenance" R&D).
Maintenance R&D includes all activities undertaken after a product is available
for general release to customers to correct errors or keep the product updated
with current information. These activities include routine changes and
additions. The maintenance R&D expense was estimated to be 5% of revenue for
the developed and in-process technologies throughout the estimation period.
In addition, as of the date of acquisition, Seagate Software management
anticipated the costs to complete the in-process technologies at approximately
$1.8 million.
Effective tax rate
The effective tax rate utilized in the analysis of developed and in-process
technologies was 38%, which reflects the Company's combined federal and state
statutory income tax rates, exclusive of non-recurring charges at the time of
the acquisition and estimated for future years.
Discount rate
The discount rates selected for Eastman's developed and in-process
technologies were 15% and 20%, respectively. In the selection of the
appropriate discount rates, consideration was given to (i) the Weighted Average
Cost of Capital (WACC) of approximately 15% at the date of acquisition and (ii)
the Weighted Average Return on Assets of approximately 18%. The discount rate
utilized for the in-process technology was
F-25
<PAGE>
SEAGATE TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
determined to be higher than the Company's WACC due to the fact that the
technology had not yet reached technological feasibility as of the date of
valuation. In utilizing a discount rate greater than the Company's WACC,
management has reflected the risk premium associated with achieving the
forecasted cash flows associated with these projects.
The purchase price allocation was based upon the anticipated release date,
as of the valuation date, of significant projects acquired, such as Sakkara and
Phoenix. Such release dates were estimated from the second quarter of the
Company's fiscal year 1999 through the fourth quarter of fiscal 1999. Material
net cash inflows from such related projects were expected to commence
immediately after their respective release dates. As a result of the
acquisition, the Company incurred a one-time write-off of in-process research
and development of $7 million.
The following is a summary of the purchase price allocation (in millions):
<TABLE>
<S> <C>
Current assets and other tangible assets........................ $ .5
Liabilities assumed............................................. (.5)
Assembled workforce............................................. .4
Developed technology............................................ .5
In-process research and development............................. 6.8
Microsoft agreement............................................. 1.5
Goodwill........................................................ .8
-------
$ 10
=======
</TABLE>
In 1998, the Company increased its investment in Dragon Systems, a maker of
voice recognition software, by $18 million. Goodwill arising from the equity
investment in Dragon Systems is being amortized on a straight-line basis over
seven years.
Contribution of the Network & Storage Management Group to New VERITAS and the
purchase of outstanding shares of Seagate Software by Seagate Technology.
Contribution of the Network & Storage Management Group to New VERITAS
On May 28, 1999, Seagate Technology, and its direct and indirect
subsidiaries, Seagate Software and the Seagate Software Network & Storage
Management Group, closed the Agreement and Plan of Reorganization (the "Plan")
dated as of October 5, 1998 with VERITAS Holding Corporation ("New VERITAS")
and VERITAS Software Corporation ("VERITAS"). The Plan provided for the
contribution by Seagate Technology, Seagate Software, and certain of their
respective subsidiaries to New VERITAS of (a) the outstanding stock of the
Network & Storage Management Group and certain other subsidiaries of Seagate
Software and (b) those assets used primarily in the network and storage
management business of Seagate Software (the "NSMG business"), in consideration
for the issuance of shares of common stock of New VERITAS to Seagate Software
and the offer by New VERITAS to grant options to purchase common stock of New
VERITAS to certain of Seagate Software's employees who become employees of New
VERITAS or its subsidiaries. As part of the Plan, New VERITAS assumed certain
liabilities of the NSMG business. The Plan was structured to qualify as a tax-
free exchange.
Subsequent to the consummation, all outstanding securities of New VERITAS
were assumed and converted into common stock of VERITAS with identical rights,
preferences and privileges, on a share for share basis. As a result of the
contribution of the NSMG business to New VERITAS, Seagate Software received a
total of 69,148,208 shares of VERITAS common stock and former employees of the
NSMG
F-26
<PAGE>
SEAGATE TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
business received options to purchase an aggregate of 6,945,048 shares of
VERITAS common stock. Share and option amounts for VERITAS have been adjusted
to reflect the two-for-one stock split effective July 9, 1999 by VERITAS.
Seagate Technology has accounted for the contribution of NSMG to New VERITAS
as a non-monetary transaction using the fair value of the assets and
liabilities exchanged. After the transaction, Seagate Software owns
approximately 41.63% (69,148,208 shares) of the outstanding shares of VERITAS,
including the NSMG business. Because Seagate Technology still owns a portion of
the NSMG business through its ownership of VERITAS, Seagate Technology did not
recognize 100% of the gain on the exchange. The gain recorded is equal to the
difference between 58.37% of the fair value of the VERITAS common stock
received and 58.37% of Seagate Technology's basis in the NSMG assets and
liabilities exchanged. Seagate Technology is accounting for its on going
investment in VERITAS using the equity method. The difference between the
recorded amount of Seagate Technology's investment in VERITAS and the amount of
its underlying equity in the net assets of VERITAS has been allocated based
upon the fair value of the underlying tangible and intangible assets and
liabilities of VERITAS. The intangible assets included amounts allocated to in-
process research and development and resulted in a $85 million write-off
included in activity related to equity interest in VERITAS in the accompanying
statement of operations. Intangible assets including goodwill are being
amortized over four years.
Seagate Technology will include in its financial results its share of the
net income or loss of VERITAS, excluding certain NSMG purchase accounting
related amounts recorded by VERITAS, but including Seagate Technology's
amortization of the difference between its recorded investment and the
underlying assets and liabilities of VERITAS. Because of practicality
considerations, the net income or loss of VERITAS will be included in the
results of Seagate Technology on a one quarter lag basis. The results of
VERITAS for the period from May 29, 1999 to June 30, 1999, the period
subsequent to the contribution of NSMG to VERITAS, will be included in the
Company's results of operations for the quarter ended October 1, 1999. The
results of VERITAS for the period from July 1, 1999 to September 30, 1999 will
be included in the Company's results for the quarter ended December 31, 1999.
Seagate Technology exchange offer
In a separate but related transaction to the NSMG contribution to VERITAS,
on June 9, 1999, the Company exchanged 5,275,772 shares of its common stock for
3,267,255 of the outstanding shares of Seagate Software common stock owned by
employees, directors and consultants of Seagate Software. The exchange ratio
was determined based on the estimated value of Seagate Software common stock
divided by the fair market value of Seagate Technology common stock.
The estimated value of Seagate Software common stock exchanged into
Seagate Technology common stock was determined based upon the sum of the fair
value of the NSMG business, as measured by the fair value of the shares
received from VERITAS, plus the estimated fair value of the Information
Management Group ("IMG") of Seagate Software as determined by the Seagate
Technology Board of Directors, plus the assumed proceeds from the exercise of
all outstanding Seagate Software stock options, divided by the number of fully
converted shares of Seagate Software. The Board of Directors of Seagate
Technology considered a number of factors in determining the estimated fair
value of the IMG business, including historical and projected revenues,
earnings and cash flows, as well as other factors and consultations with
financial advisors.
The fair value of the Seagate Software shares acquired less the original
purchase price paid by the employees was recorded as compensation expense for
those shares outstanding and vested less than six months. The purchase of
Seagate Software shares outstanding and vested more than six months was
accounted for as
F-27
<PAGE>
SEAGATE TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the purchase of a minority interest and, accordingly, the fair value of the
shares exchanged has been allocated to all of the identifiable tangible and
intangible assets and liabilities of Seagate Software. In connection with the
acquisition, Seagate Technology recorded compensation expense amounting to
approximately $124 million and wrote off purchased research and development
amounting to $2 million in the fourth quarter of fiscal 1999. Associated
intangible assets and goodwill are being amortized to operations over four
years.
Computation of pro rata gain on contribution of NSMG to New VERITAS
<TABLE>
<CAPTION>
In millions
-----------
<S> <C>
Fair value of shares received................................ $3,151
Times: pro rata percentage accounted for at fair value....... 58.37%
------
Adjusted fair value of securities received................... $1,839
------
Book value of NSMG........................................... $ 57
Times: pro rate percentage accounted for at fair value....... 58.37%
------
Book value exchanged......................................... 33
------
Pro rata gain................................................ $1,806
======
</TABLE>
Computation of original investment in VERITAS
<TABLE>
<CAPTION>
In millions
-----------
<S> <C>
Book value of NSMG........................................... $ 57
Times: pro rata percentage accounted for at fair value....... 41.63%
------
Portion of investment in VERITAS with no step up in basis.... 24
Plus: Adjusted fair value of securities received............. 1,839
------
Investment in VERITAS........................................ $1,863
======
</TABLE>
Allocation of original investment in VERITAS
<TABLE>
<CAPTION>
In millions
-----------
<S> <C>
Allocation of investment to VERITAS assets and liabilities:
Net tangible assets....................................... $ 114
Intangible assets:
Distribution channel.................................... 9
Developed technology.................................... 46
Trademark and workforce................................. 16
In-process research and development..................... 40
Allocation of investment to NSMG assets and liabilities:
Net tangible assets....................................... 24
Intangible assets:
Distribution channel.................................... 66
Developed technology.................................... 92
Trademark and workforce................................. 14
In-process research and development..................... 45
Goodwill.................................................. 1,397
------
Total original investment in VERITAS.................. $1,863
======
</TABLE>
F-28
<PAGE>
SEAGATE TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Value of minority interest
<TABLE>
<CAPTION>
Dollars in
millions,
except per
share data
----------
<S> <C>
Number of Seagate Software shares and options exchanged for
Seagate Technology stock held by former employees,
consultants and shares held more than six months by
employees.................................................. 1,010,010
Times: Exchange ratio into Seagate Technology stock......... 1.699
----------
Number of Seagate Technology shares issued.................. 1,716,007
Value per share of Seagate Technology common stock as of
June 9, 1999............................................... $ 30.75
----------
Total value Seagate Technology shares issued.............. $ 53
Less: Proceeds from assumed exercise of Seagate Software
stock options.............................................. (1)
----------
Total value of minority interest.......................... $ 52
==========
</TABLE>
Allocation of minority interest purchase price to the intangible assets of
Seagate Software
<TABLE>
<CAPTION>
In millions
-----------
<S> <C>
Distribution channel......................................... $ 2
Developed technology......................................... 4
Trademark and workforce...................................... 1
In-process research and development.......................... 2
Goodwill..................................................... 45
---
Subtotal................................................... 54
Deferred tax liability....................................... (2)
---
Total...................................................... $52
===
</TABLE>
Compensation relating to stock purchased from employees
<TABLE>
<CAPTION>
Dollars in
millions,
except per
share data
----------
<S> <C>
Seagate Software options exercised and exchanged for Seagate
Technology stock........................................... 2,240,470
Plus: Seagate Software stock held for less than 6 months and
exchanged for Seagate Technology stock..................... 16,775
----------
Total Seagate Software shares exchanged................... 2,257,245
Times: Exchange ratio into Seagate Technology stock......... 1.699
----------
Number of Seagate Technology shares issued.................. 3,835,059
----------
Value per share of Seagate Technology common stock on June
9, 1999.................................................... $ 30.75
Less: Average price paid per Seagate Technology share....... $ (4.01)
----------
Average compensation expense per Seagate Technology share
issued..................................................... $ 26.74
----------
Total compensation expense................................ $ 103
==========
</TABLE>
F-29
<PAGE>
SEAGATE TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Reconciliation of amounts included in Gain on contribution of NSMG to
VERITAS, net
<TABLE>
<CAPTION>
In millions
-----------
<S> <C>
Pro rata gain................................................ $1,806
Less:
Compensation expense....................................... 124
Transaction costs.......................................... 12
------
Gain on contribution of NSMG to VERITAS, net................. $1,670
======
</TABLE>
Activity related to equity interest in VERITAS
<TABLE>
<CAPTION>
In millions
-----------
<S> <C>
Write-off of in-process research and development............. $ 85
Amortization of intangible assets including goodwill......... 34
----
Activity related to equity interest in VERITAS............... $119
====
</TABLE>
All activity related to the equity interest in VERITAS was recorded in the
fourth quarter of fiscal 1999.
Allocation of tangible and intangible assets and liabilities related to NSMG
and VERITAS
Overview
NSMG offers network and storage management software solutions, which focus
on the information availability component of Enterprise Information Management
("EIM") by enabling IT professionals to manage distributed network resources
and to secure and protect enterprise data. NSMG's products include features
such as system backup, disaster recovery, migration, replication, automated
client protection, storage resource management, scheduling, event correlation
and desktop management.
VERITAS develops, markets and supports advanced storage management and high
availability products for open system environments. VERITAS' products provide
performance improvement and reliability enhancement features that are critical
for many commercial applications. Some of the key features of storage
management products include protection against data loss and file corruption,
rapid recovery after disk or system failure, the ability to process large
files efficiently and the ability to manage the storage systems without
interrupting users. The high availability products provide an automated
failover between computer systems organized in clusters sharing disk
resources.
In accordance with the provisions of Accounting Principles Board ("APB")
Opinions No. 16 and 17, all identifiable assets acquired were analyzed to
determine their Fair Market Values. As the basis for identifying the in-
process research and development ("R&D"), the development projects were
evaluated in the context of Interpretation 4 of Financial Accounting Standards
Board Statement No. 2. In accordance with these provisions, the developmental
projects were examined to determine if there were any alternative future uses.
Such evaluation consisted of a specific review of the efforts, including the
overall objectives of the project, progress toward the objectives, and the
uniqueness of the developments of these objectives. Further, each in-process
R&D project was reviewed to determine if technological feasibility had been
achieved.
F-30
<PAGE>
SEAGATE TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Description of methodology
Tangible net assets of VERITAS principally include cash and investments,
accounts receivable, fixed assets and other current assets. Liabilities
principally include accounts payable, accrued compensation, and other accrued
liabilities.
To estimate the value of the developed technology, the expected future cash
flows attributable to all existing technology was discounted, taking into
account risks related to the characteristics and applications of the
technology, existing and future markets, and assessments of the life cycle
stage of the technology. The developed technology is being amortized on the
straight-line basis over its estimated useful life (four years) which is
expected to exceed the ratio of current revenues to the total of current and
anticipated revenues.
The value of the distribution networks and original equipment manufacturer
agreements was estimated by considering, among other factors, the size of the
current and potential future customer bases, the quality of existing
relationships with customers, the historical costs to develop customer
relationships, the expected income and associated risks. Associated risks
included the inherent difficulties and uncertainties in transitioning business
relationships and risks related to the viability of and potential changes to
future target markets.
The value of trademarks was estimated by considering, among other factors,
the assumption that in lieu of ownership of a trademark, a company would be
willing to pay a royalty in order to exploit the related benefits of such
trademark.
The value of the assembled workforce was estimated as the costs to replace
the existing employees, including recruiting, hiring, and training costs for
each category of employee.
The value allocated to projects identified as in-process technology at
VERITAS and Seagate Software, for the minority interest acquired, were charged
to expense in the fourth quarter of fiscal 1999. These write-offs were
necessary because the acquired technologies had not reached technological
feasibility at the date of purchase and have no future alternative uses.
Seagate Software expects that the acquired in-process research and development
will be successfully developed, but there can be no assurance that commercial
viability of these products will be achieved.
The nature of the efforts required to develop the purchased in-process
technology into commercially viable products principally relate to the
completion of all planning, designing, prototyping, verification and testing
activities that are necessary to establish that the product can be produced to
meet its design specifications, including functions, features and technical
performance requirements. The value of the purchased in-process technology for
VERITAS was estimated as the projected net cash flows related to such products,
including costs to complete the development of the technology and the future
revenues to be earned upon commercialization of the products, excluding
revenues attributable to future development efforts. These cash flows were then
discounted back to their net present value. The projected net cash flows from
such projects were based on management's estimates of revenues and operating
profits related to such projects.
Goodwill is calculated as the residual difference between the estimated
amount paid and the values assigned to identified tangible and intangible
assets and liabilities.
Valuation Assumptions
Revenue
Revenue estimates were based on (i) aggregate revenue growth rates for the
businesses as a whole, (ii) growth rates for the storage management software
market, (iii) the aggregate size of the storage management software market,
(iv) anticipated product development and introduction schedules, (v) product
sales cycles, and (vi) the estimated life of a product's underlying technology.
F-31
<PAGE>
SEAGATE TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Future revenue estimates were generated based on the worldwide storage
management software market and the backup, restore and archive market. The
overall storage management software market is forecasted to increase at a
compound annual growth rate of 14.2%, from a 1997 value of $2.543 billion to a
2002 value of $4.941 billion. The backup, restore and archive software segment
of storage management software, in which NSMG competes, is expected to grow
much faster than other segments.
NSMG is positioned for continued growth in its backup, restore, and archive
software products. The backup, restore, and archive segment is the fastest
growing in the storage management software market. Moreover, NSMG competes, and
is one of the leaders in providing this type of software for the Windows NT
operating environment. Revenue for Windows 95 and Windows NT is projected to
grow at a 43.3% compound annual growth rate (1997 through 2002), higher than
for any other operating environment.
Revenue for NSMG was forecasted by product line for the years 1999 through
2001. Revenue was expected to be $350 million for the 1999 calendar year.
Thereafter, NSMG is expected to grow slightly greater than the 43.3% industry
average through 2003. The revenue by product was allocated between existing,
in-process, and future technology; indicating a four-year life cycle (revenue
contribution from technology), which is consistent with NSMG's past experience
with technology life cycles.
VERITAS is an open systems supplier. The market for open systems suppliers
grew 101.2% between 1996 and 1997. In addition, VERITAS looks to growth and
increase its market share through positioning itself as a provider of software
services in the Windows NT operating environment. As above, revenue for Windows
is projected to grow at a 43.3% compound annual growth rate (1997 through
2002).
Revenue for VERITAS was forecasted by product line for the years 1999
through 2001. Revenue was expected to be $270 million for the 1999 calendar
year. Thereafter, VERITAS is expected to grow at 67.9% and 58.4% for years 2000
and 2001, respectively, a rate greater than the 43.3% industry average. For
years 2002 through 2005, revenues are expected to level off at a 40% growth
rate. The revenue by product was allocated between existing, in-process, and
future technology indicating a four-year life cycle (revenue contribution from
technology) for NT based products and a three-year life cycle for Unix based
products which is consistent with VERITAS' past experience with technology life
cycles.
Operating expenses
Estimated operating expenses used in the valuation analysis of NSMG and
VERITAS included (i) cost of goods sold, (ii) general and administrative
expense, (iii) sales and marketing expense, and (iv) research and development
expense. In developing future expense estimates, an evaluation of both NSMG and
VERITAS's overall business models, specific product results, including both
historical and expected direct expense levels (as appropriate), and an
assessment of general industry metrics was conducted.
Cost of goods sold. Cost of goods sold, for the developed and in-process
technologies was estimated to be approximately 8.6% of revenues from 2000 to
2006 for NSMG. Cost of goods sold, for the developed and in-process
technologies was estimated to be approximately 14.7% of revenues from 2000 to
2005 for VERITAS.
General and administrative ("G&A") expense. G&A expense, expressed as a
percentage of revenue, for the developed and in-process technologies was
estimated to be 9.2% in 1999 and expected to be reduced to 6.7% by 2002 for
NSMG. G&A expense for VERITAS, expressed as a percentage of revenue, for the
developed and in-process technologies was held constant at 4.4% of revenues for
the forecast period of 2000 to 2005.
F-32
<PAGE>
SEAGATE TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Selling and marketing ("S&M") expense. S&M expense, expressed as a
percentage of revenue, for the developed and in-process technologies was
estimated to be 37.4% for years 2000 to 2006 related to NSMG. S&M expense for
VERITAS, expressed as a percentage of revenue, for the developed and in-process
technologies was estimated to be 34.7% for years 2000 to 2005.
Research and development ("R&D") expense. R&D expense consists of the costs
associated with activities undertaken to correct errors or keep products
updated with current information (also referred to as "maintenance" R&D).
Maintenance R&D includes all activities undertaken after a product is available
for general release to customers to correct errors or keep the product updated
with current information. These activities include routine changes and
additions. The maintenance R&D expense was estimated to be 17.4% of revenue for
the developed and in-process technologies for the years 2000 to 2006 for NSMG.
R&D expense for VERITAS was estimated as 18.2% of revenue in 1999 and was
reduced to 16% by 2002, continuing at that rate until 2005.
In addition, as of the date of the contribution of NSMG to New VERITAS,
Seagate Software's management and VERITAS Software's management anticipated the
costs to complete the in-process technologies at approximately $5.8 million and
$44.2 million, respectively.
Effective tax rate
The effective tax rate utilized in the analysis of developed and in-process
technologies was 33%, which reflects VERITAS's combined effective federal and
state statutory income tax rates, exclusive of non-recurring charges at the
time of the contribution and estimated for future years.
Discount rate
The discount rates selected for the developed and in-process technologies
were 12% and 17%, respectively. In the selection of the appropriate discount
rates, consideration was given to (i) the Weighted Average Rate of Return
(approximately 14% at the date of acquisition) and (ii) the Weighted Average
Return on Assets (approximately 18%) that investors expect for company's with
similar anticipated growth rates and other characteristics as the NSMG and
VERITAS businesses. The discount rate utilized for the in-process technology
was determined to be higher than the WARR due to the fact that the technology
had not yet reached technological feasibility as of the date of valuation. In
utilizing a discount rate greater than the WARR, management has reflected the
risk premium associated with achieving the forecasted cash flows associated
with these projects. The discount rate was adjusted downward from the WARR for
the developed technologies to reflect less technological and/or market risk
associated with forecasted sales of the existing products.
Allocation of tangible and intangible assets and liabilities related to the
Seagate Software minority interest acquired by Seagate Technology
Seagate Software's investment in VERITAS comprises over 85% of the fair
value of Seagate Software. Accordingly, the assumptions utilized in the
allocation of the purchase price of the minority interest of Seagate Software
acquired by Seagate Technology were materially the same as those used in the
allocation of the tangible and intangible assets and liabilities of NSMG and
VERITAS.
Pro forma financial information
The pro forma financial information presented below is presented as if the
contribution of NSMG to VERITAS and the purchase of the Seagate Software
minority interest by Seagate Technology had occurred at the beginning of fiscal
1998. The pro forma statements of operations for the twelve months ended July
2, 1999
F-33
<PAGE>
SEAGATE TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
and July 3, 1998, include the historical results of Seagate Technology less the
historic results of the NSMG business, plus Seagate Technology's equity
interest in the pro forma results of VERITAS, including recurring amortization
of related goodwill and intangibles plus recurring amortization of goodwill and
intangibles associated with the purchase of shares of Seagate Software stock by
Seagate Technology. Non-recurring transactions, such as the gain on the NSMG
contribution to VERITAS, compensation expense relating to the acquisition of
stock held less than six months by employees of Seagate Software, transaction
costs and the write-off of in-process research and development are excluded
from the pro forma presentation. The pro forma financial results are as
follows:
<TABLE>
<CAPTION>
For the years
ended
--------------
July July
2, 3,
1999 1998
------ ------
In millions,
except per
share data
<S> <C> <C>
Revenue.................................................. $6,600 $6,644
Loss before income taxes................................. (110) (1,127)
Net loss................................................. (34) (789)
Net loss per share--basic and diluted.................... $(0.14) $(3.24)
</TABLE>
Restructuring
During the third quarter of fiscal 1999, the Company recorded a
restructuring charge of $72 million as a result of steps the Company is taking
to further improve the efficiency of its operations. These actions include
closure of the Company's microchip manufacturing facility in Scotland;
discontinuance of the Company's recording head suspension business located in
Malaysia and Minnesota; consolidation of global customer service operations by
relocating such operations in Singapore, Scotland and Costa Mesa, California to
Reynosa, Mexico; and closure of the Company's recording media substrate
facility in Mexico. The restructuring charges were comprised of $37 million for
the write-off or write-down of excess manufacturing, assembly and test
equipment formerly utilized in Scotland, Malaysia and Minnesota; $16 million
for lease termination and holding costs for facilities located in Scotland and
Singapore; $10 million for employee termination costs; $3 million for the
write-off of goodwill associated with the recording media substrate operation
in Mexico; $2 million for the write-down of owned facilities located in
Malaysia; $1 million for the write-down of leasehold improvements in Singapore;
$1 million for the write-off of tooling; $1 million for contract cancellations
associated with the suspension business; and $1 million for repayment of
various grants previously received from the Scottish government. Prior to this
period, there was no indication of permanent impairment of the assets
associated with the closure and consolidation of facilities. Evaluations of the
resale market for certain assets were used to estimate fair value.
As of July 2, 1999, all of the equipment located at the microchip facility
in Scotland has been sold and the lease on this facility has been terminated.
The Company is in the final stages of disposing all of the assets for its
suspension business. The facility that was previously occupied by the
suspension operations is currently being used for other operations.
In connection with the fiscal 1999 restructuring, the Company currently
expects a workforce reduction of approximately 1,250 employees. Approximately
631 of the 1,250 employees had been terminated as of July 2, 1999. As a result
of employee terminations and the write-off or write-down of equipment and
facilities in connection with implementing the fiscal year 1999 restructuring
plan, the Company estimates that annual salary and depreciation expense will be
reduced by approximately $27 million and $16 million, respectively. The Company
anticipates that the implementation of the 1999 restructuring plan will be
substantially complete by the end of March 2000.
F-34
<PAGE>
SEAGATE TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In 1999, the Company reversed $12 million of its restructuring accruals
originally recorded in fiscal year 1998 as a result of the Company abandoning
its plan to seek an agreement with an external vendor to supply parts currently
manufactured at a facility in Thailand. This reversal included $10 million of
valuation reserves classified elsewhere on the balance sheet and reversal of
amounts included in the restructuring reserve of $1 million for facility lease
costs and $1 million for contract cancellations. In addition, reclassifications
between cost categories within the restructuring reserve were made as a result
of differences between original estimates and amounts actually incurred or
expected to be incurred. This was primarily a result of an increase in the
period of time estimated to obtain a suitable sub-lessee for certain leased
buildings located at the former San Jose, California design facility offset by
lower severance and benefits costs than originally estimated.
In the second and third quarters of fiscal 1998, the Company recorded
restructuring charges aggregating $347 million. The Company had experienced
reductions in revenue from the third quarter of fiscal year 1997 to the fourth
quarter of fiscal year 1997 of 21%, from the fourth quarter of fiscal year 1997
to the first quarter of fiscal year 1998 of 4% and from the first quarter of
fiscal year 1998 to the second quarter of fiscal year 1998 of an additional
12%. During the second quarter of fiscal 1998, forecasted production needs were
much lower than the current capacity of the Company and the Company recognized
that the recent oversupply in the marketplace was not a short-term anomaly. In
this period, the Company also decided to discontinue production of several
products, rendering test and manufacturing equipment unique to those products
obsolete. Prior to this period, there was no indication of permanent impairment
of these assets associated with the recent excess capacity of the Company or
the products to be discontinued. These charges reflect steps the Company is
taking to align worldwide operations with current market conditions by reducing
existing capacity in all areas of the Company and improving the productivity of
its operations and the efficiency of its development efforts by consolidating
manufacturing and R&D operations. Actions include exiting production of mobile
products; early discontinuation of several other products; closing and selling
the Clonmel, Ireland drive manufacturing facility; closing and subleasing the
San Jose and Moorpark, California design center facilities; aborting production
expansion projects in Cork, Ireland; and divesting the Company of the new
Philippines manufacturing facility, which was nearing completion. Included in
the restructuring charge are the write-down and write-off of tangible assets
comprised of manufacturing, assembly and test equipment and tooling formerly
utilized in California, Singapore, Thailand, Ireland and facilities located in
California, the Philippines and Thailand totaling $200 million and intangible
assets totaling $2.5 million for goodwill associated with permanently impaired
media manufacturing equipment.
The majority of the tangible assets have been disposed of or sold including
the disposal of the Clonmel, Ireland facility in May 1998 and the sublease of
one of the five buildings at the San Jose, California design center. The
Company is marketing three additional buildings in the San Jose, California
design center for sublease. The fifth building has a remaining lease term so
short as to make a sublease impractical. Equipment formerly utilized at these
facilities, in addition to equipment associated with restructuring actions in
Singapore and Thailand, has been relocated to other sites or scrapped. Of the
$137 million in write-offs and write-downs of equipment, $109 million was
scrapped and $28 million is awaiting final disposition. In addition, $10
million of equipment was transferred at net book value for use in operations at
other sites. Subsequent to the recording of the restructuring reserve,
depreciation related to certain assets that continued in use, was included in
operations. At the time these assets were identified as available for sale no
further depreciation was recorded. The write-off of intangibles and other
assets includes capital equipment deposits and goodwill associated with
permanently impaired equipment. Costs associated with aborting production
expansion projects in Cork, Ireland include primarily architect costs, lease
termination costs associated with equipment leased by contractors, and lease
termination costs for temporary housing used by contractor personnel.
Certain facilities including design centers in California, as well as
manufacturing facilities in Thailand continued in use after restructuring
amounts were recorded. The Moorpark, California product design center
F-35
<PAGE>
SEAGATE TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
remained in use for six months after the write-down of leasehold improvements
and equipment totaling $9 million. This facility has been subleased for a
portion of the remaining minimum lease term. One Thailand manufacturing
facility continues to be utilized until a satisfactory agreement can be made
with an external vendor to supply parts currently manufactured at this
location. At the time the decision to exit this facility was made, the Company
believed that it had identified a supplier for parts. It was subsequently
determined that the supplier could not meet the Company's quality standards.
As of January 1, 1999, the Company's planned workforce reduction associated
with the fiscal 1998 restructuring of approximately 15,000 employees had been
completed. The implementation of the 1998 restructuring plan was substantially
complete as of July 2, 1999.
The following table summarizes the Company's restructuring activities:
<TABLE>
<CAPTION>
Severance Intangibles
and Excess & Other Contract
Benefits Facilities Equipment Assets Cancellations Other Total
--------- ---------- --------- ----------- ------------- ----- -----
In millions
<S> <C> <C> <C> <C> <C> <C> <C>
FY98 restructuring
charge................. $ 57 $ 78 $ 137 $ 11 $ 43 $ 21 $ 347
Cash charges............ (48) (3) -- -- (38) (11) (100)
Non-cash charges........ -- (55) (137) (11) -- -- (203)
---- ---- ----- ---- ---- ---- -----
Reserve balances, July
3, 1998................ $ 9 $ 20 $ -- $ -- $ 5 $ 10 $ 44
FY99 restructuring
charge................. 10 19 37 4 1 1 72
Cash charges............ (12) (20) -- -- -- (1) (33)
Non-cash charges........ -- (4) (37) (4) -- -- (45)
Adjustments and
Reclassifications...... (3) 3 -- -- (3) 1 (2)
---- ---- ----- ---- ---- ---- -----
Reserve balances, July
2, 1999................ $ 4 $ 18 $ -- $ -- $ 3 $ 11 $ 36
==== ==== ===== ==== ==== ==== =====
</TABLE>
Business Segment and Geographic Information
The Company designs, manufactures and markets products for storage,
retrieval and management of data on computer and data communications systems.
These products include disc drives and disc drive components, tape drives and
software. The Company has three operating segments, disc drives, software and
tape drives, however, only the disc drive and software businesses are
reportable segments under the criteria of SFAS No. 131. The "other" category in
the following revenue and gross profit tables consists of tape drives and out-
of-warranty repair. The CEO evaluates performance and allocates resources based
on revenue and gross profit from operations. Gross profit from operations is
defined as revenue less cost of sales. The Company does not evaluate or
allocate assets or depreciation by operating segment, nor does the CEO evaluate
segments on these criteria. The CEO has been identified as the Chief Operating
Decision Maker as defined by SFAS No. 131.
F-36
<PAGE>
SEAGATE TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes the Company's operations by business segment:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- -------
In millions
<S> <C> <C> <C>
Revenue:
Disc Drives............................. $ 6,101 $ 6,152 $ 8,079
Software................................ 343 293 218
Other................................... 358 374 643
-------- -------- -------
Consolidated.............................. $ 6,802 $ 6,819 $ 8,940
======== ======== =======
Gross Profit:
Disc Drives............................. $ 1,163 $ 667 $ 1,668
Software................................ 291 242 173
Other................................... 98 80 181
-------- -------- -------
Consolidated............................ $ 1,552 $ 989 $ 2,022
======== ======== =======
Total Assets:
Disc Drives............................. $ 16,553 $ 16,685 $15,321
Software................................ 2,032(1) 212 180
Other................................... 299 80 53
Eliminations............................ (11,812) (11,332) (8,831)
-------- -------- -------
Consolidated............................ $ 7,072 $ 5,645 $ 6,723
======== ======== =======
</TABLE>
--------
(1) Includes $1.745 billion equity investment in VERITAS Software.
In 1999, 1998 and 1997, Compaq Computer Corporation accounted for more than
10% of consolidated revenue for a total of $1.144 billion, $873 million and
$995 million, respectively. Sales to Compaq Computer Corporation were from the
Company's disc drive segment.
Enterprise-wide information is provided in accordance with SFAS No. 131.
Long-lived assets consist of property, equipment and leasehold improvements,
capital leases, equity investments, goodwill and other intangibles, and other
non-current assets as recorded by the Company's operations in each area.
The following table summarizes the Company's operations by geographic area:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
In millions
<S> <C> <C> <C>
Revenue from external customers: (1)
United States.................................. $3,440 $3,641 $5,216
The Netherlands................................ 1,361 1,447 1,704
Singapore...................................... 1,194 1,119 713
Other.......................................... 807 612 1,307
------ ------ ------
Consolidated................................... $6,802 $6,819 $8,940
====== ====== ======
Long-lived Assets:
United States.................................. $2,571(2) $ 771 $ 852
Singapore...................................... 546 607 583
Other.......................................... 643 652 735
------ ------ ------
Consolidated................................... $3,760 $2,030 $2,170
====== ====== ======
</TABLE>
--------
(1) Revenue is attributed to countries based on the shipping location.
(2) Includes $1.745 billion equity investment in VERITAS Software.
F-37
<PAGE>
SEAGATE TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Commitments
Leases---The Company leases certain property, facilities and equipment under
non-cancelable lease agreements. Land and facility leases expire at various
dates through 2015 and contain various provisions for rental adjustments
including, in certain cases, a provision based on increases in the Consumer
Price Index. All of the leases require the Company to pay property taxes,
insurance and normal maintenance costs.
Future minimum lease payments for operating leases with initial or remaining
terms of one year or more were as follows at July 2, 1999:
<TABLE>
<CAPTION>
Operating
Leases
-----------
In millions
<S> <C>
2000....................................... $ 46
2001....................................... 41
2002....................................... 31
2003....................................... 25
2004....................................... 21
After 2004................................. 138
----
$302
====
</TABLE>
Total rent expense for all land, facility and equipment operating leases
was approximately $56 million, $58 million and $51 million for 1999, 1998 and
1997, respectively.
Capital Expenditures---The Company's commitments for construction of
manufacturing facilities and equipment approximated $78 million at July 2,
1999.
Supplemental Cash Flow Information
<TABLE>
<CAPTION>
1999 1998 1997
------ ---- ----
In millions
<S> <C> <C> <C>
Cash Transactions:
Cash paid for interest............................... $ 52 $52 $26
Cash paid for income taxes, net of refunds........... (107) (1) 59
Non-Cash Transactions:
Contribution of NSMG to VERITAS...................... $1,806 $-- $--
Acquisition of minority interest..................... 52 -- --
Conversion of debentures............................. -- -- 788
</TABLE>
Subsequent Events
The Company is in the process of developing a restructuring plan designed to
realign its manufacturing capacity and increase productivity. Some minor
restructuring activities have taken place during the first quarter of fiscal
2000; however, as this plan is further developed, the Company expects there to
be additional restructuring activities that could be substantial. As a result,
the Company will be required to record a potentially substantial charge to
operations associated with this restructuring in its fiscal quarter ended
October 1, 1999.
F-38
<PAGE>
SEAGATE TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In July 1999, the Board of Directors approved the adoption of the 1999 Stock
Option Plan (the "Plan"), subject to stockholder approval at the 1999 Annual
Meeting of Stockholders. The number of shares of common stock that will be
reserved for issuance under the Plan is estimated to be approximately 11
million.
Pursuant to a registration statement declared effective by the Securities
and Exchange Commission on August 9, 1999, the Company's Seagate Software
subsidiary sold an aggregate of 8,232,667 shares of VERITAS common stock for
proceeds of $396.8 million, net of underwriting discounts and commissions and
before expenses. Seagate Software acquired such shares in connection with the
contribution of the Network & Storage Management Group business to VERITAS. The
underwriters have an option to acquire an additional 909,833 shares of VERITAS
common stock to cover over-allotments from Seagate Software prior to September
8, 1999 at a per share price of $48.1925 (net of underwriting discounts and
commissions). In connection with the sale of the VERITAS shares, Seagate
Software agreed that it would not sell or otherwise dispose of any additional
shares of VERITAS common stock prior to November 7, 1999. Certain exceptions to
this limitation apply, including transfers to affiliated entities and the sale
of the remaining over-allotment option noted above.
On August 17, 1999, SanDisk Corporation, a company in which Seagate holds an
equity interest, filed a registration statement with the Securities and
Exchange Commission in connection with a public offering of 3,000,000 shares of
its common stock. Of the 3,000,000 shares, 2,750,000 will be sold by SanDisk
and 250,000 will be sold by the Company.
Concurrent with the equity offering, the Company will enter into a prepaid
forward contract with the SanDisk PEPS Trust in connection with a public
offering of an aggregate of $200 million of Premium Exchangeable Participating
Shares, or PEPS, of the Trust. The SanDisk PEPS Trust will offer the
underwriters an option to purchase an additional $30 million of PEPS to cover
any over-allotments in connection with the PEPS offering.
In addition, Thomas F. Mulvaney, senior vice president, general counsel and
secretary of Seagate Technology, resigned from SanDisk's board of directors on
August 13, 1999.
F-39
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Seagate Technology, Inc.
We have audited the accompanying consolidated balance sheets of Seagate
Technology, Inc. as of July 2, 1999 and July 3, 1998, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended July 2, 1999. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Seagate Technology, Inc. at July 2, 1999 and July 3, 1998, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended July 2, 1999, in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
San Jose, California
July 15, 1999, except for the Subsequent Events note,
as to which the date is August 17, 1999.
F-40
<PAGE>
INDEX TO FINANCIAL STATEMENTS OF SEAGATE SOFTWARE
<TABLE>
<CAPTION>
Page
----
<S> <C>
Consolidated Balance Sheets................................................ F-42
Consolidated Statements of Operations...................................... F-43
Consolidated Statements of Cash Flows...................................... F-44
Consolidated Statements of Stockholders' Equity............................ F-45
Notes to Consolidated Financial Statements................................. F-46
Report of Ernst & Young LLP, Independent Auditors.......................... F-73
</TABLE>
F-41
<PAGE>
SEAGATE SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
July 2, July 3,
1999 1998
---------- ---------
<S> <C> <C>
Assets
Cash.................................................... $ 25,201 $ 15,130
Accounts receivable, net................................ 42,682 46,564
Inventories............................................. 981 1,117
Other current assets.................................... 10,704 2,474
---------- ---------
Total current assets................................ 79,568 65,285
Property, equipment and leasehold improvements, net..... 6,878 16,876
Investment in VERITAS Software, net..................... 1,744,544 --
Goodwill and other intangibles, net..................... 52,550 56,836
---------- ---------
Total assets........................................ $1,883,540 $ 138,997
========== =========
Liabilities
Loan payable to Seagate Technology...................... $ 11,801 $ 16,054
Accounts payable........................................ 21,911 10,994
Accrued employee compensation........................... 26,889 14,365
Accrued expenses........................................ 11,733 15,339
Accrued income taxes.................................... -- 5,562
Deferred revenue........................................ 16,342 13,714
---------- ---------
Total current liabilities........................... 88,676 76,028
Deferred income taxes................................... 617,343 1,691
Other liabilities....................................... 225 255
---------- ---------
Total liabilities................................... 706,244 77,974
Common stock subject to repurchase...................... 35 3,917
Stockholders' Equity
Convertible preferred stock, $.001 par value--73,000,000
shares authorized;
Series A: shares issued and outstanding--54,633,333 in
1999 and 1998 (aggregate liquidation preference of
$409,750 in 1999 and 1998)........................... 55 55
Common stock, $.001 par value--authorized--300,000,000
shares in 1999 and 95,600,000 shares in 1998; shares
issued and outstanding--3,352,568 in 1999 and 235,502
in 1998................................................ 3 --
Additional paid-in capital.............................. 525,060 343,526
Retained earnings/(accumulated deficit)................. 652,772 (286,218)
Accumulated other comprehensive income.................. (629) (257)
---------- ---------
Total stockholders' equity.......................... 1,177,261 57,106
---------- ---------
Total liabilities and stockholders' equity.......... $1,883,540 $ 138,997
========== =========
</TABLE>
See notes to consolidated financial statements.
F-42
<PAGE>
SEAGATE SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
For the years ended
------------------------------
July 2, July 3, June 27,
1999 1998 1997
---------- -------- --------
<S> <C> <C> <C>
Revenues:
Licensing.................................... $ 274,431 $243,285 $183,556
Licensing from Seagate Technology............ 7,738 5,469 5,762
Maintenance, support and other............... 61,304 44,472 27,632
---------- -------- --------
Total revenues............................. 343,473 293,226 216,950
Cost of revenues:
Licensing.................................... 12,597 16,963 17,535
Licensing from Seagate Technology............ 433 539 1,834
Maintenance, support and other............... 27,522 19,687 6,560
Amortization of developed technologies....... 12,196 13,271 21,860
---------- -------- --------
Total cost of revenues..................... 52,748 50,460 47,789
---------- -------- --------
Gross profit................................... 290,725 242,766 169,161
Operating expenses:
Sales and marketing.......................... 159,938 129,343 107,706
Research and development..................... 51,524 47,173 42,842
General and administrative................... 34,055 37,124 36,861
In-process research and development.......... 2,353 6,800 2,613
Amortization of goodwill and other
intangibles................................. 14,917 16,201 23,465
Restructuring costs.......................... -- -- 2,524
Unusual items................................ -- -- 13,446
---------- -------- --------
Total operating expenses................... 262,787 236,641 229,457
---------- -------- --------
Income (loss) from operations.................. 27,938 6,125 (60,296)
Gain on contribution of NSMG to VERITAS, net... 1,670,301 -- --
Activity related to equity interest in
VERITAS....................................... (118,888) -- --
Interest expense............................... (202) (1,021) (2,688)
Other, net..................................... 1,761 1,011 307
---------- -------- --------
Interest and other, net...................... 1,552,972 (10) (2,381)
---------- -------- --------
Income (loss) before income taxes.............. 1,580,910 6,115 (62,677)
Benefit from (provision for) income taxes...... (641,920) (15,385) 8,714
---------- -------- --------
Net income (loss).............................. $ 938,990 $ (9,270) $(53,963)
========== ======== ========
Net income (loss) per common share:
Basic........................................ $ 1,703.53 $ (56.33) $(796.93)
Diluted...................................... $ 14.89 $ (56.33) $(796.93)
Number of shares used in per share
computations:
Basic........................................ 551,202 164,571 67,714
Diluted...................................... 63,047,127 164,571 67,714
</TABLE>
See notes to consolidated financial statements.
F-43
<PAGE>
SEAGATE SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
For the years ended
---------------------------------
July 2, July 3, June 27,
1999 1998 1997
----------- --------- ---------
<S> <C> <C> <C>
Operating activities
Net income (loss).......................... $ 938,990 $ (9,270) $ (53,963)
Adjustments to reconcile net income to net
cash from operating activities:
Depreciation and amortization............ 35,714 39,932 41,730
Deferred income taxes.................... 613,487 (4,542) (7,505)
Gain on contribution of NSMG to VERITAS,
net..................................... (1,670,301) -- --
Activity related to equity interest in
VERITAS................................. 118,887 -- --
Write-off of in-process research and
development............................. 2,353 6,800 2,613
Write-off or write-down of goodwill and
intangibles............................. 1,100 1,900 13,106
Unusual items............................ -- -- 13,446
Write-offs due to restructure............ -- -- 1,494
Changes in operating assets and
liabilities:
Accounts receivable.................... (15,158) (18,157) 4,583
Inventories............................ (745) 2,099 (1,581)
Other current assets................... (11,152) 1,575 (1,207)
Accounts payable....................... 4,377 1,552 (1,609)
Accrued employee compensation.......... 11,378 4,020 2,078
Accrued expenses....................... 12,348 (725) 2,430
Accrued income taxes................... (2,778) 3,633 5,796
Deferred revenue....................... 2,628 5,285 2,648
Other liabilities...................... 34 (46) 44
----------- --------- ---------
Net cash provided by operating
activities.............................. 41,162 34,056 24,103
Investing activities
Acquisitions of businesses, net of cash
acquired.................................. -- (10,000) --
Acquisition of property, equipment and
leasehold improvements, net............... (12,790) (7,992) (15,823)
Acquisition of intangibles................. (289) (4,270) --
----------- --------- ---------
Net cash used in investing activities.... (13,079) (22,262) (15,823)
Financing activities
Sale of common stock and common stock
subject to repurchase..................... 7,846 4,582 79
Borrowings from Seagate Technology......... 319,017 261,917 217,513
Payments to Seagate Technology............. (344,503) (274,834) (221,533)
----------- --------- ---------
Net cash used in financing activities.... (17,640) (8,335) (3,941)
Effect of exchange rate changes on cash.... (372) (414) 151
----------- --------- ---------
Increase in cash......................... 10,071 3,045 4,490
Cash at the beginning of the year.......... 15,130 12,085 7,595
----------- --------- ---------
Cash at the end of the year................ $ 25,201 $ 15,130 $ 12,085
=========== ========= =========
Supplemental Cash Flow Information
Cash paid for interest................... $ 202 $ 1,021 $ 2,688
Cash paid for income taxes............... 38,166 7,945 2,357
</TABLE>
See notes to consolidated financial statements.
F-44
<PAGE>
SEAGATE SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
For the years ended Series A Accumulated
July 2, 1999, July 3, Convertible Other Retained
1998 and June 28, 1996 Preferred Stock Common Stock Additional Compre- Earnings
(In thousands, except ----------------- ---------------- Paid-In hensive Accumulated
share data) Shares Amount Shares Amount Capital Income Deficit Total
---------------------- ---------- ------ --------- ------ ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 28,
1996................... 47,433,333 $47 62,500 $-- $338,534 $ 6 $(222,985) $ 115,602
Comprehensive
income/(loss)
Net loss............... -- -- -- -- -- -- (53,963) (53,963)
Foreign currency
translation
adjustment............ -- -- -- -- -- 151 -- 151
----------
Comprehensive
income/(loss)......... (53,812)
Income tax benefit from
Seagate Technology
stock option
exercises.............. -- -- -- -- 3,486 -- -- 3,486
Issuance of common stock
upon exercise of
employee stock
options................ -- -- 20,855 -- 79 -- -- 79
Issuance of convertible
preferred stock
pursuant to the
transfer to the Company
of IMG Vancouver....... 7,200,000 8 -- -- (8) -- -- --
---------- --- --------- ---- -------- ----- --------- ----------
Balance at June 27,
1997................... 54,633,333 55 83,355 -- 342,091 157 (276,948) 65,355
Comprehensive
income/(loss)
Net loss............... -- -- -- -- -- -- (9,270) (9,270)
Foreign currency
translation
adjustment............ -- -- -- -- -- (414) -- (414)
----------
Comprehensive
income/(loss)......... (9,684)
Income tax benefit from
Seagate Technology
stock option
exercises.............. -- -- -- -- 770 -- -- 770
Issuance of common stock
upon exercise of
employee stock
options................ -- -- 152,147 -- 665 -- -- 665
---------- --- --------- ---- -------- ----- --------- ----------
Balance at July 3,
1998................... 54,633,333 55 235,502 -- 343,526 (257) (286,218) 57,106
Comprehensive
income/(loss)
Net income............. -- -- -- -- -- -- 938,990 938,990
Foreign currency
translation
adjustment............ -- -- -- -- -- (372) -- (372)
----------
Comprehensive
income/(loss)......... 938,618
Income tax benefit from
Seagate Technology
stock option
exercises.............. -- -- -- -- 1,078 -- -- 1,078
Issuance of common stock
upon exercise of
employee stock
options................ -- -- 3,117,066 3 13,427 -- -- 13,430
Equity contribution by
Seagate Technology
related to the
acquisition of the
minority interests of
Seagate Software, Inc.
....................... -- -- -- -- 154,310 -- -- 154,310
Compensation expense for
stock option vesting
acceleration........... -- -- -- -- 12,719 -- -- 12,719
---------- --- --------- ---- -------- ----- --------- ----------
Balance at July 2,
1999................... 54,633,333 $55 3,352,568 $ 3 $525,060 $(629) $ 652,772 $1,177,261
========== === ========= ==== ======== ===== ========= ==========
</TABLE>
See notes to consolidated financial statements.
F-45
<PAGE>
SEAGATE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Summary of Significant Accounting Policies
Description of Business. Seagate Software, Inc. ("Seagate Software")
currently develops and markets software products and provides related services
enabling business users and information technology professionals to manage
enterprise information. Headquartered in Scotts Valley, California, Seagate
Software has over 30 offices and operations in 16 countries worldwide. Seagate
Software also has a substantial equity method investment in VERITAS Software
Corporation ("VERITAS"). The Company acquired its investment in VERITAS in May
1999 when it contributed its Network & Storage Management Group ("NSMG")
business to VERITAS. See Note on Business Combinations and Acquisitions.
Seagate Software is a majority-owned and consolidated subsidiary of Seagate
Technology, Inc. (the "Parent Company" or "Seagate Technology"), a data
technology company that provides products for storing, managing and accessing
digital information on computer systems. As of July 2, 1999, Seagate Technology
and one of its subsidiaries held 99.96% of Seagate Software's outstanding
capital stock. On a diluted basis, the outstanding minority interests of
Seagate Software amounted to approximately 6.2%, which consisted of Common
Stock and options to purchase Common Stock issued pursuant to the Seagate
Software 1996 Option Plan. Such options to purchase Seagate Software's Common
Stock are held by certain employees, directors and consultants of Seagate
Software and Seagate Technology.
Basis of Presentation. Seagate Software was incorporated in Delaware in
November 1993 and commenced operations in May 1994 pursuant to Seagate
Technology's merger with Crystal Computer Services, Inc., a company engaged in
developing and marketing report writing software. From August 1994 to June
1996, Seagate Technology acquired eight software companies, which were engaged
in developing and marketing business intelligence or network and/or storage
management software products. The amount of capital contributed by Seagate
Technology for acquisitions was determined by the amounts paid for such
acquisitions by Seagate Technology on behalf of Seagate Software. In February
1996, Seagate Technology merged with Conner Peripherals, Inc. in a transaction
accounted for as a pooling-of-interests. In connection with the merger, Seagate
Technology purchased the outstanding minority interests in Conner's storage
management software operations under Arcada Holdings, Inc. In April 1996,
Seagate Technology consolidated its software operations into Seagate Software.
Prior to December 1996, Seagate Technology International Holdings, an
indirect wholly-owned subsidiary of Seagate Technology, owned all outstanding
capital stock of Information Management Group Vancouver (formerly Crystal
Services, Inc.). Pursuant to an agreement among Seagate Technology
International Holdings, Seagate Software, and Information Management Group
Vancouver dated December 19, 1996, Seagate Technology International Holdings
surrendered the Information Management Group Stock (which was subsequently
cancelled by Information Management Group Vancouver) in exchange for 7,200,000
Convertible Preference Shares of Information Management Group Vancouver. On
December 26, 1996, the Convertible Preference Shares were exchanged for
7,200,000 Class B Exchangeable Shares of Information Management Group
Vancouver. These Class B Exchangeable Shares do not have voting rights except
as required by law, but can be exchanged at Seagate Technology International
Holdings' sole discretion for 7,200,000 shares of Seagate Software Series A
Preferred Stock. In connection with the issuance of the Class B Exchangeable
Shares described above, Seagate Technology International Holdings was granted
voting rights in Seagate Software equivalent to 7,200,000 shares of Series A
Preferred Stock. Also on December 26, 1996, Information Management Group
Vancouver issued 10,000 Class A Common Shares, which carry the right to vote,
to Seagate Software. Seagate Software therefore now owns all voting shares of
Information Management Group Vancouver. For financial reporting purposes,
Seagate Software has control over Information Management Group Vancouver and
therefore consolidates the results of Information Management Group Vancouver.
Additionally, the 7,200,000 shares of Series A Preferred Stock of Seagate
Software which Seagate Technology International Holdings could elect to receive
in exchange for the Class B Exchangeable Shares of Information Management Group
Vancouver have been treated as issued and outstanding shares of Series A
Preferred Stock of Seagate Software.
F-46
<PAGE>
SEAGATE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In June 1998, Seagate Software Company acquired all of the outstanding
capital stock of Eastman Software Storage Management Group, Inc. ("Eastman"), a
company engaged in developing, producing and marketing hierarchical storage
management products for the Windows NT platform. The purchase price of
approximately $10,000,000 was paid in cash.
On May 28, 1999, the Company contributed its NSMG business and related
assets and liabilities to a newly formed company combining this business with
that of VERITAS Software Corporation. The Company received 69,148,208 shares of
VERITAS upon contribution of the NSMG business to VERITAS. See Note on Business
Combinations and Acquisitions.
Seagate Software operates and reports financial results on a fiscal year of
52 or 53 weeks ending on the Friday closest to June 30. Accordingly, fiscal
1999 ended on July 2, 1999, fiscal 1998 ended on July 3, 1998 and fiscal 1997
ended on June 27, 1997. Fiscals 1999 and 1996 were comprised of 52 weeks and
fiscal 1998 was comprised of 53 weeks. Fiscal 2000 will be a 52-week year and
will end on June 30, 2000. All references to years in the notes to consolidated
financial statements represent fiscal years unless otherwise noted. All
intercompany transactions have been eliminated.
Revolving Loan Agreement with Seagate Technology. On July 4, 1998 Seagate
Software and Seagate Technology renewed the Revolving Loan Agreement on
substantially the same terms and conditions as the prior agreement which was
dated June 28, 1996. Under the Revolving Loan Agreement, Seagate Technology
finances certain of Seagate Software's working capital needs. The Revolving
Loan Agreement provides for maximum outstanding borrowings of up to $60,000,000
and is renewable every two years. Outstanding borrowings from the Parent
Company were $11,801,000 and $16,054,000 at July 2, 1999 and July 3, 1998,
respectively. Borrowings from Seagate Technology consist primarily of amounts
used to fund Seagate Software's operating activities. Beginning in fiscal 1999,
Seagate Software paid interest at the LIBOR rate plus 2% per annum on such
borrowings (7.31% at July 2, 1999).
Accounting Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ materially from
those estimates.
Concentration of Credit Risk. Financial instruments that potentially subject
Seagate Software to significant concentrations of credit risk consist primarily
of cash and accounts receivable. Seagate Software places its cash and cash
equivalents in high credit quality financial institutions. Accounts receivable
are derived from revenues earned from customers primarily located in North
America and Europe. Seagate Software performs ongoing credit evaluations of its
customers and generally does not require collateral. Seagate Software maintains
reserves for potential credit losses and historically such losses have been
immaterial. Revenue from one third party customer, Ingram Micro Inc., accounted
for 22% of Seagate Software's total revenues in 1999 and 1998 and 18% of
Seagate Software's total revenues in 1997. Revenue from Ingram accounted for
11% of IMG's total revenues in 1999.
Foreign Currency Translation. The U.S. dollar is the functional currency for
most of Seagate Software's foreign operations. Gains and losses on the
remeasurement into U.S. dollars of amounts denominated in foreign currencies
are included in net income for those operations whose functional currency is
the U.S. dollar. Gains and losses on translation into U.S. dollars of foreign
operations whose functional currency is the local currency are recorded as a
separate component of stockholders' equity.
Cash Management. Seagate Technology uses a centralized cash management
function for all of its domestic operations, including certain domestic
operations of Seagate Software. As a result, the substantial majority of
Seagate Software's cash is typically from balances maintained by Seagate
Software's foreign subsidiaries. However, at July 2, 1999, Seagate Software
also maintained approximately $10 million in its
F-47
<PAGE>
SEAGATE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
domestic cash accounts for employee tax liabilities associated with the recent
purchase of Seagate Software's minority interests by Seagate Technology.
Cash and Cash Equivalents. Seagate Software considers all highly liquid
investments with an original maturity of 90 days or less at the time of
purchase to be cash equivalents. Seagate Software typically uses available cash
in excess of amounts required for operating activities to pay amounts due under
the Revolving Loan Agreement. Accordingly, Seagate Software has not had
significant cash equivalents to date.
Inventories. Inventories are stated at the lower of cost (first in, first
out method) or market, and consist primarily of materials used in software
products, related supplies and packaging materials.
Property, Equipment and Leasehold Improvements. Property and equipment,
including leasehold improvements, are stated at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the assets
which range from two to five years. Assets under capital leases and leasehold
improvements are amortized using the straight-line method over the shorter of
the estimated useful lives of the assets or the remaining lease term.
Goodwill and Other Intangible Assets. Goodwill represents the excess of the
purchase price of acquired companies over estimated fair values of tangible and
intangible net assets acquired. Goodwill is amortized on a straight-line basis
over five to seven years. Under SFAS No. 121, the carrying values of long-term
assets and intangibles other than developed technology ("other intangibles")
are reviewed if facts and circumstances suggest that they may be impaired. If
this review indicates that carrying values of long-term assets and other
intangibles and associated goodwill will not be recoverable based on projected
undiscounted future cash flows, carrying values are reduced to estimated fair
values by first reducing goodwill and second by reducing long-term assets and
other intangibles.
Other intangible assets consist of trademarks, assembled workforces,
distribution networks, developed technology, customer bases, and covenants not
to compete related to acquisitions accounted for by the purchase method. See
Note on Business Combinations and Acquisitions. Amortization of purchased
intangibles, other than acquired developed technology, is provided on the
straight-line basis over the respective useful lives of the assets ranging from
36 to 60 months for trademarks, 24 to 48 months for assembled workforces and
distribution networks, 12 to 36 months for customer bases and 18 to 24 months
for covenants not to compete. In-process research and development without
alternative future use is expensed when acquired.
In addition, Seagate Software assesses the impairment of goodwill not
included in the scope of SFAS 121 under Accounting Principles Board Opinion No.
17, "Intangible Assets", (APB 17). Write-offs and write-downs to net realizable
value of goodwill not included in the scope of SFAS 121 are typically made only
when the Company has effectively abandoned and stopped selling virtually all of
the products acquired in an acquisition.
Developed Technology. Seagate Software applies Statement of Financial
Accounting Standards No. 86 ("SFAS 86"), "Accounting for the Costs of Computer
Software to Be Sold, Leased, or Otherwise Marketed", to software technologies
developed internally, acquired in business acquisitions, and purchased.
Internal development costs are included in research and development and are
expensed as incurred. SFAS 86 requires the capitalization of certain internal
development costs once technological feasibility is established, which based on
Seagate Software's development process generally occurs upon the completion of
a working model. As the time period between the completion of a working model
and the general availability of software has been short, capitalization of
internal development costs has not been material to date. Capitalized costs are
amortized based on the greater of the straight-line basis over the estimated
product life (generally 30 to 48 months) or the ratio of current revenues to
the total of current and anticipated future revenues.
F-48
<PAGE>
SEAGATE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Purchased developed technology is amortized based on the greater of the
straight-line basis over the estimated useful life (30 to 48 months) or the
ratio of current revenues to the total of current and anticipated future
revenues. The recoverability of the carrying value of purchased developed
technology and associated goodwill is reviewed periodically. The carrying value
of developed technology is compared to the estimated future gross revenues from
that product reduced by the estimated future costs of completing and disposing
of that product, including the costs of performing maintenance and customer
support (net undiscounted cash flows) and to the extent that the carrying value
exceeds the undiscounted cash flows the difference is written off.
Fair Value Disclosures. Seagate Software maintains its cash principally with
major banks in interest- and non-interest-bearing bank accounts. There are no
realized or unrealized gains or losses and fair value approximates carrying
value for all cash balances.
Pushdown and Carveout Accounting. Seagate Technology has provided
substantial services to Seagate Software, including general management,
treasury, tax, financial reporting, benefits administration, insurance,
information technology, legal, accounts payable and receivable and credit
functions. Seagate Technology has charged Seagate Software for these services
through corporate expense allocations. The amount of corporate expense
allocations is dependent upon the total amount of allocable costs incurred by
Seagate Technology on behalf of Seagate Software less amounts charged as a
specific cost or expense rather than by allocation. Such costs were
proportionately allocated to Seagate Software based on detailed inquiries and
estimates of time incurred by Seagate Technology's corporate marketing and
general and administrative departmental managers. Included in general and
administrative expenses are corporate allocation charges of $809,000,
$1,004,000 and $1,939,000 for 1999, 1998 and 1997, respectively. Included in
sales and marketing expenses are corporate allocation charges of $504,000,
$769,000 and $19,000 for 1999, 1998 and 1997, respectively. The decrease in
sales and marketing expenses in 1999 was due to reduced cost allocations from
Seagate Technology's corporate branding program which consisted of television
and newspaper advertisements.
Seagate Software participated in Seagate Technology's profit sharing plan
through the first quarter of fiscal 1998 and in Seagate Technology's management
bonus plan during 1997. Seagate Software has since adopted its own bonus plan.
Compensation expenses recorded by Seagate Software under Seagate Technology's
plans totaled $3,158,000 for 1997.
The employees of Seagate Software also participate in the Seagate Technology
Employee Stock Purchase Plan (the "Purchase Plan"). The Purchase Plan permits
eligible employees who have completed thirty days of employment prior to the
inception of the offering period to purchase common stock of Seagate Technology
through payroll deductions at the lower of 85% of the fair market value of the
common stock at the beginning or at the end of each six-month offering period.
Under the plan, 93,516, 115,058 and 80,643 shares of common stock of Seagate
Technology were issued to Seagate Software's employees in 1999, 1998 and 1997,
respectively.
The employees of Seagate Software also participate in the Seagate Technology
tax-deferred savings plan, the Seagate Technology, Inc. Savings and Investment
Plan ("the 401(k) plan"). The 401(k) plan is designed to provide qualified
employees with an accumulation of funds at retirement. Qualified employees may
elect to make contributions to the 401(k) plan on a monthly basis. Seagate
Software may make annual contributions to the 401(k) plan at the discretion of
the Board of Directors. No material contributions were made by Seagate Software
in fiscal years 1999, 1998 or 1997.
Revenue Recognition. During the first quarter of fiscal 1999, the Company
began recognizing license revenue in accordance with the American Institute of
Certified Public Accountant's Statement of Position (SOP) 97-2, as amended by
SOP 98-4, "Software Revenue Recognition." Revenue from software license
agreements is primarily recognized at the time of product delivery, provided
that fees are fixed or determinable, evidence of an arrangement exists,
collectibility is probable and the Company has vendor-specific objective
evidence of fair value. Revenue from resellers, including Value Added Resellers
("VARs"), OEMs and
F-49
<PAGE>
SEAGATE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
distributors, are primarily recognized at the time of product delivery to the
reseller. The Company's policy is to defer such revenue if resale contingencies
exist. Some of the factors that are considered to determine the existence of
such contingencies include payment terms, collectibility and past history with
the customer. Product returns are reserved for in accordance with SFAS 48. Such
returns are estimated based on historical return rates. The Company considers
other factors such as fixed and determinable fees, resale contingencies, arms
length contract terms and the ability to reasonably estimate returns to ensure
compliance with SFAS 48. Service revenue from customer maintenance fees for
ongoing customer support and product updates is recognized ratably over the
maintenance term, which is typically 12 months. Service revenue from training
and consulting is recognized when such services are performed.
Advertising Expense. The cost of advertising is expensed as incurred.
Seagate Software does not incur any direct response advertising costs.
Advertising costs totaled $24,140,000, $19,112,000 and $21,617,000 for 1999,
1998 and 1997, respectively.
Net Income (Loss) Per Share. Basic net income per common share is computed
using the weighted average number of common stock outstanding during the
period. Diluted net income per share is computed using the weighted average
number of common stock outstanding during the period assuming conversion of
dilutive common stock equivalent shares from common stock options and
convertible preferred stock. The net loss per common share is computed using
the weighted average number of shares of common stock outstanding during the
period. Common equivalent shares from common stock options and convertible
preferred stock are excluded from the computation of diluted net loss per
share, as their effect is antidilutive. During 1998, Seagate Software adopted
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
("SFAS 128"). The adoption of SFAS 128 had no impact on Seagate Software
because the weighted average shares used in the per share computations were
unchanged under SFAS 128 because the effect of stock options would have been
antidilutive. Below is a reconciliation of the numerator and denominator used
to calculate earnings per share (in thousands, except share and per share
data):
<TABLE>
<CAPTION>
July 2, July 3, June 27,
1999 1998 1997
----------- -------- --------
<S> <C> <C> <C>
Basic net income (loss) per share computation:
Numerator:
Net income (loss)............................ $ 938,990 $ (9,270) $(53,963)
----------- -------- --------
Denominator:
Weighted average number of common shares
outstanding during the period............... 551,202 164,571 67,714
----------- -------- --------
Net income (loss) per share--basic......... $ 1,703.53 $ (56.33) $(796.93)
----------- -------- --------
Diluted net income (loss) per share
computation:
Numerator:
Net income (loss)............................ $ 938,990 $ (9,270) $(53,963)
----------- -------- --------
Denominator:
Weighted average number of common shares
outstanding during the period............... 551,202 164,571 67,714
Convertible preferred stock.................. 54,633,333 -- --
Incremental common shares attributable to
exercise of outstanding options and shares
subject to repurchase (assuming proceeds
would be used to purchase treasury stock)... 7,862,592 -- --
----------- -------- --------
63,047,127 164,571 67,714
----------- -------- --------
Net income (loss) per share--diluted....... $ 14.89 $ (56.33) $(796.93)
=========== ======== ========
</TABLE>
F-50
<PAGE>
SEAGATE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Incremental common shares attributable to the exercise of outstanding
options and common stock subject to repurchase (assuming the proceeds would be
used to purchase treasury stock) aggregating 2,118,034 shares for the year
ended July 3, 1998 and 317,453 shares for the year ended June 27, 1997 were
not included in the diluted net loss per share computation because the effect
would have been antidilutive.
Accounts Receivable. Accounts receivable are summarized below, in
thousands:
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Accounts receivable.................................... $44,363 $48,200
Less allowance for non-collection...................... (1,681) (1,636)
------- -------
$42,682 $46,564
======= =======
</TABLE>
Inventory. There were no write-downs of inventory to the lower of cost or
market during fiscal 1999. The write-downs of inventory to the lower of cost
or market were $3,674,000 and $531,000 in 1998 and 1997 respectively. The
write-down in fiscal 1998 was a result of consolidating Seagate Software's
fulfillment warehouses and changing their strategy to have fulfillment
activities handled by an outsourcing partner. As a result of this
consolidation excess and obsolete components and finished goods were written
down. The write-down in fiscal 1997 related to excess and obsolete components
and finished goods inventory.
Property, Equipment and Leasehold Improvements. Property, equipment and
leasehold improvements consisted of the following, in thousands:
<TABLE>
<CAPTION>
Estimated
Useful Life 1999 1998
----------------- ------- --------
<S> <C> <C> <C>
Equipment................................ Two to five years $12,918 $ 30,999
Building and leasehold improvements...... Life of lease 2,665 9,424
------- --------
15,583 40,423
Less accumulated depreciation and
amortization............................ (8,705) (23,547)
------- --------
$ 6,878 $ 16,876
======= ========
</TABLE>
Depreciation expense was $9,677,000, $11,727,000 and $8,911,000 in 1999,
1998 and 1997, respectively.
Goodwill and Other Intangibles. Goodwill and other intangibles consisted of
the following, in thousands:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Goodwill............................................. $ 45,291 $ 49,039
Developed technology................................. 21,486 48,049
Trademarks........................................... 6,637 9,972
Assembled workforce.................................. 2,557 4,596
Distribution network................................. 2,080 2,925
Other intangibles.................................... 4,019 13,813
-------- --------
82,070 128,394
Accumulated amortization............................. (29,520) (71,558)
-------- --------
Goodwill and other intangibles....................... $ 52,550 $ 56,836
======== ========
</TABLE>
F-51
<PAGE>
SEAGATE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Amortization of developed technologies is included in costs of revenues. In
1999, 1998 and 1997 the amortization of goodwill and other intangibles includes
write-offs and write-downs to the estimated fair value of $0, $1,900,000 and
$6,173,000, respectively. In 1999, 1998 and 1997 the amortization of acquired
developed technologies included in cost of revenues includes write-downs and
write-offs to net realizable value of $1,100,000, $0 and $6,918,000,
respectively.
Seagate Software periodically reviews the net realizable value of developed
technology under the guidance of SFAS No. 86. Seagate Software compares the
estimated undiscounted future cash flows on a product by product basis to the
unamortized cost of developed technology and unamortized costs in excess of the
estimated undiscounted cash flows are written off. The write-offs of $1,100,000
in 1999 were the result of the Company's decision not to use the technology
from Timeline and Stac in future products. The impairment write-offs for
developed technology recorded in 1997 were caused by a number of factors
including Seagate Software's decision to stop selling products or technologies
such as DOS, new acquisitions, or new product designs. Seagate Software is not
currently generating revenue from any products for which the related developed
technology has been impaired.
In addition, Seagate Software assesses the impairment of goodwill not
included in the scope of SFAS 121 under Accounting Principles Board Opinion No.
17, "Intangible Assets", (APB17). During 1997, Seagate Software wrote-off and
wrote-down goodwill amounting to $6,173,000. The write-offs and write-downs
related to the decision to abandon and stop selling all current and future
products acquired from Frye Computer Systems, Inc., the decision to abandon and
stop selling virtually all current and future products acquired in the
acquisition of Palindrome Corporation, and the decision to close down and sell
Calypso Software Systems, Inc.
Seagate Software has capitalized the assembled workforce in most of its
acquisitions. When Seagate Software reviews the carrying value of its
intangibles, if there remains less than 5% of the original workforce, the
related intangible is deemed impaired. In 1998, Seagate Software wrote off the
workforces for three previous acquisitions, Network Computing, Inc., Netlabs,
Inc., and Creative Interaction Technologies, Inc., because less than 5% of the
original workforces remained.
The following table provides quantitative information about the write-offs
and write-downs of goodwill and other intangibles, in thousands:
<TABLE>
<CAPTION>
1999 1998 1997
------------------- ------------------- -------------------
Intangible Intangible Intangible
Asset Goodwill Asset Goodwill Asset Goodwill
---------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Developed Technology
Netlabs, Inc. ........ $ 780
Palindrome
Corporation.......... 2,740 $2,930
Calypso Software
Systems, Inc. ....... 1,627 2,573
Creative Interaction
Technologies, Inc. .. 1,176
Frye Computer Systems,
Inc. ................ 463 670
Network Computing,
Inc. ................ 132
Stac.................. $ 100
Timeline.............. 1,000
Assembled Workforce
Network Computing,
Inc. ................ $120 $ 155
Netlabs, Inc. ........ 431 1,045
Creative Interaction
Technologies, Inc. .. 82 67
------ --- ---- ------ ------ ------
Total................... $1,100 $ 0 $633 $1,267 $6,918 $6,173
====== === ==== ====== ====== ======
</TABLE>
F-52
<PAGE>
SEAGATE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Common Stock Subject to Repurchase. Current employees and directors of
Seagate Software and of Seagate Technology have exercised 8,630 shares of
common stock under the Option Plan. At July 2, 1999, 3,630 were vested and
5,000 were unvested. At the option of the employee or director, within 30 days
of termination such vested and unvested shares may be sold back to Seagate
Software at the original issue price. In addition, upon termination, unvested
shares are subject to repurchase at the option of Seagate Software at original
issue price. Because of the obligation to repurchase vested and unvested shares
of common stock, Seagate Software has excluded the amounts associated with the
repurchase obligation from Stockholders' Equity in the accompanying balance
sheet. At July 2, 1999, the repurchase obligation amounted to $35,200.
New Accounting Pronouncements
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 provides
guidance on capitalization of the costs incurred for computer software
developed or obtained for internal use. It also provides guidance for
determining whether computer software is internal-use software and on
accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold to the public. The Company
has not yet determined the impact, if any, of adopting this statement. The
disclosures prescribed by SOP 98-1 will be effective for the Company's
consolidated financial statements for the fiscal year ending June 30, 2000.
In June 1998, FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). This statement establishes accounting and reporting standards for
derivative instruments and for hedging activities. It requires that derivatives
be recognized in the balance sheet at fair value and specifies the accounting
for changes in fair value. In June 1999, the FASB issued SFAS 137, "Accounting
for Derivative Instruments and Hedging Activities--Deferral of the Effective
Date of FASB No. 133" to defer the effective date of SFAS 133 until fiscal
years beginning after June 15, 2000. Seagate Software generally does not use
derivative financial instruments and the impact of SFAS 133 is not anticipated
to be material when adopted.
Business Combinations and Acquisitions
Contribution of the Network & Storage Management Group to New VERITAS and
the purchase of outstanding shares of Seagate Software by Seagate Technology.
Contribution of the Network & Storage Management Group to New VERITAS
On May 28, 1999, Seagate Software, its subsidiary Seagate Software Network &
Storage Management Group, Inc.,, and its parent company Seagate Technology,
closed the Agreement and Plan of Reorganization (the "Plan") dated October 5,
1998 with VERITAS Holding Corporation ("New VERITAS") and VERITAS Software
Corporation ("VERITAS"). The Plan provided for the contribution by Seagate
Software, Seagate Technology, and certain of their respective subsidiaries to
New VERITAS of (a) the outstanding stock of the Network & Storage Management
Group and certain other subsidiaries of Seagate Software and (b) those assets
used primarily in the network and storage management business of Seagate
Software (the "NSMG business"), in consideration for the issuance of shares of
Common Stock of New VERITAS to Seagate Software and the offer by New VERITAS to
grant options to purchase Common Stock of New VERITAS to certain of Seagate
Software's employees who become employees of New VERITAS or its subsidiaries.
As part of the Plan, New VERITAS assumed certain liabilities of the NSMG
business. The Plan was structured to qualify as a tax-free exchange.
F-53
<PAGE>
SEAGATE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Subsequent to the consummation, all outstanding securities of New VERITAS
were assumed and converted into common stock of VERITAS with identical rights,
preferences and privileges, on a share for share basis. As a result of the
contribution of the NSMG business to New VERITAS, Seagate Software received a
total of 69,148,208 shares of VERITAS common stock and former employees of the
NSMG business received options to purchase an aggregate of 6,945,048 shares of
VERITAS common stock. Share and option amounts for VERITAS have been adjusted
to reflect the two-for-one stock split by VERITAS effected July 9, 1999.
VERITAS common stock is publicly traded on NASDAQ under the symbol "VRTS". As
of July 2, 1999 the aggregate fair value of common shares of VERITAS owned by
Seagate Software was $3,328 million.
Seagate Software has accounted for the contribution of NSMG to New VERITAS
as a non-monetary transaction using the fair value of the assets and
liabilities exchanged. After the transaction, Seagate Software owns
approximately 41.63% (69,148,208 shares) of the outstanding shares of VERITAS,
on May 28, 1999. Because Seagate Software still owns a portion of the NSMG
business through its ownership of VERITAS, Seagate Software did not recognize
100% of the gain on the exchange. The gain recorded is equal to the difference
between 58.37% of the fair value of the VERITAS common stock received and
58.37% of Seagate Software's basis in the NSMG assets and liabilities
exchanged. Seagate Software is accounting for its on going investment in
VERITAS using the equity method. The difference between the recorded amount of
Seagate Software's investment in VERITAS and the amount of its underlying
equity in the net assets of VERITAS has been allocated based upon the fair
value of the underlying tangible and intangible assets and liabilities of
VERITAS. The intangible assets included amounts allocated to in-process
research and development and resulted in a $84,707,000 write-off included in
"Activity related to equity interests in VERITAS" in the accompanying statement
of operations. Intangible assets including goodwill are being amortized over 4
years.
Seagate Software will include in its financial results its share of the net
income or loss of VERITAS, excluding certain NSMG purchase accounting related
amounts recorded by VERITAS, but including Seagate Software's amortization of
the difference between the recorded investment and the underlying assets and
liabilities of VERITAS. Because of practicality considerations, the net income
or loss of VERITAS will be included in the results of Seagate Software on a one
quarter lag basis.
Seagate Technology exchange offer
In a separate but related transaction, on June 9, 1999, the Parent Company
exchanged 5,275,772 shares of Seagate Technology common stock for 3,267,155 of
the outstanding shares of Seagate Software common stock owned by employees,
directors and consultants of Seagate Software. The exchange ratio was
determined based on the estimated value of Seagate Software common stock
divided by the fair market value of Seagate Technology common stock.
The estimated value of Seagate Software common stock was determined based
upon the sum of the fair value of the NSMG business, as measured by the fair
value of the shares received from VERITAS, plus the estimated fair value of the
Information Management Group ("IMG") as determined by Seagate Software's Board
of Directors, plus the assumed proceeds from the exercise of all outstanding
stock options, divided by the number of fully converted shares of Seagate
Software. The Board of Directors of Seagate Software considered a number of
factors in determining the estimated fair value of the IMG business, including
historical and projected revenues, earnings and cash flows, as well as other
factors and consultations with financial advisors.
The purchase of shares outstanding and vested more than six months was
accounted for as the purchase of a minority interest and, accordingly, the fair
value of the shares exchanged was allocated to all of the
F-54
<PAGE>
SEAGATE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
identifiable tangible and intangible assets and liabilities of Seagate
Software. For those shares outstanding and vested less than six months, the
fair value of the shares purchased less the original purchase price paid by the
employees was recorded as compensation expense. Compensation expense associated
with the issuance of Seagate Technology common stock amounted to approximately
$102.5 million. In addition, the Company also recorded compensation expense
amounting to $12.7 million for accelerated vesting on certain stock options for
the Chief Executive Officer of the Company and several other employees all of
whom were to become employees of VERITAS, and $8.6 million for the purchase of
unvested stock options held by certain continuing employees.
Seagate Software recorded the acquisition of its common stock by Seagate
Technology as a capital contribution from Seagate Technology. Seagate Software
recorded total compensation expense amounting to $123.8 million and wrote-off
in-process research and development amounting to $2.4 million in the fourth
quarter of fiscal 1999 in connection with the above described transactions.
Associated intangible assets and goodwill are being amortized to operations
over four years.
Computation of pro rata gain on contribution of NSMG to VERITAS
<TABLE>
<S> <C>
Fair value of shares received.......................... $3,151,350,059
Times: pro rata percentage accounted for at fair
value................................................. 58.37%
--------------
Adjusted fair value of securities received............. $1,839,594,294
Book value of NSMG..................................... $ 57,266,000
Times: pro rate percentage accounted for at fair
value................................................. 58.37%
--------------
Book value exchanged................................... 33,428,913
--------------
Pro rata gain.......................................... $1,806,165,381
==============
Computation of original investment in VERITAS
Book value of NSMG..................................... $ 57,266,000
Times: pro rata percentage accounted for at fair
value................................................. 41.63%
--------------
Portion of investment in VERITAS with no step up in
basis................................................. 23,837,087
Plus: adjusted fair value of securities received....... 1,839,594,294
--------------
Investment in VERITAS.................................. $1,863,431,381
==============
</TABLE>
F-55
<PAGE>
SEAGATE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Allocation of original investment in VERITAS
<TABLE>
<S> <C>
Allocation of investment to VERITAS assets and liabilities:
Net tangible assets......................................... $114,236,055
Intangible assets:
Distribution channel...................................... 8,949,418
Developed technology...................................... 46,079,096
Trademark and workforce................................... 16,608,455
In-process research and development....................... 39,668,816
</TABLE>
<TABLE>
<S> <C>
Allocation of investment to NSMG assets and liabilities:
Net tangible assets........................................ 23,837,087
Intangible assets:
Distribution channel..................................... 65,934,317
Developed technology..................................... 92,033,317
Trademark and workforce.................................. 13,902,816
In-process research and development...................... 45,038,466
Goodwill................................................... 1,397,143,538
--------------
Total original investment in VERITAS....................... $1,863,431,381
==============
</TABLE>
Value of minority interest
<TABLE>
<S> <C>
Number of Seagate Software shares and options exchanged for
Seagate Technology stock held by former employees,
consultants and shares held more than six months by
employees.................................................... 1,010,010
Times: exchange ratio into Seagate Technology stock........... 1.699
-----------
Number of Seagate Technology shares issued.................... 1,716,007
Value per share of Seagate Technology common stock on June 9,
1999......................................................... $ 30.75
-----------
Total value Seagate Technology Stock issued................... $52,767,215
Less: proceeds from assumed exercise of Seagate Software stock
options...................................................... (1,013,244)
-----------
Total value of minority interest.............................. $51,753,971
===========
</TABLE>
Allocation of minority interest purchase price to the intangible assets of
Seagate Software
<TABLE>
<S> <C>
Distribution channel............................................ $ 2,079,782
Developed technology............................................ 3,835,862
Trademark and workforce......................................... 847,404
In-process research and development............................. 2,352,616
Goodwill........................................................ 45,291,451
Deferred tax liability.......................................... (2,653,144)
-----------
Total........................................................... $51,753,971
===========
</TABLE>
F-56
<PAGE>
SEAGATE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Compensation relating to stock purchased from employees
<TABLE>
<S> <C>
Seagate Software options exercised and exchanged for Seagate
Technology stock............................................. 2,240,470
Plus: Seagate Software stock held for less than 6 months and
exchanged for Seagate Technology stock....................... 16,775
------------
Total shares exchanged........................................ 2,257,245
Times: exchange ratio into Seagate Technology stock........... 1.699
------------
Number of Seagate Technology shares issued.................... 3,835,060
============
Times: value per share of Seagate Technology common stock on
June 9, 1999................................................. $ 30.75
Less: average price paid per Seagate Software stock on a
Seagate Technology equivalent per share basis................ $ (4.01)
------------
Average compensation expense per Seagate Technology share
issued....................................................... $ 26.74
------------
Compensation expense related to the issuance of Seagate
Technology common stock...................................... $102,549,504
============
</TABLE>
Reconciliation of amounts included in net gain
<TABLE>
<S> <C>
Pro rata gain................................................. $1,806,165,381
Less:
Compensation expense........................................ 123,839,815
Transaction costs........................................... 12,024,584
--------------
Net gain...................................................... $1,670,300,982
==============
</TABLE>
Activity related to equity interest in VERITAS
<TABLE>
<S> <C>
Write-off of in-process research and development............... $ 84,707,000
Amortization of intangible assets including goodwill........... 34,180,229
------------
Activity related to equity interest in VERITAS................. $118,887,229
============
</TABLE>
Overview of allocation of fair value to tangible and intangible assets and
liabilities
In accordance with the provisions of Accounting Principles Board Opinions
No. 16 and 17, all identifiable assets acquired were analyzed to determine
their fair values. As the basis for identifying the in-process research and
development , the development projects were evaluated in the context of
Interpretation 4 of Financial Accounting Standards Board Statement No. 2. In
accordance with these provisions, the developmental projects were examined to
determine if there were any alternative future uses. Such evaluation consisted
of a specific review of the efforts, including the overall objectives of the
project, progress toward the objectives, and the uniqueness of the developments
of these objectives. Further, each in-process research and development project
was reviewed to determine if technological feasibility had been achieved.
F-57
<PAGE>
SEAGATE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Description of allocation methodology
Tangible net assets of VERITAS (including NSMG) principally included cash
and investments, accounts receivable, fixed assets and other current assets.
Liabilities principally included accounts payable, accrued compensation, and
other accrued liabilities. Tangible assets and liabilities were generally
assumed to have a fair value equal to book value. Intangible assets included
developed technology, distribution networks, original equipment manufacturer
agreements, trademarks, assembled workforce, and in-process research and
development. The fair value of intangible assets was determined as follows:
To estimate the value of the developed technology, the expected future cash
flows attributable to all existing technology was discounted, taking into
account risks related to the characteristics and applications of the
technology, existing and future markets, and assessments of the life cycle
stage of the technology. The developed technology is being amortized on the
straight-line basis over its estimated useful life (four years) which is
expected to exceed the ratio of current revenues to the total of current and
anticipated revenues.
The value of the distribution networks and original equipment manufacturer
agreements was estimated by considering, among other factors, the size of the
current and potential future customer bases, the quality of existing
relationships with customers, the historical costs to develop customer
relationships, the expected income and associated risks. Associated risks
included the inherent difficulties and uncertainties in transitioning business
relationships and risks related to the viability of and potential changes to
future target markets.
The value of trademarks was estimated by considering, among other factors,
the assumption that in lieu of ownership of a trademark, a company would be
willing to pay a royalty in order to exploit the related benefits of such
trademark.
The value of the assembled workforce was estimated as the costs to replace
the existing employees, including recruiting, hiring, and training costs for
each category of employee.
The value allocated to projects identified as in-process technology at
VERITAS and at Seagate Software for the minority interest acquired by Seagate
Technology, were charged to expense in the fourth quarter of fiscal 1999. These
write-offs were necessary because the acquired technologies had not reached
technological feasibility at the date of purchase and have no future
alternative uses. Seagate Software expects that the acquired in-process
research and development will be successfully developed, but there can be no
assurance that commercial viability of these products will be achieved.
The nature of the efforts required to develop the acquired in-process
research and development into commercially viable products principally relate
to the completion of all planning, designing, prototyping, verification and
testing activities that are necessary to establish that the product can be
produced to meet its design specifications, including functions, features and
technical performance requirements. The value of the acquired in-process
research and development for VERITAS was estimated as the projected net cash
flows related to such products, including costs to complete the development of
the technology and the future revenues to be earned upon commercialization of
the products, excluding revenues attributable to future development efforts.
These cash flows were then discounted back to their net present value. The
projected net cash flows from such projects were based on management's
estimates of revenues and operating profits related to such projects.
Goodwill was calculated as the residual difference between the estimated
amount paid and the values assigned to identified tangible and intangible
assets and liabilities.
F-58
<PAGE>
SEAGATE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Valuation assumptions
Revenue
Revenue estimates were based on (i) aggregate revenue growth rates for the
businesses as a whole, (ii) growth rates for the storage management software
market, (iii) the aggregate size of the storage management software market,
(iv) anticipated product development and introduction schedules, (v) product
sales cycles, and (vi) the estimated life of a product's underlying technology.
Future revenue estimates were generated based on the worldwide storage
management software market and the backup, restore and archive market. The
overall storage management software market is forecasted to increase at a
compound annual growth rate of 14.2%, from a 1997 value of $2,543 million to a
2002 value of $4,941 million. The backup, restore and archive software segment
of storage management software and in particular the Windows NT segment, in
which NSMG competes, is expected to grow much faster than other segments.
Revenue for Windows NT is projected to grow at a 43.3% compound annual growth
rate from1997 through 2002.
Revenue for NSMG was forecasted by product line for the years 1999 through
2001. Revenue was expected to be $350 million for the 1999 calendar year.
Thereafter, NSMG is expected to grow slightly greater than the 43.3% industry
average through 2003. The revenue by product was allocated between existing,
in-process, and future technology; indicating a four-year life cycle for
revenue contribution from technology which is consistent with NSMG's historical
experience with technology life cycles.
VERITAS is an open systems supplier. The market for open systems suppliers
grew 101.2% between 1996 and 1997.
Revenue for VERITAS was forecasted by product line for the years 1999
through 2001. Revenue was expected to be $270 million for the 1999 calendar
year. Thereafter, VERITAS is expected to grow at 67.9%
and 58.4% for years 2000 and 2001, respectively, a rate greater than the 43.3%
industry average. For years 2002 through 2005, revenues are expected to level
off at a 40% growth rate. The revenue by product was allocated between
existing, in-process, and future technology indicating a four-year life cycle
(revenue contribution from technology) for Windows NT based products and a
three-year life cycle for Unix based products which is consistent with VERITAS'
past experience with technology life cycles.
Operating expenses
Estimated operating expenses used in the valuation analysis of NSMG and
VERITAS included (i) cost of goods sold, (ii) general and administrative
expense, (iii) sales and marketing expense, and (iv) research and development
expense. In developing future expense estimates, an evaluation of both NSMG and
VERITAS's overall business models, specific product results, including both
historical and expected direct expense levels (as appropriate), and an
assessment of general industry metrics was conducted.
Cost of goods sold. Cost of goods sold, for the developed and in-process
technologies was estimated to be approximately 8.6% of revenues from 2000 to
2006 for NSMG. Cost of goods sold, for the developed and in-process
technologies was estimated to be approximately 14.7% of revenues from 2000 to
2005 for VERITAS.
General and administrative ("G&A") expense. G&A expense, expressed as a
percentage of revenue, for the developed and in-process technologies was 9.2%
in 1999 and expected to be reduced to 6.7% by 2002 for NSMG. G&A expense for
VERITAS, expressed as a percentage of revenue, for the developed and in-process
technologies was held constant at 4.4% of revenues for the forecast period of
2000 to 2005.
F-59
<PAGE>
SEAGATE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Selling and marketing ("S&M") expense. S&M expense, expressed as a
percentage of revenue, for the developed and in-process technologies was
estimated to be 37.4% for years 2000 to 2006 related to NSMG. S&M expense for
VERITAS, expressed as a percentage of revenue, for the developed and in-process
technologies was estimated to be 34.7% for years 2000 to 2005.
Research and development ("R&D") expense. R&D expense consists of the costs
associated with activities undertaken to correct errors or keep products
updated with current information (also referred to as "maintenance" R&D).
Maintenance R&D includes all activities undertaken after a product is available
for general release to customers to correct errors or keep the product updated
with current information. These activities include routine changes and
additions. The maintenance R&D expense was estimated to be 2% of revenue for
the developed and in-process technologies for the years 2000 to 2006 for NSMG.
R&D expense for VERITAS was estimated as 18.2% of revenue in 1999 and was
reduced to 16% by 2002, continuing at that rate until 2005.
As of the date of the contribution of NSMG to New VERITAS, the estimated
costs to complete the in-process research and development projects at VERITAS
(including NSMG) was approximately $50 million.
Effective tax rate
The effective tax rate utilized in the analysis of developed and in-process
technologies was 33%, which reflects VERITAS's combined effective federal and
state statutory income tax rates, exclusive of non-recurring charges at the
time of the contribution and estimated for future years.
Discount rate
The discount rates selected for Seagate Software's developed and in-process
technologies were 12% and 17%, respectively. In the selection of the
appropriate discount rates, consideration was given to (i) the
Weighted Average Rate of Return (the "WARR", approximately 14% at the date of
contribution) and (ii) the Weighted Average Return on Assets (approximately 18%
at the date of contribution) that investors expect for companies with similar
anticipated growth rates and other characteristics as the NSMG and VERITAS
businesses. The discount rate utilized for the in-process research and
development was determined to be higher than the WARR due to the fact that the
technology had not yet reached technological feasibility as of the date of
valuation. In utilizing a discount rate greater than the WARR, management has
reflected the risk premium associated with achieving the forecasted cash flows
associated with these projects. The discount rate was adjusted downward from
the WARR for the developed technologies to reflect less technological and
market risk associated with forecasted sales of the existing products.
Pro forma financial information
The pro forma financial information presented below is presented as if the
contribution of NSMG to VERITAS and the purchase of Seagate Software minority
interest by Seagate Technology had occurred at the beginning of fiscal 1998.
The pro forma statements of operations for the twelve months ended July 2, 1999
and July 3, 1998, include the historical results of Seagate Software less the
historic results of the NSMG business, plus Seagate Software's equity interest
in the pro forma results of VERITAS, including recurring amortization of
related goodwill and intangibles plus recurring amortization of goodwill and
intangibles associated with the purchase of shares of Seagate Software stock by
Seagate Technology. Non-recurring transactions, such as the gain on the NSMG
contribution to VERITAS, compensation expense relating to the acquisition of
stock held less
F-60
<PAGE>
SEAGATE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
than six months by employees of Seagate Software, transaction costs and the
write-off of in-process research and development are excluded from the pro
forma presentation. The pro forma financial results are as follows:
<TABLE>
<CAPTION>
For the twelve months ended
---------------------------
In thousands, except per share data July 2, 1999 July 3, 1998
- ----------------------------------- ------------- -------------
<S> <C> <C>
Revenues...................................... $ 141,168 $ 118,180
Loss before income taxes...................... (402,869) (416,443)
Net loss...................................... (271,589) (268,060)
Net loss per share--basic and diluted......... $ (81.01) $ (79.96)
</TABLE>
Acquisition of Eastman Software Storage Management Group, Inc.
In June 1998, Seagate Software acquired all of the outstanding capital stock
of Eastman Software Storage Management Group, Inc. ("Eastman"), a company
engaged in developing, producing and marketing hierarchical storage management
products for the Windows NT platform. The purchase price of approximately
$10,000,000 was paid in cash. Approximately $6,800,000 of the total purchase
price represented the value of in-process technology that had not yet reached
technological feasibility, had no alternative future uses and was charged to
Seagate Software's operations in the quarter ended July 2, 1999. Seagate
Software accounted for the acquisition using the purchase method, and the
results of operations of Eastman are only included in Seagate Software's
operations since the date the acquisition was completed. Pro forma financial
information is not presented as such amounts are not material. The following is
a summary of the purchase price allocation, in thousands:
<TABLE>
<S> <C>
Current assets and other tangible assets........................ $ 535
Liabilities assumed............................................. (508)
Assembled workforce............................................. 340
Developed technology............................................ 500
In-process research and development............................. 6,800
Microsoft agreement............................................. 1,500
Goodwill........................................................ 833
-------
$10,000
=======
</TABLE>
Overview
Eastman's two primary products were OPEN/stor for Windows NT and AvailHSM
for NetWare. By integrating Eastman's product line, NSMG planned to convert
Eastman's Storage Migrator product into a stand-alone HSM application for
Windows NT environments. As of the date of acquisition, Seagate Software
determined that it would abandon the AvailHSM product and technology due to
dated features and functionality; and accordingly, the valuation analysis did
not include a fair value for the AvailHSM product.
As for OPEN/stor at the date of acquisition, NSMG planned to phase out the
product over the following 12 to 15 months. NSMG's purpose for the acquisition
was for the next generation technologies that were underway at Eastman,
referenced by project names Sakkara and Phoenix. These projects were complete
re-writes of Eastman's prior generation technology that would allow the product
to be sold stand-alone upon completion.
In accordance with SFAS 86, paragraph 38 ("Accounting for the Costs of
Computer Software to be Sold, Leased, or Otherwise Marketed"), "the cost of
software purchased to be integrated with another product or process will be
capitalized only if technological feasibility was established for the software
component and if
F-61
<PAGE>
SEAGATE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
all research and development activities for the other components of the product
or process were completed at the time of the purchase." Although Seagate
Software purchased existing products from Eastman, the existing products did
not operate on a stand-alone basis. Therefore, as mentioned above, all of the
original underlying code and base technology for the next generation products
were in the process of being completely re-written as date of acquisition.
Assumptions
Revenue
Future revenue estimates were generated for the following technologies: (i)
OPEN/stor, (ii) Sakkara, and (iii) Phoenix. Aggregate revenue for existing
Eastman products was estimated to be approximately $167,000 for the one month
ending June 30, 1998. Revenues were estimated to increase to approximately $3.9
million and $7.1 million for fiscal years 1999 and 2000 when most of the in-
process projects were expected to be complete and shipping. Thereafter, revenue
was estimated to increase at rates ranging from 20% to 30% for fiscal years
2001 through 2006. Revenue estimates were based on (i) aggregate revenue growth
rates for the business as a whole, (ii) individual product revenues, (iii)
growth rates for the storage management software market, (iv) the aggregate
size of the storage management software market, (v) anticipated product
development and introduction schedules, (vi) product sales cycles, and (vii)
the estimated life of a product's underlying technology.
Operating expenses
Operating expenses used in the valuation analysis of Eastman included (i)
cost of goods sold, (ii) general and administrative expense, (iii) selling and
marketing expense, and (iv) research and development expense. In developing
future expense estimates, an evaluation of both Seagate and Eastman's overall
business model, specific product results, including both historical and
expected direct expense levels (as appropriate), and an assessment of general
industry metrics was conducted.
Cost of goods sold. Cost of goods sold, expressed as a percentage of
revenue, for the developed and in-process technologies was estimated to be
approximately 5% throughout the estimation period. Seagate Software's cost of
goods sold was 20% for fiscal 1996 and 22% for fiscal 1997.
General and administrative ("G&A") expense. G&A expense, expressed as a
percentage of revenue, for the developed and in-process technologies was
estimated to be approximately 10% throughout the estimation period.
Selling and marketing ("S&M") expense. S&M expense, expressed as a
percentage of revenue, for the developed and in-process technologies was
estimated to be 27% throughout the estimation period.
Research and development ("R&D") expense. R&D expense consists of the costs
associated with activities undertaken to correct errors or keep products
updated with current information (also referred to as "maintenance" R&D).
Maintenance R&D includes all activities undertaken after a product is available
for general release to customers to correct errors or keep the product updated
with current information. These activities include routine changes and
additions. The maintenance R&D expense was estimated to be 5% of revenue for
the developed and in-process technologies throughout the estimation period.
In addition, as of the date of acquisition, Seagate Software's management
anticipated the costs to complete the in-process research and development at
approximately $1.8 million.
F-62
<PAGE>
SEAGATE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Effective tax rate
The effective tax rate utilized in the analysis of developed and in-process
research and development was 38%, which reflects Seagate's combined federal and
state statutory income tax rates, exclusive of non-recurring charges at the
time of the acquisition and estimated for future years.
Discount rate
The discount rates selected for Eastman's developed and in-process
technologies were 15% and 20%, respectively. In the selection of the
appropriate discount rates, consideration was given to (i) the Weighted Average
Cost of Capital (the "WACC", approximately 15% at the date of acquisition) and
(ii) the Weighted Average Return on Assets (approximately 18% at the date of
acquisition). The discount rate utilized for the in-process technology was
determined to be higher than Seagate's WACC due to the fact that the technology
had not yet reached technological feasibility as of the date of valuation. In
utilizing a discount rate greater than Seagate's WACC, management has reflected
the risk premium associated with achieving the forecasted cash flows associated
with these projects.
Stockholders' Equity
Seagate Software's authorized capital stock consists of 300,000,000 shares
of common stock and 73,000,000 shares of preferred stock, 54,633,333 of which
have been designated as Series A preferred stock and 18,366,667 of which remain
undesignated.
Preferred Stock. The Series A preferred have the following rights,
preferences and privileges:
Conversion. The holders of the Series A preferred stock have the right to
convert the Series A preferred stock at any time into common stock. The Series
A preferred stock will be automatically converted into common stock, at the
then-effective conversion price, upon the closing of a firm commitment
underwritten public offering pursuant to an effective registration statement
under the Securities Act of 1933, as amended. The initial conversion rate will
be one share of preferred stock for each share of common stock. The conversion
price of the Series A preferred stock will be subject to adjustment to reduce
the effect of dilution in the event that Seagate Software issues additional
shares of common stock or equivalents.
Voting. Each share of Series A preferred stock entitles the holder to one
vote for each share of common stock into which such share could then be
converted. Except as required by law, the holders of shares of Series A
preferred stock and the holders of shares of common stock shall vote together
as one class on all matters submitted to a vote of stockholders of Seagate
Software.
Dividend Preference. The holders of shares of Series A preferred stock shall
be entitled to receive, when, as and if declared by the Board of Directors out
of funds legally available for the purpose, an annual cash dividend in the
amount of $0.45 per share (as adjusted to reflect any stock split, stock
dividend, combination, recapitalization and the like (collectively a
"Recapitalization") with respect to the Series A preferred stock), prior and in
preference to any declaration or payment of any dividend (payable other than in
common stock) on the common stock of Seagate Software. Such dividends shall not
be cumulative, and no right shall accrue to holders of Series A preferred stock
by reason of the fact that dividends on such shares are not declared or paid in
any year. In the event any dividend shall be paid to the holders of common
stock such dividend shall be distributed among the holders of the common stock
and the Series A preferred stock in proportion to the shares of common stock
then held by them and the shares of common stock which they then have the right
to acquire upon the conversion of the Series A preferred stock held by them.
F-63
<PAGE>
SEAGATE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Liquidation Preference. In the event of any liquidation, dissolution or
winding up of Seagate Software or other reorganization, a distribution of $7.50
per share, as adjusted to reflect any Recapitalization of Series A preferred
stock, plus all accrued or declared but unpaid dividends, if any, shall be made
to the holders of Series A preferred stock before any amount shall be paid to
the holders of common stock.
Dividends. No dividends have been declared, or paid, to date by Seagate
Software on any of the outstanding common stock or preferred stock.
Stock Option Plans. The Option Plan provides for the issuance of either
incentive or nonstatutory stock options to employees and consultants of Seagate
Software. Seagate Software has reserved a total of 16,600,000 shares under the
Plan. Options granted under Seagate Software's Plan are granted at fair market
value, expire ten years from the date of the grant and vest equally over 48
months. Following is a summary of stock option activity from the inception of
the plan through the year ended July 2, 1999:
<TABLE>
<CAPTION>
Options Outstanding
----------------------------
Number of Weighted Average
Shares Exercise Price
---------- ----------------
<S> <C> <C>
Balance at June 28, 1996...................... 3,231,112 4.00
Granted..................................... 2,851,255 5.42
Exercised................................... (20,855) 4.00
Canceled.................................... (973,733) 4.36
----------
Balance at June 27, 1997...................... 5,087,779 4.73
Granted..................................... 8,039,707 9.04
Exercised................................... (892,212) 5.13
Canceled.................................... (1,299,143) 5.27
----------
Balance at July 3, 1998....................... 10,936,131 7.81
Granted..................................... 1,875,202 30.30
Exercised................................... (2,381,983) 6.69
Canceled.................................... (6,619,171) 10.10
----------
Balance at July 2, 1999....................... 3,810,179 15.63
==========
</TABLE>
F-64
<PAGE>
SEAGATE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Options available for grant were 9,494,771, 750,802 and 7,491,366 at the end
of fiscal 1999, 1998 and 1997, respectively. During 1999 the Board of Directors
and stockholders of Seagate Software approved a 4,000,000 refreshment of
options available for grant increasing the plan total to 16,600,000 from
12,600,000. The following table summarizes information about options
outstanding at July 2, 1999.
<TABLE>
<CAPTION>
Exercisable
Options Outstanding Options
---------------------------------- ----------------
Weighted
Average Weighted Weighted
Remaining Average Number Average
Number of Contractual Exercise of Exercise
Exercise Prices Shares Life (in years) Price Shares Price
- --------------- --------- --------------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
$ 4.00...................... 256,003 7.0 $ 4.00 53,051 $ 4.00
$ 6.00...................... 1,017,003 8.0 6.00 136,811 6.00
$ 7.50--8.75................ 417,239 8.5 8.42 40,113 8.43
$ 9.00--11.00............... 250,871 8.8 9.62 20,359 9.62
$ 12.75..................... 999,958 9.0 12.75 86,670 12.75
$ 13.25--26.25.............. 195,469 9.2 16.99 16,048 16.90
$ 32.00..................... 42,733 9.5 32.00 3,665 32.00
$ 42.00..................... 370,625 9.8 42.00 28,868 42.00
$ 47.00..................... 47,050 9.9 47.00 1,143 47.00
$ 53.03..................... 213,228 9.9 53.03 19,024 53.03
--------- -------
Total..................... 3,810,179 8.7 15.63 405,752 13.15
========= =======
</TABLE>
Pro Forma Information. In October 1995, the Financial Accounting Standards
Board released Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" ("SFAS 123"). SFAS 123 provides an alternative to
Accounting Principles Board Opinion 25, "Accounting for Stock Issued to
Employees" ("APBO 25") and requires additional disclosures. Seagate Software
has elected to follow APBO 25 in accounting for stock options granted. Under
APBO 25, Seagate Software generally recognized no compensation expense with
respect to such options.
Pro forma information regarding net income and earnings per share is
required by SFAS 123 for stock options granted after June 30, 1995 as if
Seagate Software had accounted for its stock options under the fair value
method of SFAS 123. The fair value of Seagate Software's stock options was
estimated using a Black-Scholes option valuation model. The Black-Scholes
option valuation model was developed for use in estimating the fair value of
traded options that have no vesting restrictions and are fully transferable. In
addition, the Black-Scholes model requires the input of highly subjective
assumptions, including the expected stock price volatility. Because Seagate
Software's stock options granted to employees have characteristics
significantly different from those of exchange-traded options (and are not
fully transferable) and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the Black-
Scholes model does not necessarily provide a reliable single measure of the
fair value of its stock options granted to employees. The fair value of Seagate
Software's stock options granted to employees was estimated assuming no
expected dividends and the following weighted average assumptions:
<TABLE>
<CAPTION>
Seagate Seagate
Software Technology
Incentive Employee Stock
Stock Option Purchase
Plan Shares Plan Shares
---------------- ----------------
1999 1998 1997 1999 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Expected life (in years)................. 3.31 3.67 3.65 .50 .56 .50
Risk-free interest rate.................. 5.2 % 5.7 % 6.2 % 4.6 % 5.5 % 5.4 %
Volatility............................... .68 .55 .55 .80 .63 .46
</TABLE>
F-65
<PAGE>
SEAGATE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The weighted average exercise price and weighted average fair value of stock
options granted in 1999 under Seagate Software's Plan were $30.30 and $19.31
per share, respectively. The weighted average purchase price and weighted
average fair value of shares granted in 1999 under the Seagate Technology
Employee Stock Purchase Plan (the "Purchase Plan") were $22.72 and $10.18,
respectively.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized over the options' vesting period (for stock options) and
over the six-month purchase period for stock purchases under the Purchase Plan.
Seagate Software's pro forma information follows, in thousands:
<TABLE>
<CAPTION>
1999 1998 1997
--------- -------- --------
<S> <C> <C> <C>
Net income (loss)............................. $ 926,520 $(16,496) $(57,831)
Net income (loss) per common share............ $1,680.91 $(100.24) $(854.05)
</TABLE>
The effects on pro forma disclosures of applying SFAS 123 are not likely to
be representative of the effects on pro forma disclosures of future years.
Because SFAS 123 is applicable only to options granted subsequent to June 30,
1995, and Seagate Software did not commence granting stock options for the
purchase of Seagate Software common stock until June 1996, the pro forma effect
will not be fully reflected until 2000.
Income Taxes
Seagate Software is included in the consolidated federal and certain
combined and consolidated foreign and state income tax returns of Seagate
Technology. Seagate Technology and Seagate Software have entered into a tax
sharing agreement (the "Tax Allocation Agreement") pursuant to which Seagate
Software computes hypothetical tax returns (with certain modifications) as if
Seagate Software was not included in consolidated or combined returns with
Seagate Technology. Seagate Software must pay Seagate Technology the positive
amount of any such hypothetical taxes. If the hypothetical tax returns show
entitlement to refunds, including any refunds attributable to a carryback, then
Seagate Technology will pay Seagate Software the amount of such refunds. At the
end of 1999 and 1997, there were no intercompany tax related balances due to or
from Seagate Software to Seagate Technology. At the end of 1998, $8,500,000 in
intercompany tax related balances was owed from Seagate Software to Seagate
Technology.
The benefit from (provision for) income taxes consisted of the following, in
thousands:
<TABLE>
<CAPTION>
1999 1998 1997
--------- -------- -------
<S> <C> <C> <C>
Current Tax Expense
Federal...................................... $ (16,889) $ (9,444) $ 5,007
State........................................ (2,374) (1,575) 384
Foreign...................................... (9,169) (8,908) (4,182)
--------- -------- -------
Total Current Tax Expense...................... (28,432) (19,927) 1,209
--------- -------- -------
Deferred Tax Expense
Federal...................................... (547,169) 3,831 6,330
State........................................ (66,319) 711 1,175
--------- -------- -------
Total Deferred Tax Expense..................... (613,488) 4,542 7,505
--------- -------- -------
Benefit from (Provision for) Income Taxes...... $(641,920) $(15,385) $ 8,714
========= ======== =======
</TABLE>
The benefit from (provision for) income taxes has been computed on a
separate return basis (with certain modifications), except that pursuant to the
Tax Allocation Agreement, the tax benefits of certain of the Company's 1998 and
1997 tax losses and credits were recognized in the year such losses and credits
were utilized by Seagate Technology in its tax returns. In 1999, Seagate
Software did not recognize the benefit of certain tax credits because they were
not expected to be utilized by Seagate Technology in its tax returns.
F-66
<PAGE>
SEAGATE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The pro forma information assuming a tax provision based on a separate
return basis is as follows:
<TABLE>
<CAPTION>
Year Ended
July 2,
1999
----------
<S> <C>
Income before provision for income taxes......................... $1,580,910
Provision for income taxes....................................... (631,589)
----------
Net Income....................................................... $ 949,321
==========
</TABLE>
The income tax benefits related to the exercise of employee stock options
reduced amounts due to or increased amounts due from Seagate Technology
pursuant to the Tax Allocation Agreement and were credited to additional paid-
in capital. Such amounts approximated $1,389,000, $770,000 and $3,486,000 in
1999, 1998, and 1997, respectively.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The significant
components of Seagate Software's deferred tax assets and liabilities were as
follows, in thousands:
<TABLE>
<CAPTION>
1999 1998
--------- --------
<S> <C> <C>
Deferred Tax Assets
Receivable reserves....... $ 1,231 $ 1,951
Accrued warranty.......... 7 244
Inventory valuation
accounts................. 69 504
Accrued compensation and
benefits................. 655 1,329
Depreciation.............. (18) (986)
Accrued expenses not
currently deductible..... 915 2,532
Acquisition related
items.................... 37,377 36,264
Domestic and foreign net
operating loss
carryforwards............ 734 13,116
Tax credit carryforwards.. 7,602 8,686
Other..................... 84 2,164
--------- --------
Total Deferred Tax
Assets................. 48,656 65,804
Valuation allowance....... (48,656) (65,804)
--------- --------
Net Deferred Tax
Assets................. -- --
--------- --------
Deferred gain on VERITAS.. (614,690) --
Acquisition related
items.................... (2,653) (1,691)
--------- --------
Total Deferred Tax
Liabilities............ (617,343) (1,691)
--------- --------
Net Deferred Tax
Liabilities.............. $(617,343) (1,691)
========= ========
</TABLE>
Deferred Tax Liabilities
A valuation allowance has been provided for the deferred tax assets as of
the end of 1999 and 1998. Realization of the deferred tax assets is dependent
on future earnings, the timing and amount of which are uncertain. In addition,
the net operating loss and tax credit carryforwards of acquired subsidiaries
are subject to further limitations on utilization due to the "change in
ownership" provisions of Internal Revenue Code Section 382 and the "separate
return limitation year" rules of the federal consolidated return regulations.
Approximately $8,213,000 of the valuation allowance in 1998 is attributable to
deferred tax assets that when realized, will reduce unamortized goodwill or
other intangible assets of the acquired subsidiaries. The valuation allowance
decreased by $17,148,000 in 1999 primarily due to the transfer of the valuation
reserve associated
F-67
<PAGE>
SEAGATE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
with the NSMG business' deferred tax assets to VERITAS during 1999. The
valuation allowance increased by $7,927,000 and $11,946,000 in 1998 and 1997,
respectively.
As of July 2, 1999, Seagate Software had domestic and foreign net operating
loss carryforwards of approximately $734,000 expiring in 2003 through 2014 if
not used to offset future taxable income. In addition, Seagate Software, as of
July 2, 1999, had foreign tax credit carryforwards of $7,602,000, expiring in
2003 and 2004, if not used to offset future tax liabilities.
The reconciliation between the benefit from (provision for) income taxes at
the U.S. statutory rate and the effective rate are summarized as follows, in
thousands:
<TABLE>
<CAPTION>
1999 1998 1997
--------- -------- -------
<S> <C> <C> <C>
Benefit (provision) at U.S. statutory rate...... $(553,505) $ (2,413) $23,245
State income tax benefit/(provision), net....... (66,610) (393) 382
Foreign taxes in excess of the U.S. statutory
rate........................................... (1,020) (2,084) (255)
Write-off of in-process research and
development.................................... (823) -- --
Goodwill and other acquisition related items.... 7,054 (2,621) (5,666)
Valuation allowance............................. (16,652) (7,927) (8,871)
Other individually immaterial items............. (10,364) 53 (121)
--------- -------- -------
Benefit from (provision for) income taxes....... $(641,920) $(15,385) $ 8,714
========= ======== =======
</TABLE>
Cumulative undistributed earnings of certain foreign operations of Seagate
Software, in the amount of $11,055,000, are considered to be permanently
invested in non-US operations. No income tax has been provided on these
amounts. Additional state and federal taxes that would have to be provided if
these earnings were repatriated to the U.S. cannot be determined at this time.
Restructuring Costs
In fiscal 1997, Seagate Software recorded a restructuring charge of $2.5
million. These charges represented a $3.4 million restructuring charge that
included the closure of the NSMG business' facility located in Cupertino,
California as well as the closure of operations related to the 1996 acquisition
of Calypso Software. These decisions resulted in cash charges of $770,000 for
severances and benefits and non-cash charges of $505,000 for excess facilities,
$2,106,000 for write-downs and write-offs of equipment and intangibles and
$100,000 for contract cancellations and other.
The restructuring charges recorded in 1997 were reduced by $957,000 for the
reversal of amounts pertaining to the fiscal 1996 restructuring charges. At the
end of 1998, approximately $1.2 million of the restructuring charges remained.
Upon contribution of the Network & Storage Management Group to VERITAS, the
remaining portion of the restructuring charges were eliminated.
Lines of Credit
In addition to the Revolving Loan Agreement with Seagate Technology, certain
foreign subsidiaries have line of credit facilities with third party financial
institutions. These line of credit facilities provide for additional borrowings
of up to an equivalent of approximately $794,000 at July 2, 1999. Interest
rates payable on borrowings are based on local bank prime interest rates. At
July 2, 1999, there were no outstanding borrowings under any of these lines of
credit.
F-68
<PAGE>
SEAGATE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Business Segment and Geographic Information
Seagate Software adopted Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
(SFAS No. 131), in fiscal 1999. SFAS No. 131 establishes standards for
reporting information about operating segments.
Seagate Software's ongoing IMG business operates in a single industry
segment, enterprise information management. Seagate Software's products and
services are sold throughout the world, through direct, OEM, reseller and
distributor channels. Within the segment, the chief operating decision maker,
the chief executive
officer, evaluates the performance of the business based upon stand-alone
revenue from product channels, revenue by geographic regions, and revenues by
product. The chief executive officer does not receive discrete financial
information about asset allocation, expense allocation or profitability from
the business products or maintenance, support and other services.
Prior to the contribution of NSMG to VERITAS in May 1999, NSMG operated in
the storage management solutions business. The VERITAS investment and the
Minority interest are provided in the table below in order to reconcile segment
information to the consolidated total amounts.
Operating segment information (in thousands):
<TABLE>
<CAPTION>
VERITAS investment/
For fiscal 1999 IMG NSMG Minority interest Total
- --------------- -------- -------- ------------------- ----------
<S> <C> <C> <C> <C>
Total revenues............ $141,168 $202,305 $ -- $ 343,473
Interest (expense)........ (128) (74) -- (202)
Depreciation and
amortization............. 14,691 19,939 1,084 35,714
Gain on contribution of
NSMG to VERITAS, net..... -- -- 1,670,301 1,607,301
Activity related to equity
to interest in VERITAS... -- -- (118,888) (118,888)
Benefit from/(provision
for) income taxes........ (15,138) (28,733) (598,049) (641,920)
Total assets.............. 77,827 -- 1,805,713 1,883,540
</TABLE>
<TABLE>
<CAPTION>
For fiscal 1998 IMG NSMG Total
- --------------- -------- -------- --------
<S> <C> <C> <C>
Total revenues.................................... $118,180 $175,046 $293,226
Interest (expense)................................ (253) (768) (1,021)
Depreciation and amortization..................... 11,914 28,018 39,932
Benefit from/(provision for) income taxes......... (9,524) (5,861) (15,385)
Total assets...................................... 64,276 74,721 138,997
<CAPTION>
For fiscal 1997 IMG NSMG Total
- --------------- -------- -------- --------
<S> <C> <C> <C>
Total revenues.................................... $ 75,448 $141,502 $216,950
Interest income/(expense)......................... 45 (2,733) (2,688)
Depreciation and amortization..................... 8,739 32,642 41,381
Benefit from/(provision for) income taxes......... (1,872) 10,586 8,714
Total assets...................................... 49,507 94,087 143,594
</TABLE>
F-69
<PAGE>
SEAGATE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Product and services revenue (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
---------- -------- --------
<S> <C> <C> <C>
Information Management Group --
Licensing revenues................................ $ 90,803 $ 83,093 $ 52,895
Licensing revenues from Seagate Technology........ 239 421 842
Maintenance, support and other.................... 50,126 34,666 21,711
---------- -------- --------
Subtotal......................................... 141,168 118,180 75,448
Network & Storage Management Group --
Licensing revenues................................ $ 183,628 $160,192 $130,661
Licensing revenues from Seagate Technology........ 7,499 5,048 4,920
Maintenance, support and other.................... 11,178 9,806 5,921
---------- -------- --------
Subtotal......................................... 202,305 175,046 141,502
---------- -------- --------
Total revenues..................................... $ 343,473 $293,226 $216,950
========== ======== ========
Geographic revenues (in thousands): (1)
<CAPTION>
1999 1998 1997
---------- -------- --------
<S> <C> <C> <C>
Information Management Group --
United States..................................... $ 87,573 $ 79,708 $ 48,602
Europe............................................ 38,761 26,186 17,574
Japan............................................. 2,299 1,642 1,364
Other (3)......................................... 12,535 10,644 7,908
---------- -------- --------
Subtotal......................................... 141,168 118,180 75,448
<CAPTION>
1999 1998 1997
---------- -------- --------
<S> <C> <C> <C>
Network & Storage Management Group --
United States..................................... $ 131,103 $115,269 $ 89,638
Europe............................................ 56,797 49,667 34,182
Japan............................................. 8,522 3,851 1,449
Other (3)......................................... 5,883 6,259 16,233
---------- -------- --------
Subtotal......................................... 202,305 175,046 141,052
---------- -------- --------
Total revenues..................................... $ 343,469 $293,226 $216,950
========== ======== ========
Long-lived assets (in thousands): (2)
<CAPTION>
1999 1998
---------- --------
<S> <C> <C> <C>
United States..................................... $1,797,936 $ 53,163
Canada............................................ 4,783 3,944
Europe............................................ 879 15,912
Japan............................................. 203 504
Other (3)......................................... 171 189
---------- --------
Total long-lived assets.......................... 1,803,972 73,712
========== ========
</TABLE>
- --------
(1) Revenues are attributed to geographic regions based on the location of
customers.
(2) Long-lived assets are primarily comprised of property and equipment,
purchased intangible assets and equity investments.
(3) It is not practical to present long-lived asset information for 1997.
F-70
<PAGE>
SEAGATE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In 1999, 1998, and 1997, Ingram accounted for more than 10% of consolidated
revenues for a total of $76.0 million, $64.3 million, and $38.2 million,
respectively.
Commitments
Leases. Seagate Software leases certain property, facilities and equipment
under non-cancelable lease agreements. Facility leases expire at various dates
through 2006 and contain various provisions for rental adjustments. The leases
require Seagate Software to pay property taxes, insurance and normal
maintenance
costs. Seagate Software also occupies certain facilities owned by Seagate
Technology. Future minimum payments for operating leases were as follows at
July 2, 1999, in thousands:
<TABLE>
<CAPTION>
Operating
Leases
---------
<S> <C>
2000............................................................. $ 4,363
2001............................................................. 3,570
2002............................................................. 2,865
2003............................................................. 2,282
2004............................................................. 1,724
After 2004....................................................... 1,039
-------
$15,843
=======
</TABLE>
Total rent expense for all facility and equipment operating leases was
approximately $12,004,000, $8,023,000 and $5,292,000 for 1999, 1998 and 1997,
respectively.
Non-cancelable Capital Obligations. As of July 2, 1999, there were no
outstanding non-cancelable capital obligations.
Legal Proceedings
On November 10, 1997, Vedatech Corporation commenced an action in the High
Court of Justice Chancery Division in the United Kingdom against Seagate
Software Information Management Group Ltd. claiming breach of an oral agreement
and infringement of a Vedatech U.K. copyright in the Japanese translation of
one of the Company's products (the "Complaint") and seeking monetary and
injunctive relief. No specific damage amount has yet been claimed. The Company
has hired local counsel in the U.K., reviewed documents and conducted
interviews. The Company filed an initial response in the U.K. court on January
13, 1998 and is now in the discovery process. The Company believes the
Complaint has no merit and intends to vigorously defend the action. However, if
an unfavorable outcome were to arise, there can be no assurance that such
outcome would not have a material adverse effect on the Company's liquidity,
financial position or results of operations.
In addition to the foregoing, Seagate Software is engaged in legal actions
arising in the ordinary course of its business and believes that the ultimate
outcome of these actions will not have a material adverse effect on the
Company's financial position, liquidity, or results of operations.
Subsequent Events (unaudited)
Pursuant to a registration statement declared effective by the Securities
and Exchange Commission on August 9, 1999, Seagate Software sold an aggregate
of 8,232,667 shares of VERITAS common stock for proceeds of $396.8 million, net
of underwriting discounts and commissions and before expenses. Seagate
F-71
<PAGE>
SEAGATE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Software acquired such shares in connection with the contribution of the
Network & Storage Management Group business to VERITAS. Seagate Software
estimates that it will record a gain on the sale of approximately $193 million.
The underwriters have an option to acquire an additional 909,833 shares of
VERITAS common stock to cover over-allotments from Seagate Software prior to
September 8, 1999 at a per share price of $48.1925 (net of underwriting
discounts and commissions). In connection with the sale of the VERITAS shares,
Seagate Software agreed that it would not sell or otherwise dispose of any
additional shares of VERITAS common stock prior to November 7, 1999. Certain
exceptions to this limitation apply, including transfers to affiliated entities
and the sale of the remaining over-allotment option noted above.
F-72
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Seagate Software, Inc.
We have audited the accompanying consolidated balance sheets of Seagate
Software, Inc. as of July 2, 1999 and July 3, 1998, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended July 2, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Seagate
Software, Inc. at July 2, 1999 and July 3, 1998, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended July 2, 1999, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
San Jose, California
July 23, 1999
F-73
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
SEAGATE TECHNOLOGY, INC.,
SEAGATE DAYLIGHT MERGER CORP.
AND
SEAGATE SOFTWARE, INC.
Dated as of September 2, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
ARTICLE I THE MERGER...................................................... A-1
1.1 The Merger ...................................................... A-1
1.2 Effective Time of the Merger..................................... A-1
1.3 Tax Free Reorganization; Accounting.............................. A-2
ARTICLE II EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE CONSTITUENT
CORPORATIONS; EXCHANGE OF CERTIFICATES................................... A-2
2.1 Effect on Capital Stock.......................................... A-2
2.2 Exchange of Certificates......................................... A-4
2.3 Taking of Necessary Action; Further Action....................... A-5
ARTICLE III REPRESENTATIONS AND WARRANTIES OF SEAGATE SOFTWARE............ A-5
3.1 Organization and Qualification; Subsidiaries..................... A-5
3.2 Certificate of Incorporation and Bylaws.......................... A-6
3.3 Capitalization................................................... A-6
3.4 Authority Relative to this Agreement............................. A-6
3.5 No Conflict; Required Filings and Consents....................... A-7
3.6 SEC Filings; Financial Statements................................ A-7
3.7 Registration Statement; Proxy Statement.......................... A-8
3.8 Board Approval................................................... A-8
3.9 Vote Required.................................................... A-8
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF SEAGATE TECHNOLOGY AND SUB... A-9
4.1 Organization and Qualification; Subsidiaries..................... A-9
4.2 Certificate of Incorporation and Bylaws.......................... A-9
4.3 Capitalization................................................... A-9
4.4 Authority Relative to this Agreement............................. A-10
4.5 No Conflict; Required Filings and Consents....................... A-10
4.6 SEC Filings; Financial Statements................................ A-11
4.7 Registration Statement; Proxy Statement.......................... A-11
4.8 Board Approval................................................... A-11
4.9 Vote Required.................................................... A-11
4.10 Interim Operations of Sub........................................ A-12
ARTICLE V CONDUCT AND TRANSACTIONS PRIOR TO EFFECTIVE TIME; ADDITIONAL
AGREEMENTS............................................................... A-12
5.1 Information and Access........................................... A-12
5.2 Preparation of S-4 and the Proxy Statement; Other Filings........ A-12
5.3 Advice of Changes; SEC Filings................................... A-13
5.4 Shareholders Meetings............................................ A-13
5.5 Agreements to Take Reasonable Action............................. A-13
5.6 Consents......................................................... A-14
5.7 NYSE Additional Shares Listing................................... A-14
5.8 Affiliates....................................................... A-14
5.9 Seagate Software Options......................................... A-14
5.10 Indemnification and Insurance.................................... A-14
5.11 Tax-Free Reorganization.......................................... A-15
</TABLE>
A-i
<PAGE>
TABLE OF CONTENTS--(Continued)
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
ARTICLE VI CONDITIONS PRECEDENT.......................................... A-15
6.1 Conditions to Each Party's Obligation to Effect the Merger...... A-15
6.2 Conditions of Obligations of Seagate Technology and Sub......... A-16
6.3 Conditions of Obligation of Seagate Software.................... A-16
ARTICLE VII TERMINATION.................................................. A-17
7.1 Termination..................................................... A-17
7.2 Effect of Termination........................................... A-17
7.3 Fees and Expenses............................................... A-17
ARTICLE VIII GENERAL PROVISIONS.......................................... A-17
8.1 Amendment....................................................... A-17
8.2 Extension; Waiver............................................... A-18
8.3 Nonsurvival of Representations, Warranties and Agreements....... A-18
8.4 Entire Agreement................................................ A-18
8.5 Severability.................................................... A-18
8.6 Notices......................................................... A-18
8.7 Headings........................................................ A-19
8.8 Counterparts.................................................... A-19
8.9 Benefits; Assignment............................................ A-19
8.10 Governing Law................................................... A-19
</TABLE>
A-ii
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is dated as of
August , 1999, by and among Seagate Technology, Inc., a Delaware corporation
("Seagate Technology"), Seagate Daylight Merger Corp., a Delaware corporation
and wholly-owned subsidiary of Seagate Technology ("Sub"), and Seagate
Software, Inc., a Delaware corporation ("Seagate Software"). Seagate Technology
and Seagate Software are sometimes referred to individually as a "Company" and
collectively as the "Companies."
RECITALS:
A. The Boards of Directors of Seagate Software, Seagate Technology and Sub
have each approved the terms and conditions of the business combination between
Seagate Technology and Seagate Software to be effected by the merger (the
"Merger") of Sub with and into Seagate Software, pursuant to the terms and
subject to the conditions of this Agreement and the Delaware Business
Corporation Act (the "Delaware Statute").
B. The parties intend, by executing this Agreement, to adopt a plan of
reorganization within the meaning of Section 368 of the Internal Revenue Code
of 1986, as amended (the "Code").
NOW, THEREFORE, in consideration of the covenants, promises and
representations set forth in this Agreement, the parties agree as follows:
ARTICLE I
1.1 The Merger
(a) Upon the terms and subject to the conditions of this Agreement and in
accordance with the Delaware Statute, Sub shall be merged with and into Seagate
Software. Seagate Software and Sub shall execute a Certificate of Merger or
other appropriate form, in a form satisfactory to the parties (the "certificate
of merger") immediately prior to the Closing. Following the Merger, Seagate
Software shall continue as the surviving corporation (the "Surviving
Corporation") and the separate corporate existence of Sub shall cease. Sub and
Seagate Software are collectively referred to as the "Constituent
Corporations."
1.2 Effective Time of the Merger
(a) Subject to the provisions of this Agreement and the Certificate of
Merger, the Certificate of Merger, together with any required certificates,
shall be duly filed in accordance with the Delaware Statute simultaneously with
or as soon as practicable following the Closing (as defined in Section 1.3
below). The Merger shall become effective (the "Effective Time") upon the
filing of the Certificate of Merger (together with any required certificates)
with the Secretary of State of the State of Delaware.
(b) Closing. Unless this Agreement shall have been terminated pursuant to
Section 7.1, the closing of the Merger (the "Closing") will take place at 10:00
a.m. on a date (the "Closing Date") to be mutually agreed upon by the parties,
which date shall be no later than the third Business Day (as defined below)
after all of the conditions set forth in Article 6 shall have been satisfied
(or waived in accordance with Section 8.2), unless another date is agreed to in
writing by the parties. The Closing shall take place at the offices of Wilson
Sonsini Goodrich & Rosati, 650 Page Mill Road, Palo Alto, California, 94304-
1050, unless another place is agreed to in writing by the parties. As used in
this Agreement, "Business Day" shall mean any day, other than a Saturday,
Sunday or legal holiday on which banks are permitted to close in the City and
State of New York.
(c) Effect of the Merger. At the Effective Time, the effect of the Merger
shall be as provided in this Agreement and the applicable provisions of the
Delaware Statute. Without limiting the generality of the
A-1
<PAGE>
foregoing, and subject thereto, at the Effective Time all the property, rights,
privileges, powers and franchises of Seagate Software and Sub shall vest in the
Surviving Corporation, and all debts, liabilities and duties of Seagate
Software and Sub shall become the debts, liabilities and duties of the
Surviving Corporation.
(d) Certificate of Incorporation and Bylaws of Surviving Corporation. At the
Effective Time, (i) the Certificate of Incorporation of Sub, as in effect
immediately prior to the Effective Time shall be the Certificate of
Incorporation of the Surviving Corporation until thereafter altered, amended or
repealed as provided in the Delaware Statute and such Certificate of
Incorporation of Surviving Corporation provided that at the Effective Time the
Certificate of Incorporation of the Surviving Corporation shall be amended so
that the name of the Surviving Corporation shall be "Seagate Software Holdings,
Inc." and (ii) the Bylaws of Sub shall become the Bylaws of the Surviving
Corporation until thereafter altered, amended or repealed as provided in the
Delaware Statute or in the Certificate of Incorporation or Bylaws of the
Surviving Corporation.
(e) Directors and Officers. The initial directors of the Surviving
Corporation shall be the directors of Sub immediately prior to the Effective
Time, until their respective successors are duly elected or appointed and
qualified. The initial officers of the Surviving Corporation shall be the
officers of Sub immediately prior to the Effective Time, until their respective
successors are duly appointed.
1.3 Tax Free Reorganization; Accounting. The parties intend that the Merger
be treated as a tax free reorganization under Section 368(a) of the Code, and
to be accounted for as a purchase for accounting purposes.
ARTICLE II
EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE
CONSTITUENT CORPORATIONS; EXCHANGE OF CERTIFICATES
2.1 Effect on Capital Stock. At the Effective Time, subject and pursuant to
the terms of this Agreement, by virtue of the Merger and without any action on
the part of the Constituent Corporations or the holders of any shares of
capital stock of the Constituent Corporations:
(a) Capital Stock of Sub. Each issued and outstanding share of the common
stock, $.01 par value, of Sub shall be converted into one validly issued, fully
paid and nonassessable share of common stock, $.01 par value, of the Surviving
Corporation. Each stock certificate of Sub evidencing ownership of any such
shares shall continue to evidence ownership of such shares of common stock of
the Surviving Corporation.
(b) Cancellation of Certain Shares of Seagate Software Capital Stock. Each
share of Seagate Software Capital Stock (as defined in Section 2.1(c)) that is
owned by Seagate Software as treasury stock and each share of Seagate Software
Capital Stock that is owned by Seagate Technology, Sub or any other subsidiary
of Seagate Technology or Seagate Software shall be canceled and no capital
stock of Seagate Technology or other consideration shall be delivered in
exchange therefor.
A-2
<PAGE>
(c) Exchange Ratio for Seagate Software Capital Stock. Each share of common
stock, $.01 par value, of Seagate Software ("Seagate Software Common Stock")
and each share of Series A Preferred Stock, $.01 par value of Seagate Software
("Seagate Software Series A Preferred Stock" and collectively with the Seagate
Software Common Stock, the "Seagate Software Capital Stock") issued and
outstanding immediately prior to the Effective Time (other than shares canceled
pursuant to Section 2.1(b)), will be canceled and extinguished and
automatically converted (subject to Sections 2.1(e)) into the right to receive
the number of shares of Seagate Technology Common Stock, $0.01 par value (the
"Seagate Technology Common Stock") calculated in accordance with the following
formula (the "Exchange Ratio"):
Value of Seagate Software divided by [the sum total of
Exchange Ratio =all outstanding shares of Seagate Software Preferred
Stock and Common Stock and Common Stock issuable upon
exercise of outstanding options to purchase Seagate
Software Common Stock]
-------------------------------------------------------
Value of one share of Seagate Technology Common Stock
For purposes of the above calculation:
(i) "Value of Seagate Software" shall be comprised of the following:
(A) The value of the Information Management Group business as
determined by Seagate Software's board of directors;
(B) The cash received by Seagate Software from its sale of VERITAS
Common Stock prior to the Closing, net of taxes;
(C) The proceeds which would be received by Seagate Software upon
the exercise of all currently outstanding options to purchase Seagate
Software Common Stock; and
(D) The value of the Veritas Common Stock held by Seagate Software
prior to the Closing. The value of the VERITAS Common Stock shall be
calculated as follows: the total number of shares of VERITAS Common
Stock held by Seagate Software multiplied by the average closing price
of the VERITAS Common Stock as traded on the Nasdaq National Market for
the five trading days ending on (and including) the day two days
preceding the Closing Date.
(ii) "Value of one share of Seagate Technology Common Stock" shall equal
the average closing price of the Common Stock as traded on the New York
Stock Exchange for the five trading days ending on (and including) the
second day preceding the Closing Date.
The shares of Seagate Technology Common Stock will be delivered upon
surrender of the certificate representing such shares of Seagate Software
Common Stock in the manner provided in Section 2.2 (or in the case of a lost,
stolen, or destroyed certificate, upon delivery of an affidavit (and bond, if
required) in the manner provided in Section 2.2(g)). Fractional shares shall be
rounded up to the nearest full share.
(d) Stock Options. At the Effective Time all options to purchase Seagate
Software Common Stock then outstanding under Seagate Software's 1996 Amended
and Restated Stock Option Plan (the "Option Plan") shall be treated as set
forth in Section 5.9.
(e) Adjustment of Exchange Ratio. If between the date of this Agreement and
the Effective Time, the outstanding shares of Seagate Technology Common Stock
or Seagate Software Common Stock shall have been changed into a different
number of shares or a different class by reason of any reclassification,
recapitalization, split-up, stock dividend, stock combination, exchange of
shares, readjustment or otherwise, then the Exchange Ratio shall be
correspondingly adjusted.
A-3
<PAGE>
2.2 Exchange of Certificates.
(a) Exchange Agent. Prior to the Closing Date, Seagate Technology shall
select a bank or trust company to act as exchange agent (the "Exchange Agent")
in the Merger. Immediately following the Effective Time, Seagate Technology
shall deposit with the Exchange Agent, for the benefit of the holders of shares
of Seagate Software Common Stock, for exchange in accordance with this Article
2, certificates representing the shares of Seagate Technology Common Stock
(such shares of Seagate Technology Common Stock, together with any dividends or
distributions with respect thereto, are referred to as the "Exchange Fund")
issuable pursuant to this Article 2 in exchange for outstanding shares of
Seagate Software Common Stock, and cash in an amount sufficient for payment in
lieu of fractional shares pursuant to Section 2.2(f).
(b) Exchange Procedures. As soon as practicable after the Effective Time,
the Exchange Agent shall mail to each holder of record (other than Seagate
Software, any subsidiary of Seagate Software, Sub, Seagate Technology and any
other subsidiary of Seagate Technology) of a certificate or certificates which
immediately prior to the Effective Time represented issued and outstanding
shares of Seagate Software Common Stock (collectively, the "Certificates")
whose shares are being converted into Seagate Technology Common Stock pursuant
to Section 2.1(c) of this Agreement, (i) a letter of transmittal (which shall
specify that delivery shall be effected, and risk of loss and title to the
Certificates shall pass, only upon delivery of the Certificates to the Exchange
Agent and shall be in such form and have such other provisions as Seagate
Technology and Seagate Software may reasonably specify) and (ii) instructions
for use in effecting the surrender of the Certificates in exchange for
certificates representing Seagate Technology Common Stock. Upon surrender of a
Certificate for cancellation to the Exchange Agent, together with a duly
executed letter of transmittal and such other documents as may be reasonably
required by the Exchange Agent, the holder of such Certificate shall be
entitled to receive in exchange therefor a certificate representing that number
of whole shares of Seagate Technology Common Stock which such holder has the
right to receive pursuant to the provisions of this Article 2 and the
Certificate so surrendered shall forthwith be canceled. In the event of a
transfer of ownership of shares of Seagate Software Common Stock which is not
registered on the transfer records of Seagate Software, a certificate
representing the proper number of shares of Seagate Technology Common Stock may
be issued to a transferee if the Certificate representing such Seagate Software
Common Stock is presented to the Exchange Agent, accompanied by all documents
required to evidence and effect such transfer and by evidence that any
applicable stock transfer taxes have been paid. Until surrendered as
contemplated by this Section 2.2, each Certificate shall be deemed, on and
after the Effective Time, to represent only the right to receive upon such
surrender the certificate representing shares of Seagate Technology Common
Stock and cash in lieu of any fractional shares of Seagate Technology Common
Stock as contemplated by this Article 2, and the Delaware Statute.
(c) Distributions with Respect to Unsurrendered Certificates. No dividends
or other distributions declared or made after the Effective Time with respect
to Seagate Technology Common Stock with a record date after the Effective Time
shall be paid to the holder of any Unsurrendered Certificate with respect to
the shares of Seagate Technology Common Stock represented thereby and no cash
payment in lieu of fractional shares shall be paid to any such holder pursuant
to Section 2.1(f) until the holder of record of such Certificate shall
surrender such Certificate. Subject to the effect, if any, of applicable laws,
following surrender of any such Certificate, there shall be paid to the record
holder of the certificates representing whole shares of Seagate Technology
Common Stock issued in exchange therefor, without interest, (i) at the time of
such surrender, the amount of any cash payable in lieu of a fractional share of
Seagate Technology Common Stock to which such holder is entitled pursuant to
Section 2.1(f) and the amount of dividends or other distributions with a record
date after the Effective Time theretofore paid with respect to such whole
shares of Seagate Technology Common Stock and (ii) at the appropriate payment
date, the amount of dividends or other distributions with a record date after
the Effective Time but prior to surrender and a payment date subsequent to
surrender payable with respect to such whole shares of Seagate Technology
Common Stock.
(d) No Further Ownership Rights in Seagate Software Common Stock. All shares
of Seagate Technology Common Stock issued upon the surrender for exchange of
shares of Seagate Software Capital
A-4
<PAGE>
Stock in accordance with the terms of this Article 2 (including any cash paid
pursuant to Section 2.2(c) or 2.2(e)) shall be deemed to have been issued in
full satisfaction of all rights pertaining to such shares of Seagate Software
Capital Stock. There shall be no further registration of transfers on the stock
transfer books of the Surviving Corporation of the shares of Seagate Software
Capital Stock which were outstanding immediately prior to the Effective Time.
If, after the Effective Time, Certificates are presented to the Surviving
Corporation for any reason, they shall be canceled and exchanged as provided in
this Article 2.
(e) Termination of Exchange Fund. Any portion of the Exchange Fund which
remains undistributed to the shareholders of Seagate Software for twelve months
after the Effective Time shall be delivered to Seagate Technology, upon demand,
and any former shareholders of Seagate Software who have not previously
complied with this Article 2 shall thereafter look only to Seagate Technology
for payment of their claim for Seagate Technology Common Stock, any cash in
lieu of fractional shares of Seagate Technology Common Stock and any dividends
or distributions with respect to Seagate Technology Common Stock.
(f) No Liability. Neither the Exchange Agent, Seagate Technology, Sub nor
Seagate Software shall be liable to any holder of shares of Seagate Software
Capital Stock or Seagate Technology Common Stock, as the case may be, for
shares (or dividends or distributions with respect thereto) from the Exchange
Fund delivered to a public official pursuant to any applicable abandoned
property, escheat or similar law.
(g) Lost, Stolen or Destroyed Certificates. In the event any Certificates
evidencing shares of Seagate Software Capital Stock shall have been lost,
stolen or destroyed, the holder of such lost, stolen or destroyed
Certificate(s) shall execute an affidavit of that fact upon request. The holder
of any such lost, stolen or destroyed Certificate(s) shall also deliver a bond
in such sum as Seagate Technology may reasonably require as indemnity against
any claim that may be made against Seagate Technology or the Exchange Agent
with respect to the Certificate(s) alleged to have been lost, stolen or
destroyed. The affidavit and any bond which may be required hereunder shall be
delivered to the Exchange Agent, who shall be responsible for making payment
for such lost, stolen or destroyed Certificate(s).
2.3 Taking of Necessary Action; Further Action. If, at any time after the
Effective Time, any such further action is necessary or desirable to carry out
the purposes of this Agreement and to vest the Surviving Corporation with full
right, title and possession to all assets, property, rights, privileges, powers
and franchises of Seagate Software and Sub, the officers and directors of
Seagate Software and Sub are fully authorized in the name of their respective
corporations or otherwise to take, and will take, all such lawful and necessary
action.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SEAGATE SOFTWARE
Seagate Software represents and warrants to Seagate Technology and Sub,
except as set forth in the Seagate Software SEC Reports (as defined in Section
3.6), as follows:
3.1 Organization and Qualification; Subsidiaries. (i) Each of Seagate
Software and its subsidiaries is a corporation duly organized, validly existing
and in good standing under the laws of the jurisdiction of its incorporation
and has the requisite corporate power and authority to own, lease and operate
its assets and properties and to carry on its business as it is now being
conducted. Each of Seagate Software and its subsidiaries is in possession of
all franchises, grants, authorizations, licenses, permits, easements, consents,
certificates, approvals and orders ("Approvals") necessary to own, lease and
operate the properties it purports to own, operate or lease and to carry on its
business as it is now being conducted, except where the failure to have such
Approvals would not, individually or in the aggregate, have a Material Adverse
Effect (as defined below). Each of Seagate Software and its subsidiaries is
duly qualified or licensed as a foreign corporation to do business, and is in
good standing, in each jurisdiction where the character of the properties
owned, leased or operated by it or the nature of its activities makes such
qualification or licensing necessary, except for such failures to be so duly
qualified or licensed and in good standing that would not, either individually
or in the
A-5
<PAGE>
aggregate, have a Material Adverse Effect. When used in connection with Seagate
Software or any of its subsidiaries, the term "Material Adverse Effect" means
any change, event or effect that is materially adverse to the business, assets
(including intangible assets), liabilities, financial condition or results of
operations of Seagate Software and its subsidiaries taken as a whole; provided,
however, that a "Material Adverse Effect" shall not include any (i) adverse
effect on the results of operations or financial condition of Seagate Software
that is attributable to the transactions or resulting business enterprise
contemplated by this Agreement, including, without limitation, delay of,
reduction in, or cancellation or change in the terms of product orders by
customers of Seagate Software or an increase in the price of, a delay of,
reduction in or cancellation of or change in terms with respect to products or
components supplied by, or any deterioration in or termination of a
relationship by, vendors of Seagate Software, (ii) change arising out of
conditions in or affecting the industries in which the parties to this
Agreement compete or (iii) decline in the stock price of VERITAS Software
Corporation.
3.2 Certificate of Incorporation and Bylaws. Seagate Software has previously
furnished to Seagate Technology a complete and correct copy of its Certificate
of Incorporation and Bylaws as amended to date. Such Certificate of
Incorporation, Bylaws and equivalent organizational documents of each of its
subsidiaries are in full force and effect. Neither Seagate Software nor any of
its subsidiaries is in violation of any of the provisions of its Certificate of
Incorporation or Bylaws or equivalent organizational documents.
3.3 Capitalization. The authorized capital stock of Seagate Software
consists of 300,000,000 shares of Seagate Software Common Stock and 73,000,000
shares of Preferred Stock ("Seagate Software Preferred Stock"), each having a
par value of $.01 per share. Of the Preferred Stock, 54,633,333 shares are
designated as Series A Preferred Stock, one share is designated as Special
Voting Preferred Stock and the remaining 18,366,666 shares of Preferred Stock
are undesignated. At the close of business on July 2, 1999, (i) approximately
3,352,568 shares of Seagate Software Common Stock were issued and outstanding
all of which are validly issued, fully paid and nonassessable, (ii) 47,433,333
shares of Series A Preferred Stock and one share of Special Voting Preferred
Stock were issued and outstanding, all of which are validly issued, fully paid
and nonassessable, (iii) no shares of Seagate Software Common Stock were held
in treasury by Seagate Software or by subsidiaries of Seagate Software, (iv)
approximately 3,810,179 shares of Seagate Software Common Stock were available
for future issuance upon the exercise of outstanding options to purchase
Seagate Software Common Stock under the Option Plan, (v) approximately
9,474,771 shares of Seagate Software Common Stock were available for future
grant under the Option Plan and (vi) 7,200,000 shares of Series A Preferred
Stock were reserved for issuance upon cancellation of the Special Voting
Preferred Stock. No change in such capitalization has occurred between July 2,
1999 and the date hereof except the issuance of shares of Seagate Software
Common Stock pursuant to the exercise of outstanding options. As of the date of
this Agreement, there are no options, warrants or other rights, agreements,
arrangements or commitments of any character relating to the issued or unissued
capital stock of Seagate Software or any of its subsidiaries or obligating
Seagate Software or any of its subsidiaries to issue or sell any shares of
capital stock of, or other equity interests in, Seagate Software or any of its
subsidiaries. All shares of Seagate Software Common Stock subject to issuance
as aforesaid, upon issuance on the terms and conditions specified in the
instruments pursuant to which they are issuable, shall be duly authorized,
validly issued, fully paid and nonassessable. There are no obligations,
contingent or otherwise, of Seagate Software or any of its subsidiaries to
repurchase, redeem or otherwise acquire any shares of Seagate Software Common
Stock or the capital stock of any subsidiary or to provide funds to or make any
investment (in the form of a loan, capital contribution or otherwise) in any
such subsidiary or any other entity other than guarantees of obligations of
subsidiaries entered into in the ordinary course of business. All of the
outstanding shares of capital stock (other than directors' qualifying shares)
of each of Seagate Software's subsidiaries is duly authorized, validly issued,
fully paid and nonassessable and all such shares (other than directors'
qualifying shares) are owned by Seagate Software or another subsidiary free and
clear of all security interests, liens, claims, pledges, agreements,
limitations in Seagate Software's voting rights, charges or other encumbrances
of any nature whatsoever.
3.4 Authority Relative to this Agreement. Seagate Software has all necessary
corporate power and authority to execute and deliver this Agreement and to
perform its obligations hereunder and thereunder and,
A-6
<PAGE>
subject to obtaining the approval of the shareholders of Seagate Software of
the Merger, to consummate the transactions contemplated hereby and thereby. The
execution and delivery of this Agreement by Seagate Software and the
consummation by Seagate Software of the transactions contemplated hereby and
thereby have been duly and validly authorized by all necessary corporate action
on the part of Seagate Software and no other corporate proceedings on the part
of Seagate Software are necessary to authorize this Agreement or to consummate
the transactions so contemplated (other than, with respect to the Merger, the
approval and adoption of this Agreement by holders of a majority of the
outstanding shares of Seagate Software Capital Stock and a majority of the
outstanding shares of Seagate Software Preferred Stock, voting as a separate
class, in accordance with the Delaware Statute and Seagate Software's
Certificate of Incorporation and Bylaws). This Agreement have been duly and
validly executed and delivered by Seagate Software and, assuming the due
authorization, execution and delivery by Seagate Technology and Sub, constitute
legal and binding obligations of Seagate Software, enforceable against Seagate
Software in accordance with their respective terms, subject to (i) bankruptcy,
insolvency, reorganization, moratorium or other similar laws affecting or
relating to creditors rights generally and (ii) the availability of injunctive
relief and other equitable remedies.
3.5 No Conflict; Required Filings and Consents
(a) The execution and delivery of this Agreement by Seagate Software does
not, and the performance of this Agreement by Seagate Software shall not, (i)
conflict with or violate the Certificate of Incorporation or Bylaws or
equivalent organizational documents of Seagate Software or any of its
subsidiaries, (ii) subject to obtaining the approval of Seagate Software's
shareholders of the Merger and compliance with the requirements set forth in
Section 3.5(b) below, conflict with or violate any law, rule, regulation,
order, judgment or decree applicable to Seagate Software or any of its
subsidiaries or by which its or any of their respective properties is bound or
affected, or (iii) result in any breach of or constitute a default (or an event
that with notice or lapse of time or both would become a default) under, or
impair Seagate Software's rights or alter the rights or obligations of any
third party under, or give to others any rights of termination, amendment,
acceleration or cancellation of, or result in the creation of a lien or
encumbrance on any of the properties or assets of Seagate Software or any of
its subsidiaries pursuant to, any material note, bond, mortgage, indenture,
contract, agreement, lease, license, permit, franchise or other instrument or
obligation to which Seagate Software or any of its subsidiaries is a party or
by which Seagate Software or any of its subsidiaries or its or any of their
respective properties are bound or affected, except for any such breaches,
defaults or other occurrences that could not reasonably be expected to have,
individually or in the aggregate, a Material Adverse Effect.
(b) The execution and delivery of this Agreement by Seagate Software do not,
and the performance of this Agreement by Seagate Software shall not, require
any consent, approval, authorization or permit of, or filing with or
notification to, any court, administrative agency, commission, governmental or
regulatory authority, domestic or foreign (a "Governmental Entity"), except (A)
for applicable requirements, if any, of the Securities Act of 1933, as amended
(the "Securities Act"), the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), state securities laws ("Blue Sky Laws"), the pre-merger
notification requirements (the "HSR Approval") of the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR Act") for certain
stockholders or optionees of Seagate Software, if applicable, and of foreign
Governmental Entities and the rules and regulations thereunder and the filing
and recordation of the Certificate of Merger as required by the Delaware
Statute and (B) where the failure to obtain such consents, approvals,
authorizations or permits, or to make such filings or notifications, (i) would
not prevent consummation of the Merger or otherwise prevent Seagate Software
from performing its obligations under this Agreement or (ii) could not,
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect.
3.6 SEC Filings; Financial Statements. Seagate Software has made available
to Seagate Technology a correct and complete copy of each report, schedule,
registration statement and definitive proxy statement filed by Seagate Software
with the Securities and Exchange Commission ("SEC") on or after June 28, 1997
and prior to the date of this Agreement (the "Seagate Software SEC Reports"),
which are all the forms, reports and documents required to be filed by Seagate
Software with the SEC since June 28, 1997. The Seagate Software
A-7
<PAGE>
SEC Reports (A) were prepared in accordance with the requirements of the
Securities Act or the Exchange Act, as the case may be, and (B) did not at the
time they were filed (or if amended or superseded by a filing prior to the date
of this Agreement then on the date of such filing) contain any untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. None of Seagate
Software's subsidiaries is required to file any reports or other documents with
the SEC.
Each set of consolidated financial statements (including, in each case, any
related notes thereto) contained in the Seagate Software SEC Reports was
prepared in accordance with generally accepted accounting principles ("GAAP")
applied on a consistent basis throughout the periods involved (except as may be
indicated in the notes thereto) and each fairly presents the consolidated
financial position of Seagate Software and its subsidiaries as at the
respective dates thereof and the consolidated results of its operations and
cash flows for the periods indicated, except that the unaudited interim
financial statements were or are subject to adjustments which were not or are
not expected to be material in amount.
Seagate Software has previously furnished to Seagate Technology a complete
and correct copy of any amendments or modifications, which have not yet been
filed with the SEC but which are required to be filed, to agreements, documents
or other instruments which previously had been filed by Seagate Software with
the SEC pursuant to the Securities Act or the Exchange Act.
3.7 Registration Statement; Proxy Statement. None of the information
supplied or to be supplied by Seagate Software for inclusion or incorporation
by reference in (i) the registration statement on Form S-4 to be filed with the
SEC by Seagate Technology in connection with the issuance of the Seagate
Technology Common Stock in or as a result of the Merger (the "S-4") will, at
the time the S-4 becomes effective under the Securities Act, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light
of the circumstances under which they are made, not misleading; and (ii) the
Proxy Statement (the "Proxy Statement") to be filed with the SEC by Seagate
Software pursuant to Section 5.2 hereof will, at the dates mailed to the
shareholders of Seagate Software, at the times of the shareholders meeting of
Seagate Software (the "Shareholders Meeting") in connection with the
transactions contemplated hereby and as of the Effective Time, contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they are made, not misleading. The Proxy
Statement will comply as to form in all material respects with the provisions
of the Exchange Act and the rules and regulations promulgated by the SEC
thereunder.
3.8 Board Approval. The Board of Directors of Seagate Software has, as of
the date of this Agreement (i) approved this Agreement and the transactions
contemplated hereby and thereby, (ii) determined that the Merger is in the best
interests of the shareholders and optionees of Seagate Software and is on terms
that are fair to such shareholders and (iii) recommended that the shareholders
of Seagate Software approve this Agreement and the Merger.
3.9 Vote Required. The affirmative vote of a majority of the votes that
holders of the outstanding shares of Seagate Software Capital Stock are
entitled to vote thereon and the affirmative vote of a majority of the votes
that the holders of the outstanding shares of Seagate Software Preferred Stock,
voting as a single class, are the only votes of the holders of any class or
series of Seagate Software's capital stock necessary to approve this Agreement
and the transactions contemplated hereby.
A-8
<PAGE>
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF SEAGATE TECHNOLOGY AND SUB
Seagate Technology and Sub jointly and severally represent and warrant to
Seagate Software, except as set forth in the Seagate Technology SEC Reports (as
defined in Section 4.7), as follows:
4.1 Organization and Qualification; Subsidiaries. Except with respect to
Seagate Software and its Subsidiaries, each of Seagate Technology and its
subsidiaries is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation and has the
requisite corporate power and authority to own, lease and operate its assets
and properties and to carry on its business as it is now being conducted. Each
of Seagate Technology and its subsidiaries is in possession of all Approvals
necessary to own, lease and operate the properties it purports to own, operate
or lease and to carry on its business as it is now being conducted, except
where the failure to have such Approvals would not, individually or in the
aggregate, have a Material Adverse Effect (as defined below). Each of Seagate
Technology and its subsidiaries is duly qualified or licensed as a foreign
corporation to do business, and is in good standing, in each jurisdiction where
the character of the properties owned, leased or operated by it or the nature
of its activities makes such qualification or licensing necessary, except for
such failures to be so duly qualified or licensed and in good standing that
would not, either individually or in the aggregate, have a Material Adverse
Effect. When used in connection with Seagate Technology or any of its
subsidiaries, the term "Material Adverse Effect" means any change, event or
effect that is materially adverse to the business, assets (including intangible
assets), liabilities, financial condition or results of operations of Seagate
Technology and its subsidiaries taken as a whole; provided, however, that a
"Material Adverse Effect" shall not include any (i) adverse effect on the
results of operations or financial condition of Seagate Technology that is
attributable to the transactions or resulting business enterprise contemplated
by this Agreement, including, without limitation, delay of, reduction in, or
cancellation or change in the terms of product orders by customers of Seagate
Technology or an increase in the price of, a delay of, reduction in or
cancellation of or change in terms with respect to products or components
supplied by, or a deterioration in or termination of a relationship by, vendors
of Seagate Technology, (ii) change arising out of conditions in or affecting
the industries in which the parties to this Agreement compete or (iii) decline
in Seagate Technology's stock price.
4.2 Certificate of Incorporation and Bylaws. Seagate Technology has
previously furnished to Seagate Software a complete and correct copy of its
Certificate of Incorporation and Bylaws as amended to date. Such Certificate of
Incorporation, Bylaws and equivalent organizational documents of each of its
subsidiaries are in full force and effect. Neither Seagate Technology nor any
of its subsidiaries is in violation of any of the provisions of its Certificate
of Incorporation or Bylaws or equivalent organizational documents.
4.3 Capitalization. The authorized capital stock of Seagate Technology
consists of (i) 600,000,000 shares of Seagate Technology Common Stock and of
(ii) 1,000,000 shares of Preferred Stock, $.01 par value per share ("Seagate
Technology Preferred Stock"). At the close of business on July 2, 1999,
(i) approximately 228.7 million shares of Seagate Technology Common Stock were
issued and outstanding, all of which are validly issued, fully paid and
nonassessable, (ii) approximately 5.8 million shares of Seagate Technology
Common Stock were reserved for future issuance pursuant to Seagate Technology's
employee stock purchase plan, (iii) approximately 33.9 million shares of
Seagate Technology Common Stock were reserved for issuance upon the exercise of
outstanding options ("Seagate Technology Options") to purchase Seagate
Technology Common Stock, approximately 5.0 million shares of Seagate Technology
Common Stock were reserved for future grant under the various option plans
described in the notes to the Consolidated Financial Statements of Seagate
Technology for the periods ended July 2, 1999 and (iv) no shares of Seagate
Technology Common Stock were reserved for issuance upon exercise of warrants.
No change in such capitalization has occurred between July 2, 1999 and the date
hereof except issuances of Seagate Technology Common Stock that would be
permitted pursuant to Section 5.2(c) hereof. As of the date hereof, no shares
of Seagate Technology Preferred Stock were issued or outstanding. The
authorized capital stock of Sub consists of 1,000 shares of common stock, par
value $0.01 per share, 100 shares of which, as of the date hereof, are issued
and
A-9
<PAGE>
outstanding. All of the outstanding shares of Seagate Technology's and Sub's
respective capital stock have been duly authorized and validly issued and are
fully paid and nonassessable. Except as set forth in this Section 4.3, as of
the date of this Agreement, there are no options, warrants or other rights,
agreements, arrangements or commitments of any character relating to the issued
or unissued capital stock of Seagate Technology or any of its subsidiaries or
obligating Seagate Technology or any of its subsidiaries to issue or sell any
shares of capital stock of, or other equity interests in, Seagate Technology or
any of its subsidiaries. All shares of Seagate Technology Common Stock subject
to issuance as aforesaid, upon issuance on the terms and conditions specified
in the instruments pursuant to which they are issuable, shall, and the shares
of Seagate Technology Common Stock to be issued pursuant to the Merger will be,
duly authorized, validly issued, fully paid and nonassessable. There are no
obligations, contingent or otherwise, of Seagate Technology or any of its
subsidiaries to repurchase, redeem or otherwise acquire any shares of Seagate
Technology Common Stock or the capital stock of any subsidiary or to provide
funds to or make any investment (in the form of a loan, capital contribution or
otherwise) in any such subsidiary or any other entity other than guarantees of
obligations of subsidiaries entered into in the ordinary course of business.
Except with respect to Seagate Software and its Subsidiaries, all of the
outstanding shares of capital stock (other than directors' qualifying shares)
of each of Seagate Technology's subsidiaries is duly authorized, validly
issued, fully paid and nonassessable and all such shares (other than directors'
qualifying shares) are owned by Seagate Technology or another subsidiary free
and clear of all security interests, liens, claims, pledges, agreements,
limitations in Seagate Technology's voting rights, charges or other
encumbrances of any nature whatsoever.
4.4 Authority Relative to this Agreement. Each of Seagate Technology and Sub
has all necessary corporate power and authority to execute and deliver this
Agreement, and to perform its obligations hereunder and thereunder to
consummate the transactions contemplated hereby and thereby. The execution and
delivery of this Agreement by Seagate Technology and Sub and the consummation
by Seagate Technology and Sub of the transactions contemplated hereby and
thereby have been duly and validly authorized by all necessary corporate action
on the part of Seagate Technology and Sub and no other corporate proceedings on
the part of Seagate Technology or Sub are necessary to authorize this
Agreement, or to consummate the transactions so contemplated. This Agreement
have been duly and validly executed and delivered by Seagate Technology and Sub
and, assuming the due authorization, execution and delivery by Seagate
Software, constitute legal and binding obligations of Seagate Technology and
Sub, enforceable against Seagate Technology and Sub in accordance with their
respective terms, subject to (i) bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting or relating to creditors rights
generally and (ii) the availability of injunctive relief and other equitable
remedies.
4.5 No Conflict; Required Filings and Consents. The execution and delivery
of this Agreement by Seagate Technology and Sub does not, and the performance
of this Agreement by Seagate Technology and Sub shall not, (i) conflict with or
violate the Certificate of Incorporation, Bylaws or equivalent organizational
documents of Seagate Technology or any of its subsidiaries, (ii) conflict with
or violate any law, rule, regulation, order, judgment or decree applicable to
Seagate Technology or any of its subsidiaries or by which it or their
respective properties are bound or affected, or (iii) result in any breach of
or constitute a default (or an event that with notice or lapse of time or both
would become a default) under, or impair Seagate Technology's or any such
Subsidiary's rights or alter the rights or obligations of any third party
under, or give to others any rights of termination, amendment, acceleration or
cancellation of, or result in the creation of a lien or encumbrance on any of
the properties or assets of Seagate Technology or any of its subsidiaries
pursuant to, any material note, bond, mortgage, indenture, contract, agreement,
lease, license, permit, franchise or other instrument or obligation to which
Seagate Technology or any of its Subsidiaries is a party or by which Seagate
Technology or any of its Subsidiaries or its or any of their respective
properties are bound or affected, except for any such breaches, defaults or
other occurrences that could not reasonably be expected to have, individually
or in the aggregate, a Material Adverse Effect.
The execution and delivery of this Agreement by Seagate Technology and Sub
does not, and the performance of this Agreement by Seagate Technology and Sub
shall not, require any consent, approval, authorization or permit of, or filing
with or notification to, any Governmental Entity except (i) for applicable
A-10
<PAGE>
requirements, if any, of the Securities Act, the Exchange Act, Blue Sky Laws,
the pre-merger notification requirements of the HSR Act for certain
shareholders and optionees of Seagate Software, if applicable, and of foreign
governmental entities and the rules and regulations thereunder, the rules and
regulations of NYSE, and the filing and recordation of the Certificate of
Merger as required by the Delaware Statute and (ii) where the failure to obtain
such consents, approvals, authorizations or permits, or to make such filings or
notifications, (i) would not prevent consummation of the Merger or otherwise
prevent Seagate Technology or Sub from performing their respective obligations
under this Agreement or (ii) could not, individually or in the aggregate,
reasonably be expected to have a Material Adverse Effect.
4.6 SEC Filings; Financial Statements. Seagate Technology has made available
to Seagate Software a correct and complete copy of each report, schedule,
registration statement and definitive proxy statement filed by Seagate
Technology with the SEC on or after June 28, 1997 and prior to the date of this
Agreement (the "Seagate Technology SEC Reports"), which are all the forms,
reports and documents required to be filed by Seagate Technology with the SEC
since June 28, 1997. The Seagate Technology SEC Reports (A) were prepared in
accordance with the requirements of the Securities Act or the Exchange Act, as
the case may be, and (B) did not at the time they were filed (or if amended or
superseded by a filing prior to the date of this Agreement then on the date of
such filing) contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading. None of Seagate Technology's subsidiaries is required to file
any reports or other documents with the SEC.
Each set of consolidated financial statements (including, in each case, any
related notes thereto) contained in the Seagate Technology SEC Reports was
prepared in accordance with GAAP applied on a consistent basis throughout the
periods involved (except as may be indicated in the notes thereto) and each
fairly presents the consolidated financial position of Seagate Technology and
its subsidiaries as at the respective dates thereof and the consolidated
results of its operations and cash flows for the periods indicated, except that
the unaudited interim financial statements were or are subject to adjustments
which were not or are not expected to be material in amount.
Seagate Technology has previously furnished to Seagate Software a complete
and correct copy of any amendments or modifications, which have not yet been
filed with the SEC but which are required to be filed, to agreements, documents
or other instruments which previously had been filed by Seagate Technology with
the SEC pursuant to the Securities Act or the Exchange Act.
4.7 Registration Statement; Proxy Statement. None of the information
supplied or to be supplied by Seagate Technology for inclusion or incorporation
by reference (i) in the S-4 will, at the time the S-4 becomes effective under
the Securities Act, contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they are
made, not misleading; and (ii) the Proxy Statement will, at the dates mailed to
the shareholders of Seagate Software, at the times of the Shareholders Meeting
and as of the Effective Time, contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or necessary
in order to make the statements therein, in light of the circumstances under
which they are made, not misleading. The Proxy Statement will comply as to form
in all material respects with the provisions of the Exchange Act and the rules
and regulations promulgated by the SEC thereunder, and the S-4 will comply as
to form in all material respects with the provisions of the Securities Act and
the rules and regulations promulgated by the SEC thereunder.
4.8 Board Approval. The Board of Directors of Seagate Technology has, as of
the date hereof, (i) approved this Agreement and the transactions contemplated
hereby and thereby, (ii) determined that the Merger is in the best interests of
the shareholders of Seagate Technology and is on terms that are fair to such
shareholders.
4.9 Vote Required. No vote of the holders of the shares of Seagate
Technology Common Stock is necessary to approve the Merger or the issuance of
Seagate Technology Common Stock in connection with the Merger.
A-11
<PAGE>
4.10 Interim Operations of Sub. Sub was formed solely for the purpose of
engaging in the transactions contemplated hereby, has engaged in no other
business activities and has conducted its operations only as contemplated
hereby.
ARTICLE V
CONDUCT AND TRANSACTIONS PRIOR TO
EFFECTIVE TIME; ADDITIONAL AGREEMENTS
5.1 Information and Access. From the date of this Agreement and continuing
until the Effective Time, each Company shall afford and, with respect to clause
(b) below, such Company shall cause its independent auditors to afford, (a) to
the officers, independent auditors, counsel and other representatives of the
other Company reasonable access to the properties, books, records (including
Tax Returns filed and those in preparation) and personnel of such Company and
its subsidiaries in order that the other Company may have a full opportunity to
make such investigation as it reasonably desires to make of such Company and
its subsidiaries and (b) to the independent auditors of the other Company,
reasonable access to the audit work papers and other records of the independent
auditors of such Company and its subsidiaries. Additionally, each Company and
its subsidiaries will permit the other Company to make such reasonable
inspections of such Company and its subsidiaries and their respective
operations during normal business hours as the other Company may reasonably
require and each Company and its subsidiaries will cause its officers and the
officers of its subsidiaries to furnish the other Company with such financial
and operating data and other information with respect to the business and
properties of such Company and its subsidiaries as the other Company may
from time to time reasonably request. No investigation pursuant to this Section
5.1 shall affect or otherwise obviate or diminish any representations and
warranties of any party or conditions to the obligations of any party.
5.2 Preparation of S-4 and the Proxy Statement; Other Filings. As promptly
as practicable after the date of this Agreement, Seagate Technology and Seagate
Software shall prepare and file with the SEC a preliminary Proxy Statement in
form and substance satisfactory to each of Seagate Technology and Seagate
Software and Seagate Technology shall prepare and file with the SEC the S-4, in
which the Proxy Statement will be included as a prospectus. Each of Seagate
Technology and Seagate Software shall use its reasonable efforts to respond to
any comments of the SEC, to have the S-4 declared effective under the
Securities Act as promptly as practicable after such filing and to cause the
Proxy Statement to be mailed to Seagate Software's shareholders at the earliest
practicable time. As promptly as practicable after the date of this Agreement,
Seagate Technology and Seagate Software shall prepare and file any other
filings required under the Exchange Act, the Securities Act or any other
federal or Blue Sky Laws relating to the Merger and the transactions
contemplated by this Agreement and the Certificate of Merger, including,
without limitation, under the HSR Act and state takeover laws (the "Other
Filings"). Each Company will notify the other Company promptly of the receipt
of any comments from the SEC or its staff and of any request by the SEC or its
staff or any other government officials for amendments or supplements to the S-
4, the Proxy Statement or any Other Filing or for additional information and
will supply the other Company with copies of all correspondence between such
Company or any of its representatives, on the one hand, and the SEC, or its
staff or any other government officials, on the other hand, with respect to the
S-4, the Proxy Statement, the Merger or any Other Filing. The Proxy Statement,
the S-4 and the Other Filings shall comply in all material respects with all
applicable requirements of law. Whenever any event occurs which is required to
be set forth in an amendment or supplement to the Proxy Statement, the S-4 or
any Other Filing, Seagate Technology or Seagate Software, as the case may be,
shall promptly inform the other Company of such occurrence and cooperate in
filing with the SEC or its staff or any other government officials, and/or
mailing to shareholders of Seagate Technology and Seagate Software, such
amendment or supplement. The Proxy Statement shall include the recommendations
of the Board of Directors of Seagate Software in favor of the Merger, provided
that the recommendation of the Board of Directors of Seagate Software may not
be included or may be withdrawn if previously included if the Board of
Directors of Seagate Software is required to do so to fulfill its fiduciary
obligations to the shareholders of Seagate Software.
A-12
<PAGE>
5.3 Advice of Changes; SEC Filings. Each Company shall promptly provide the
other Company (or its counsel) copies of all filings made by such Company with
any Governmental Entity in connection with this Agreement and the transactions
contemplated hereby and thereby.
5.4 Shareholders Meetings. Seagate Software shall call a meeting of its
shareholders to be held as promptly as practicable for the purpose of voting
upon this Agreement. Seagate Technology and Seagate Software shall coordinate
and cooperate with respect to the timing of the Shareholders Meeting, and
Seagate Software shall use its reasonable efforts to hold the Shareholders
Meeting as soon as practicable after the date of this Agreement.
5.5 Agreements to Take Reasonable Action. Seagate Software shall take, and
shall cause its subsidiaries to take, all reasonable actions necessary to
comply promptly with all legal requirements which may be imposed on Seagate
Software or its subsidiaries with respect to the Merger (including furnishing
the information required under the HSR Act) and shall take all reasonable
actions necessary to cooperate promptly with and furnish information to Seagate
Technology in connection with any such requirements imposed upon Seagate
Technology or Sub or any subsidiary of Seagate Technology or Sub in connection
with the Merger. Seagate Software shall take, and shall cause its subsidiaries
to take, all reasonable actions necessary (i) to obtain (and will take all
reasonable actions necessary to promptly cooperate with Seagate Technology or
Sub and their subsidiaries in obtaining) any clearance, consent, authorization,
order or approval of, or any exemption by, any Governmental Entity, or other
third party, required to be obtained or made by Seagate Software or any of its
subsidiaries (or by Seagate Technology or any of its subsidiaries) in
connection with the Merger or the taking of any action contemplated by this
Agreement; (ii) to lift, rescind or mitigate the effect of any injunction or
restraining order or other order adversely affecting the ability of Seagate
Software to consummate the transactions contemplated hereby; (iii) to fulfill
all conditions applicable to Seagate Software or Seagate Technology pursuant to
this Agreement reasonably within that party's control; and (iv) to prevent,
with respect to a threatened or pending temporary, preliminary or permanent
injunction or other order, decree or ruling or statute, rule, regulation or
executive order, the entry, enactment or promulgation thereof, as the case may
be; provided, however, that with respect to clauses (i) through (iv) above,
Seagate Software and its subsidiaries will take only such curative measures
(such as licensing and divestiture) as Seagate Technology and Seagate Software
mutually determine, in good faith, to be reasonable.
Seagate Technology and Sub shall take, and shall cause their subsidiaries to
take, all reasonable actions necessary to comply promptly with all legal
requirements which may be imposed on them or their subsidiaries with respect to
the Merger (including furnishing the information required under the HSR Act)
and shall take all reasonable actions necessary to cooperate promptly with and
furnish information to Seagate Software in connection with any such
requirements imposed upon Seagate Software or any subsidiary of Seagate
Software in connection with the Merger. Seagate Technology and Sub shall take,
and shall cause their subsidiaries to take, all reasonable actions necessary
(i) to obtain (and will take all reasonable actions necessary to promptly
cooperate with Seagate Software and its subsidiaries in obtaining) any
clearance, consent, authorization, order or approval of, or any exemption by,
any Governmental Entity, or other third party, required to be obtained or made
by Seagate Technology or any of its subsidiaries (or by Seagate Software or any
of its subsidiaries) in connection with the Merger or the taking of any action
contemplated by this Agreement; (ii) to lift, rescind or mitigate the effect of
any injunction or restraining order or other order adversely affecting the
ability of Seagate Technology or Sub to consummate the transactions
contemplated hereby; (iii) to fulfill all conditions applicable to Seagate
Technology or Sub or Seagate Software pursuant to this Agreement; and (iv) to
prevent, with respect to a threatened or pending temporary, preliminary or
permanent injunction or other order, decree or ruling or statute, rule,
regulation or executive order, the entry, enactment or promulgation thereof, as
the case may be; provided, however, that with respect to clauses (i) through
(iv) above Seagate Technology and its subsidiaries will take only such curative
measures (such as licensing and divestiture) as Seagate Technology determines,
in good faith, to be reasonable.
Subject to the terms and conditions of this Agreement, each of the parties
shall use all reasonable efforts to take, or cause to be taken, all actions and
to do, or cause to be done, all things necessary, proper or advisable
A-13
<PAGE>
under applicable laws and regulations to consummate and make effective as
promptly as practicable the transactions contemplated by this Agreement,
subject to the appropriate approval of the shareholders of Seagate Software.
Seagate Technology and Seagate Software will use their reasonable best efforts
to resolve any competitive issues relating to or arising under the HSR Act or
any other federal or state antitrust or fair trade law raised by any
Governmental Entity including making offers of curative divestitures and/or
licensing of technology which Seagate Technology determines, in good faith, to
be reasonable. If such offers are not accepted by such Governmental Entity,
Seagate Technology (with Seagate Software's cooperation) shall pursue all
litigation resulting from such issues. The parties hereto will consult and
cooperate with one another, and consider in good faith the views of one
another, in connection with any analyses, appearances, presentations,
memoranda, briefs, arguments, opinions and proposals made or submitted by or on
behalf of any party hereto in connection with proceedings under or relating to
the HSR Act or any other federal or state antitrust or fair trade law.
5.6 Consents. Seagate Technology, Sub and Seagate Software shall each use
best efforts to obtain the consent and approval of, or effect the notification
of or filing with, each person or authority whose consent or approval is
required of any of Seagate Technology, Seagate Software or Sub in order to
permit the consummation of the Merger and the transactions contemplated by this
Agreement and to enable the Surviving Corporation to conduct and operate the
business of Seagate Software and its subsidiaries substantially as presently
conducted and as contemplated to be conducted.
5.7 NYSE Additional Shares Listing. Seagate Technology will cause the shares
of Seagate Technology Common Stock issuable to the shareholders and optionees
of Seagate Software in the Merger to be listed for trading on the NYSE.
5.8 Affiliates. Set forth on Exhibit A hereto is a list of those persons who
may be deemed to be, in Seagate Software's reasonable judgment, affiliates of
Seagate Software within the meaning of Rule 145 promulgated under the
Securities Act (each a "Seagate Software Rule 145 Affiliate"). Seagate Software
will provide Seagate Technology with such information and documents as Seagate
Technology reasonably requests for purposes of reviewing such list. Seagate
Software will use its reasonable best efforts to deliver or cause to be
delivered to Seagate Technology, as promptly as practicable on or following the
date hereof, from each Seagate Software Rule 145 Affiliate an executed
affiliate agreement in substantially the form attached hereto as Exhibit B (the
"Seagate Software Affiliate Agreement"), each of which will be in full force
and effect as of the Effective Time. Seagate Technology will be entitled to
place appropriate legends on the shares of Seagate Technology Common Stock to
be received by a Seagate Software Affiliate pursuant to the terms of this
Agreement, and to issue appropriate stop transfer instructions to the transfer
agent for the Seagate Technology Common Stock, consistent with the terms of the
Seagate Software Affiliate Agreement.
5.9 Seagate Software Options. Seagate Software shall amend all outstanding
options granted under the Seagate Software 1996 Stock Option Plan or any other
stock plan or arrangement (the "Accelerated Options") to provide that the
Accelerated Options are fully vested and exercisable immediately prior to the
Closing. The vesting acceleration will be contingent on the closing of the
Merger. Seagate Software agrees to advise all of its employees who hold
Accelerated Options to make an election not less than ten (10) Business Days
prior to the Effective Date to either (i) exercise any or all of such
employee's Accelerated Options at the time such Accelerated Options become
fully vested and exercisable and purchase the related shares of Seagate
Software Common Stock (which shares shall convert into shares of Seagate
Technology Common Stock pursuant to the Merger upon the Effective Date) or (ii)
receive a payment of Seagate Technology Common Stock as soon as possible after
the Effective Date equal to the Exchange Ratio multiplied by the total number
of shares issuable upon exercise of the outstanding options less the number of
Seagate Technology shares which equal in value the aggregate exercise price
plus all withholding taxes required under applicable law. All accelerated
options will terminate upon the Closing.
5.10 Indemnification and Insurance. From and after the Effective Time,
Seagate Technology will, and will also cause the Surviving Corporation to,
fulfill and honor in all respects the obligations of Seagate Software pursuant
to any indemnification agreements between Seagate Software and its present and
former
A-14
<PAGE>
directors and officers in effect immediately prior to the Effective Time (the
"Indemnified Parties") and any indemnification provisions under Seagate
Software's Certificate of Incorporation or Bylaws as in effect on the date
hereof. The Certificate of Incorporation and Bylaws of the Surviving
Corporation will contain provisions with respect to exculpation and
indemnification that are at least as favorable to the Indemnified Parties as
those contained in the Certificate of Incorporation and Bylaws of Seagate
Software as in effect on the date hereof, which provisions will not be amended,
repealed or otherwise modified for a period of six years from the Effective
Time in any manner that would adversely affect the rights thereunder of
individuals who, immediately prior to the Effective Time, were directors,
officers, employees or agents of Seagate Software, unless such modification is
required by law.
For a period of six years after the Effective Time, Seagate Technology will,
or will cause the Surviving Corporation to, use all commercially reasonable
efforts to maintain in effect, if available, directors' and officers' liability
insurance covering those persons who are currently covered by Seagate
Software's directors' and officers' liability insurance policy on terms
substantially similar to those applicable to the current directors and officers
of Seagate Software; provided, however, that in no event will Seagate
Technology or the Surviving Corporation be required to expend in excess of 125%
of the annual premium currently paid by Seagate Software for such coverage (or
such coverage as is available for such 125% of such annual premium).
The provisions of this Section 5.10 are intended to be in addition to the
rights otherwise available to the Indemnified Parties by law, charter, statute,
bylaw, resolution of the Board of Directors of Seagate Software or agreement,
and shall operate for the benefit of, and shall be enforceable by, each of the
Indemnified Parties, their heirs and their representatives.
5.11 Tax-Free Reorganization. From and after the date of this Agreement,
each of Seagate Technology, Sub and Seagate Software shall use best efforts to
cause the Merger to qualify, and shall not, without the prior written consent
of the other party hereto, knowingly take any actions or cause any actions to
be taken which could prevent the Merger from qualifying as a reorganization
under the provisions of Section 368(a) of the Code. In particular, Seagate
Technology and Sub represent and warrant that they have no plan to cause the
Surviving Corporation to issue additional shares of its Stock, or dispose of
stock, that would result in Seagate Technology or Surviving Corporation losing
control of the Surviving Corporation within the meaning of Section 368(c) of
the Code.
ARTICLE VI
CONDITIONS PRECEDENT
6.1 Conditions to Each Party's Obligation to Effect the Merger. The
respective obligation of each party to effect the Merger is subject to the
satisfaction prior to the Closing Date of the following conditions:
(a) Shareholder Approval. This Agreement shall have been approved and
adopted by the requisite vote of the shareholders of Seagate Software (as
described in Section 3.10), in accordance with applicable law.
(b) Effectiveness of the S-4. The S-4 shall have been declared effective by
the SEC under the Securities Act and shall not be the subject of any stop order
or proceeding by the SEC seeking a stop order.
(c) Governmental Entity Approvals. All material authorizations, consents,
orders or approvals of, or declarations or filings with, or expiration of
waiting periods imposed by, any Governmental Entity necessary for the
consummation of the transactions contemplated by this Agreement shall have been
filed, expired or been obtained, other than those that, individually or in the
aggregate, the failure to be filed, expired or obtained would not, in the
reasonable opinion of Seagate Technology, have a Material Adverse Effect on
Seagate Software or Seagate Technology.
(d) No Injunctions or Restraints; Illegality. No temporary restraining
order, preliminary or permanent injunction or other order issued by any court
of competent jurisdiction or other legal restraint or prohibition (an
A-15
<PAGE>
"Injunction") preventing the consummation of the Merger shall be in effect, nor
shall any proceeding brought by an administrative agency or commission or other
governmental authority or instrumentality, domestic or foreign, seeking any of
the foregoing be pending; and there shall not be any action taken, or any
statute, rule, regulation or order (whether temporary, preliminary or
permanent) enacted, entered or enforced which makes the consummation of the
Merger illegal or prevents or prohibits the Merger.
(e) Tax Opinions. Seagate Technology and Seagate Software shall have
received written opinions from Ernst & Young LLP in form and substance
reasonably satisfactory to them to the effect that the Merger will constitute a
reorganization within the meaning of Section 368(a) of the Code with respect to
the Seagate Technology Common Stock to be received by stockholders of Seagate
Software in the Merger. In rendering such opinions, counsel may rely upon (and
Seagate Technology, Sub and Seagate Software shall be required to make)
reasonably requested representations of Seagate Technology, Sub and Seagate
Software.
(f) Listing of Shares. Seagate Technology will have amended its listing
application with the NYSE to include the shares of Common Stock issued under
this Agreement.
6.2 Conditions of Obligations of Seagate Technology and Sub. The obligations
of Seagate Technology and Sub to effect the Merger are subject to the
satisfaction of the following additional conditions, unless waived in writing
by Seagate Technology:
(a) Representations and Warranties. The representations and warranties of
Seagate Software set forth in this Agreement shall be true and correct
(determined without regard to any materiality qualifiers in any particular
representation or warranty, including without limitation "Material Adverse
Effect") (i) as of the date hereof and (ii) as of the Closing Date, as though
made on and as of the Closing Date (provided that in the cases of clauses (i)
and (ii) any such representation and warranty made as of a specific date shall
be true and correct as of such specific date), except for such inaccuracies as
individually or in the aggregate which would not have a Material Adverse Effect
(x) in the case of clause (i) on Seagate Software and subsidiaries taken as a
whole and (y) in the case of clause (ii) on Seagate Technology, Seagate
Software and their respective subsidiaries taken as a whole (as if the Merger
were consummated); and Seagate Technology shall have received a certificate
signed by the president and the chief financial officer of Seagate Software to
such effect.
(b) Performance of Obligations of Seagate Software. Seagate Software shall
have performed in all material respects all obligations and covenants required
to be performed by it under this Agreement prior to or as of the Closing Date,
and Seagate Technology shall have received a certificate signed by the chief
executive officer and the chief financial officer of Seagate Software to such
effect.
(c) Consents. Seagate Technology and Sub shall have received duly executed
copies of all third-party consents and approvals contemplated by this Agreement
in form and substance reasonably satisfactory to Seagate Technology and Sub,
except those consents that the failure to so receive would not, individually or
in the aggregate, have a Material Adverse Effect on Seagate Software.
(d) Shareholder Consent. This Agreement and the Merger shall have been
approved by the affirmative vote of the holders of at least a majority of the
outstanding Seagate Software Capital Stock, voting together as a single class,
and a majority of the outstanding shares of the Seagate Software Preferred
Stock, voting as a separate class.
(e) Shares. No more than 11,250,000 shares of Seagate Technology Common
Stock shall be issuable in the Merger.
6.3 Conditions of Obligation of Seagate Software. The obligation of Seagate
Software to effect the Merger is subject to the satisfaction of the following
conditions, unless waived in writing by Seagate Software:
(a) Representations and Warranties. The representations and warranties of
Seagate Technology and Sub set forth in this Agreement shall be true and
correct (determined without regard to any materiality qualifiers in any
particular representation or warranty, including without limitation "Material
Adverse Effect") (i) as of the date hereof and (ii) as of the Closing Date, as
though made on and as of the Closing Date (provided that in the cases of
clauses (i) and (ii) any such representation and warranty made as of a specific
A-16
<PAGE>
and its subsidiaries taken as a whole and (y) in the case of clause (ii) on
Seagate Technology, Seagate Software and their respective subsidiaries taken as
a whole (as if the Merger were consummated); and Seagate Software shall have
received a certificate signed by the chief executive officer and the chief
financial officer of Seagate Technology and the president of Sub to such
effect.
(b) Performance of Obligations of Seagate Technology and Sub. Each of
Seagate Technology and Sub shall have performed in all material respects all
obligations and covenants required to be performed by it under this Agreement
prior to or as of the Closing Date, and Seagate Software shall have received a
certificate signed by the chief executive officer and the chief financial
officer of Seagate Technology and the president of Sub to such effect.
ARTICLE VII
TERMINATION
7.1 Termination. This Agreement may be terminated at any time prior to the
Effective Time of the Merger, whether before or after approval of the Merger by
the shareholders of Seagate Software:
(a) by mutual written consent duly authorized by the Boards of Directors of
Seagate Technology and Seagate Software;
(b) by either Seagate Technology or Seagate Software if the Merger shall not
have been consummated by February 29, 2000 (provided that if the Merger shall
not have been consummated due to the waiting period (or any extension thereof)
under the HSR Act not having expired or been terminated, or due to an action
having been instituted by the Department of Justice or Federal Trade Commission
challenging or seeking to enjoin the consummation of the Merger, then such date
shall be extended to June 30, 2000, and provided further that the right to
terminate this Agreement under this Section 7.1(b) shall not be available to
any party whose action or failure to act has been the cause of or resulted in
the failure of the Merger to occur on or before such date and such action or
failure to act constitutes a breach of this Agreement);
(c) by Seagate Technology if at any time prior to the Closing more than
11,250,000 shares of Seagate Technology Common Stock shall be issuable in the
Merger.
7.2 Effect of Termination. In the event of the termination of this Agreement
as provided in Section 7.1, this Agreement shall be of no further force or
effect, except (i) as set forth in this Section 7.2, Section 7.3 and Article 8,
each of which shall survive the termination of this Agreement, and (ii) nothing
herein shall relieve any party from liability for any breach of this Agreement.
No termination of this Agreement shall affect the obligations of the parties
contained in the Confidentiality Agreement, all of which obligations shall
survive the termination of this Agreement in accordance with its terms.
7.3 Fees and Expenses. Except as set forth in this Section 7.3, all fees and
expenses incurred in connection with this Agreement and the transactions
contemplated hereby shall be paid by the party incurring such expenses, whether
or not the Merger is consummated; provided, however, that Seagate Technology
and Seagate Software shall share equally all fees and expenses, other than
attorneys' fees, incurred in relation to the printing and filing of the Proxy
Statement (including any preliminary materials related thereto) and the S-4
(including financial statements and exhibits) and any amendments or supplements
thereto.
ARTICLE VIII
GENERAL PROVISIONS
8.1 Amendment. This Agreement may be amended prior to the Effective Time by
the parties, by action taken by their respective Boards of Directors, at any
time before or after approval of the Merger by the shareholders of Seagate
Software but, after any such approval, no amendment shall be made which by law
requires further approval by such shareholders without such further approval.
This Agreement may not be amended except by an instrument in writing signed on
behalf of each of the parties.
A-17
<PAGE>
8.2 Extension; Waiver. At any time prior to the Effective Time, the parties,
by action taken by their respective Boards of Directors, may (i) extend the
time for the performance of any of the obligations or other acts of the other
parties, (ii) waive any inaccuracies in the representations and warranties
contained in this Agreement or in any document delivered pursuant to this
Agreement and (iii) waive compliance with any of the agreements or conditions
contained in this Agreement. Any agreement on the part of a party to any such
extension or waiver shall be valid only if set forth in an instrument in
writing signed on behalf of such party.
8.3 Nonsurvival of Representations, Warranties and Agreements. All
representations, warranties and agreements in this Agreement or in any
instrument delivered pursuant to this Agreement shall be deemed to be
conditions to the Merger and shall not survive the Merger, except for the
agreements contained in Sections 2.3 (further assurances) 5.9 (options), 5.10
(indemnification), 5.11 (tax-free reorganization) and 7.3 (fees and expenses),
each of which shall survive the Merger.
8.4 Entire Agreement. This Agreement, the other exhibits hereto and the
other documents referenced herein contain the entire agreement between the
parties with respect to the subject matter hereof and supersede all prior
arrangements and understandings, both written and oral, with respect thereto.
8.5 Severability. It is the desire and intent of the parties that the
provisions of this Agreement be enforced to the fullest extent permissible
under the law and public policies applied in each jurisdiction in which
enforcement is sought. Accordingly, in the event that any provision of this
Agreement would be held in any jurisdiction to be invalid, prohibited or
unenforceable for any reason, such provision, as to such jurisdiction, shall be
ineffective, without invalidating the remaining provisions of this Agreement or
affecting the validity or enforceability of such provision in any other
jurisdiction. Notwithstanding the foregoing, if such provision could be more
narrowly drawn so as not to be invalid, prohibited or unenforceable in such
jurisdiction, it shall, as to such jurisdiction, be so narrowly drawn, without
invalidating the remaining provisions of this Agreement or affecting the
validity or enforceability of such provision in any other jurisdiction.
8.6 Notices. All notices and other communications pursuant to this Agreement
shall be in writing and shall be deemed to be sufficient if contained in a
written instrument and shall be deemed given if delivered personally, faxed,
sent by nationally-recognized, overnight courier or mailed by registered or
certified mail (return receipt requested), postage prepaid, to the parties at
the following addresses (or at such other address for a party as shall be
specified by like notice):
if to Seagate Technology or Sub, to:
Seagate Technology, Inc.
920 Disc Drive
Scotts Valley, California 95067
Attention: Chief Financial Officer
Facsimile: (831) 438-6550
with a copy to:
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, California 94304
Attention: Larry W. Sonsini, Esq./John T. Sheridan, Esq.
Facsimile: (650) 493-6911
if to Seagate Software, to:
Seagate Software, Inc.
915 Disc Drive
Scotts Valley, California 95066
Attention: Chief Financial Officer
Facsimile: (831) 438-6550
cc: Legal Department
A-18
<PAGE>
with a copy to:
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, California 94304
Attention: Larry W. Sonsini, Esq./John T. Sheridan, Esq.
Facsimile: (650) 493-6811
All such notices and other communications shall be deemed to have been
received (a) in the case of personal delivery, on the date of such delivery,
(b) in the case of a fax, when the party receiving such fax shall have
confirmed receipt of the communication, (c) in the case of delivery by
nationally-recognized, overnight courier, on the Business Day following
dispatch and (d) in the case of mailing, on the third Business Day following
such mailing.
8.7 Headings. The headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement.
8.8 Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each
of the parties and delivered to the other parties, it being understood that all
parties need not sign the same counterpart.
8.9 Benefits; Assignment. This Agreement is not intended to confer upon any
person other than the parties any rights or remedies hereunder and shall not be
assigned by operation of law or otherwise; provided, however, that (i) the
holders of Seagate Software Options are intended beneficiaries of the covenants
and agreements contained in Section 5.9; (ii) the officers and directors of
Seagate Software are intended beneficiaries of the covenants and agreements
contained in Section 5.10 and (iii) Sub may assign all or any portion of its
rights hereunder to any other newly-formed, wholly-owned subsidiary of Seagate
Technology, and Seagate Software shall execute any amendment to this Agreement
necessary to provide the benefits of this Agreement to any such assignee.
8.10 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of California where applicable to
contracts made and to be performed therein except to the extent that the laws
of the State of Delaware shall govern the Merger.
[Remainder of Page Intentionally Left Blank]
A-19
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be signed by
their respective officers thereunto duly authorized, as of the date first
written above.
SEAGATE TECHNOLOGY, INC.
/s/ Stephen J. Luczo
By:_____________________________________
Stephen J. Luczo
Name: __________________________________
President and Chief Executive
Officer
Title: _________________________________
SEAGATE DAYLIGHT MERGER CORP.
/s/ Gregory B. Kerfoot
By:_____________________________________
Gregory B. Kerfoot
Name: __________________________________
President
Title: _________________________________
SEAGATE SOFTWARE, INC.
/s/ Gregory B. Kerfoot
By:_____________________________________
Gregory B. Kerfoot
Name: __________________________________
President and Chief Operating
Officer
Title: _________________________________
A-20
<PAGE>
EXHIBIT A
AFFILIATES
Stephen J. Luczo
Gary B. Filler
Lawrence Perlman
Donald L. Waite
Gregory B. Kerfoot
Ellen E. Chamberlain
A-21
<PAGE>
EXHIBIT B
AFFILIATE AGREEMENT
THIS AFFILIATE AGREEMENT ("Agreement") is dated as of September , 1999,
between Seagate Technology, Inc., a Delaware corporation ("Seagate
Technology"), and the undersigned affiliate ("Affiliate") of Seagate Software,
Inc., a Delaware corporation ("Seagate Software").
WHEREAS, Seagate Technology and Seagate Software propose to enter into an
Agreement and Plan of Reorganization ("Merger Agreement") pursuant to which a
subsidiary of Seagate Technology will merge into Seagate Software ("Merger"),
and Seagate Software will become a wholly-owned subsidiary of Seagate
Technology (capitalized terms not otherwise defined herein shall have the
meanings ascribed to them in the Merger Agreement);
WHEREAS, pursuant to the Merger, at the Effective Time outstanding shares of
Seagate Software Capital Stock, including any shares owned by Affiliate, will
be converted into the right to receive shares of Common Stock of Seagate
Technology;
WHEREAS, the execution and delivery of this Agreement by Affiliate is a
material inducement to Seagate Technology to enter into the Merger Agreement;
WHEREAS, it is intended that the Merger will constitute a reorganization
within the meaning of Section 368(b) of the Internal Revenue Code of 1986, as
amended (the "Code"), and that it will be a condition to effectiveness of the
Merger that legal counsel for each of Seagate Software and Seagate Technology
deliver written opinions to such effect;
WHEREAS, Affiliate has been advised and understands that the Merger
constitutes a transaction covered by Rule 145 ("Rule 145") promulgated under
the Securities Act of 1933, as Amended (the "Securities Act"), the Affiliate
may be deemed to be an "affiliate" of Seagate Software, as the term "affiliate"
is used (i) for purposes of paragraphs (c) and (d) of Rule 145 of the Rules and
Regulations (the "Rules and Regulations") of the Securities and Exchange
Commission (the "Commission") and (ii) in the Commission's Accounting Series
Releases 130 and 135, as amended, and the Seagate Technology Common Stock that
the Affiliate will acquire in connection with the Merger may be disposed of
only in conformity with Rule 145 and other provisions described herein,
although nothing contained herein shall be construed as an admission by
Affiliate that Affiliate is in fact an affiliate of Seagate Software.
NOW, THEREFORE, intending to be legally bound, the parties hereby agree as
follows:
1. Acknowledgments by Affiliate.
(a) Affiliate has full power to execute this Agreement and to make the
representations, warranties and agreements herein and to perform the
Affiliate's obligations hereunder.
(b) Affiliate acknowledges and understands that the representations,
warranties and covenants by Affiliate set forth herein will be relied upon by
Seagate Technology, Seagate Software, and their respective Affiliates, counsel
and accounting firms, and that substantial losses and damages may be incurred
by these persons if Affiliate's representations, warranties or covenants are
breached. Affiliate has carefully read this Agreement and the Merger Agreement
and has discussed the requirements of this Agreement with his professional
advisors, who are qualified to advise him with regard to such matters.
2. Compliance with Rule 145 and the Act.
(a) Affiliate has been advised that (i) the issuance of shares of Seagate
Technology Common Stock in connection with the Merger is expected to be
effected pursuant to a Registration on Form S-4 to be filed with Commission to
register the shares of Seagate Technology Common Stock under the Securities
Act, and as such
A-22
<PAGE>
will not be deemed "restricted securities" within the meaning of Rule 144
promulgated under the Securities Act, and resale of such shares will not be
subject to any restrictions other than as set forth in Rule 145 promulgated
under the Securities Act (which will not apply if such shares are otherwise
transferred pursuant to an effective registration statement under the
Securities Act or an appropriate exemption from registration), and (ii)
Affiliate may be deemed to be an "affiliate" of Seagate Software within the
meaning of the Securities Act and, in particular, Rule 145 promulgated
thereunder. Affiliate accordingly agrees not to sell, transfer or otherwise
dispose of any Seagate Technology Common Stock issued to Affiliate in the
Merger unless (i) such sale, transfer or other disposition is made in
conformity with the requirements of Rule 145(d) promulgated under the
Securities Act; (ii) such sale, transfer or other disposition is made pursuant
to an effective registration statement under the Securities Act; or (iii)
Affiliate delivers to Seagate Technology a written opinion of counsel,
reasonably acceptable to Seagate Technology in form and substance, that such
sale, transfer or other disposition is otherwise exempt from registration under
the Securities Act. In connection with the obligations of Affiliate hereunder,
Seagate Technology agrees to file all reports required under the Exchange Act
of 1934, as amended, to satisfy all the requirements of Rule 144(c) as long as
Affiliate shall be subject to the requirements of Rule 145.
(b) Seagate Technology will give stop transfer instructions to its transfer
agent with respect to any Seagate Technology Common Stock received by Affiliate
pursuant to the Merger and there will be placed on the certificates
representing such Common Stock, or any substitutions therefor, a legend stating
in substance:
"THE SHARES REPRESENTED BY THIS CERTIFICATE WERE ISSUED IN A TRANSACTION TO
WHICH RULE 145 APPLIES AND MAY ONLY BE TRANSFERRED IN CONFORMITY WITH RULE
145(D), PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") OR IN ACCORDANCE WITH A WRITTEN
OPINION OF COUNSEL, REASONABLY ACCEPTABLE TO THE ISSUER IN FORM AND SUBSTANCE,
THAT SUCH TRANSFER IS EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT."
The legend set forth above shall be removed (by delivery of a substitute
certificate without such legend) and Seagate Technology shall so instruct its
transfer agent, if Affiliate delivers to Seagate Technology (i) satisfactory
written evidence that the shares have been sold in compliance with Rule 145 (in
which case, the substitute certificate will be issued in the name of the
transferee), or (ii) an opinion of counsel, in form and substance reasonably
satisfactory to Seagate Technology, to the effect that public sale of the
shares by the holder thereof is no longer subject to Rule 145.
3. Beneficial Ownership of Stock. Except for the Seagate Software Common
Stock and options to purchase Seagate Software Common Stock set forth in
Appendix A hereto, Affiliate does not beneficially own any shares of Seagate
Software Common Stock or any other equity securities of Seagate Software or any
options, warrants or other rights to acquire any equity securities of Seagate
Software.
4. Notices.
(a) All notices and other communications required or permitted hereunder
shall be in writing and shall be delivered by hand or delivered by overnight
courier, freight prepaid, or sent via facsimile (with acknowledgment of
complete transmission) to the parties at the following addresses (or at such
other address for a party as shall be specified by the notice):
(i) If to Seagate Technology, to:
Seagate Technology, Inc.
920 Disc Drive
Scotts Valley, CA 95067
Attention: Chief Financial Officer
Facsimile: (831) 438-6550
A-23
<PAGE>
with a copy to:
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, CA 94304-1050
Attention: Larry W. Sonsini, Esq./John T. Sheridan, Esq.
Facsimile: (650) 493-6811
(ii) If to the undersigned Affiliate, to:
------------------------------------
------------------------------------
------------------------------------
------------------------------------
Attention: __________________________
Facsimile: __________________________
Each such notice or other communication shall for all purposes of this
Agreement be treated as effective when received, and shall in any event be
deemed to have been received (i) when delivered, if delivered personally, or
sent by facsimile and confirmed in writing, or (ii) three business days after
the business day of deposit with overnight courier, addressed and shipped as
aforesaid.
5. Miscellaneous.
(a) For the convenience of the parties hereto, this Agreement may be
executed in one or more counterparts, each of which shall be deemed an
original, but all of which together shall constitute one and the same document.
(b) This Agreement shall be enforceable by, and shall inure to the benefit
of and be binding upon, the parties hereto and their respective successors and
assigns. As used herein, the term "successors and assigns" shall mean, where
the context so permits, subsidiaries, heirs, executors, administrators,
trustees and successor trustees, and personal and other representatives.
(c) This Agreement shall be governed by and construed, interpreted and
enforced in accordance with the laws of the State of California without
reference to the conflicts of laws principles thereof.
(d) If a court of competent jurisdiction determines that any provision of
this Agreement is not enforceable or is enforceable only if limited in time
and/or scope, this Agreement shall continue in full force and effect with such
provision stricken or so limited.
(e) Counsel to and accountants for the parties to the Agreement shall be
entitled to rely upon this Agreement as needed.
(f) This Agreement shall not be modified or amended, or any right hereunder
waived or any obligation excused, except by a written agreement signed by both
parties.
(g) The capitalized terms used and not defined herein shall have the same
meanings set forth in the Merger Agreement.
(h) The headings contained in this Agreement are for reference only and
shall not affect in any way the meaning or interpretation of this Agreement.
A-24
<PAGE>
Executed as of the date shown on the first page of this Agreement.
SEAGATE TECHNOLOGY, INC.
By:_____________________________________
Name: __________________________________
Title: _________________________________
AFFILIATE
By:_____________________________________
Name of Affiliate: _____________________
Name of Signatory (if different from
name of Affiliate): ____________________
Title of Signatory (if applicable): ____
[Seagate Software Affiliate Agreement Signature Page]
A-25
<PAGE>
APPENDIX A
Affiliate: _____________________________________________________________________
Total Number of shares of Seagate Software Common Stock owned on the date
hereof:
- ----------------------------------------
Total Number of options to purchase Seagate Software Common Stock owned on the
date hereof (including the dates of grant, vesting, exercise prices and
expiration dates):
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[Signature Page to Agreement and Plan of Reorganization]
A-26
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's board of directors to grant, indemnity to directors
and officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act. The registrant's certificate of
incorporation and bylaws provide for indemnification of the registrant's
directors, officers, employees and other agents to the maximum extent permitted
by the Delaware law. In addition, the registrant has entered into
indemnification agreements with its officers and directors.
ITEM 21. EXHIBITS
<TABLE>
<CAPTION>
Exhibits: Notes:
--------- ------
<C> <S> <C>
2.1 Agreement and Plan of Reorganization dated September 2, **
1999 among Seagate Technology, Inc., Seagate Daylight
Merger Corp. and Seagate Software, Inc.
3.1 Certificate of Incorporation of Registrant, as amended. (A)
3.2 By-Laws of Registrant, as amended. (B)
4.1 Indenture, dated as of March 1, 1997 (the "Indenture"), (C)
between Seagate Technology, Inc. and First Trust of
California, National Association, as Trustee.
4.2 Officers' Certificate pursuant to Section 301 of the (C)
Indenture, without Exhibits,
establishing the terms of Seagate Technology's senior
notes and senior debentures.
4.3 Form of Senior Note. (C)
4.4 Form of Senior Debenture. (C)
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, *
Professional Corporation.
8.1 Tax opinion of Ernst & Young LLP. *
8.2 Tax opinion of Wilson Sonsini Goodrich & Rosati, *
Professional Corporation.
10.1 1983 Incentive Stock Option Plan and form of Stock (E)
Option Agreement.
10.2 Seagate Technology Employee Stock Purchase Plan, as (K)
amended.
10.3 Registrant's Executive Stock Plan. (I)
10.4 Conner Peripherals, Inc. 1986 Incentive Stock Plan. (I)
10.5 Building Agreement for Land At Private Lot A14547 in Yio (K)
Chu Kang dated
May 30, 1996 between Seagate Technology International
and Jurong Town
Corporation.
10.6 Lease Agreement dated July 18, 1994 between Universal (K)
Appliances Limited
and Seagate Technology (Thailand) Limited.
10.7 1991 Incentive Stock Option Plan and form of Option (K)
Agreement, as amended.
10.8 Acquisition Agreement dated as of September 29, 1989 by (G)
and among Seagate
Technology, Inc. and Control Data Corporation, Imprimis
Technology
Incorporated and Magnetic Peripherals, Inc.
10.9 Amended and Restated Directors' Option Plan and form of (H)
Option Agreement.
10.10 Amended and Restated Archive Corporation Stock Option (I)
and Restricted
Stock Purchase Plan--1981.
10.11 Amended and Restated Archive Corporation Incentive Stock (I)
Option Plan--1981.
10.12 Conner Peripherals, Inc.--Arcada Holdings, Inc. Stock (J)
Option Plan.
10.13 Arcada Holdings, Inc. 1994 Stock Option Plan. (J)
10.14 Separation Agreement and Release between the Registrant (K)
and Alan F. Shugart
dated as of July 29, 1998.
10.15 1998 Nonstatutory Stock Option Plan and form of Stock (I)
Option Agreement.
21.1 Subsidiaries of the Registrant. (I)
23.1 Consent of Ernst & Young LLP, Independent Auditors. *
23.2 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Power of Attorney (included on page II-4). *
99.1 Form of Proxy *
</TABLE>
II-1
<PAGE>
- --------
* Filed herewith
** Incorporated by reference to Appendix A attached to the Proxy
Statement/Prospectus on Form S-4 filed with the Securities and Exchange
Commission on September 3, 1999.
(A) Incorporated by reference to exhibits filed in response to Item 16,
"Exhibits," of the Company's Registration Statement on Form S-3 (File No.
33-13430) filed with the Securities and Exchange Commission on April 14,
1987.
(B) Incorporated by reference to exhibits filed in response to Item 14(a),
"Exhibits," of the Company's Form 10-K, as amended, for the year ended June
30, 1990.
(C) Incorporated by reference to exhibits filed in response to Item 7(b),
"Financial Statements and Exhibits" of the Company's Current Report on Form
8-K dated March 4, 1997.
(E) Incorporated by reference to exhibits filed in response to Item 14(a),
"Exhibits," of the Company's Form 10-K for the year ended June 30, 1983.
(G) Incorporated by reference to exhibits filed in response to Item 7(c),
"Exhibits," of the Company's Current Report on Form-8K dated October 2,
1989.
(H) Incorporated by reference to exhibits filed in response to Item 14(a),
"Exhibits," of the Company's Form 10-K for the year ended June 30, 1991.
(I) Incorporated by reference to exhibits filed in response to Item 14(a),
"Exhibits," of the Company's Form 10-K for the year ended July 2, 1999.
ITEM 22. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended (the "Securities Act");
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement or any material change to such
information in the Registration Statement set forth in the Registration
Statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of post-effective amendment any
of the securities being registered which remain unsold at the termination
of the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") (and, where
applicable, each filing of an employee benefit plan's annual report pursuant to
Section 15(d) of the Exchange Act) that is incorporated by reference in the
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
II-2
<PAGE>
(c) The undersigned registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this Registration Statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable forms.
(d) The registrant undertakes that every prospectus: (i) that is filed
pursuant to paragraph (c) immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Securities Act and is used in
connection with an offering of securities subject to Rule 415, will be filed as
a part of an amendment to the Registration Statement and will not be used until
such amendment is effective, and that, for purposes of determining any
liability under the Securities Act, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bonafide offering thereof.
(e) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, and otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final of such issue.
(f) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of this Form, within one business day after receipt
of such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the Registration Statement through
the date of responding to the request.
(g) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and Seagate
Software being acquired involved therein, that was not the subject of and
included in the Registration Statement when it becomes effective.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Scotts Valley, State of
California, on this 3rd day of September, 1999.
SEAGATE TECHNOLOGY, INC.
/s/ Stephen J. Luczo
By: ___________________________
Stephen J. Luczo
Chief Executive Officer,
President and a
Director
POWER OF ATTORNEY
Know All Men By These Presents, that each person whose signature appears
below constitutes and appoints Stephen J. Luczo and Charles C. Pope, jointly
and severally, his attorney-in-fact, each with full power of substitution for
him or her in any and all capacities, to sign any amendments to this
Registration Statement (including post-effective amendments), and to file the
same, with exhibits thereto and other documents in connection therewith, with
the Securities and Exchange Commission, hereby ratifying and confirming all
that each of said attorneys-in-fact, or his or her substitute or substitutes,
may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Stephen J. Luczo Chief Executive Officer, September 3, 1999
____________________________________ President and a Director
(Stephen J. Luczo) (Principal Executive
Officer)
/s/ Charles C. Pope Executive Vice President and September 3, 1999
____________________________________ Chief Financial Officer
(Charles C. Pope) (Principal Financial and
Accounting Officer)
/s/ Gary B. Filler Co-Chairman of the Board September 3, 1999
____________________________________
(Gary B. Filler)
/s/ Lawrence Perlman Co-Chairman of the Board September 3, 1999
____________________________________
(Lawrence Perlman)
/s/ Kenneth Haughton Director September 3, 1999
____________________________________
(Kenneth Haughton)
/s/ Robert A. Kleist Director September 3, 1999
____________________________________
(Robert A. Kleist)
/s/ Thomas P. Stafford Director September 3, 1999
____________________________________
(Thomas P. Stafford)
/s/ Laurel L. Wilkening Director September 3, 1999
____________________________________
(Laurel L. Wilkening)
</TABLE>
II-4
<PAGE>
SEAGATE TECHNOLOGY, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Col. A Col. B Col. C Col. D Col. E Col. F
------ ------ ------ ------ ------ ------
Additions
---------
Balance at Charged to Charged to Balance at
Beginning Costs and Other Accounts-- Deductions-- End of
Description of Period Expenses Describe Describe (1) Period
----------- ----------- ---------- ---------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Year Ended July 2, 1999:
Deducted from asset
accounts:
Allowance for doubtful
accounts............... $54,130,000 $ 457,000 $ -- $ 2,058,000 $52,529,000
=========== ========== ===== =========== ===========
Year Ended July 3, 1998:
Deducted from asset
accounts:
Allowance for doubtful
accounts............... $60,413,000 $1,182,000 $ -- $ 7,465,000 $54,130,000
=========== ========== ===== =========== ===========
Year Ended June 27,
1997:
Deducted from asset
accounts:
Allowance for doubtful
accounts............... $66,656,000 $5,729,000 $ -- $11,972,000 $60,413,000
=========== ========== ===== =========== ===========
</TABLE>
- --------
(1) Uncollectible accounts written off, net of recoveries.
II-5
<PAGE>
EXHIBIT 5.1
OPINION OF WILSON SONSINI GOODRICH & ROSATI
September 2, 1999
Seagate Technology, Inc.
920 Disc Drive
Scotts Valley, California 95067
Re: Registration Statement on Form S-4
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-4 to be filed by you
with the Securities and Exchange Commission (the "Commission") on or about
September 3, 1999 (as such may be further amended or supplemented, the
"Registration Statement"), in connection with the registration under the
Securities Act of 1933, as amended (the "Act"), of up to 11,250,000 shares of
your common stock, par value $0.01 per share (the "Shares"). As your counsel in
connection with this transaction, we have examined the proceedings proposed to
be taken by you in connection with the sale of the Shares.
Based on the foregoing, it is our opinion that, upon conclusion of the
proceedings being taken or contemplated to be taken prior to the sale of the
Shares and upon completion of the proceedings taken in order to permit such
transactions to be carried out in accordance with the securities laws of
various states where required, the Shares, when sold in the manner described in
the Registration Statement, will be legally and validly issued, fully paid and
nonassessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement, and further consent to the use of our name wherever appearing in the
Registration Statement, including the prospectus constituting a part thereof,
which has been approved by us, as such may be further amended or supplemented.
Sincerely,
Wilson Sonsini Goodrich & Rosati
Professional Corporation
/s/ Wilson Sonsini Goodrich & Rosati
<PAGE>
EXHIBIT 8.1
September 2, 1999
Board of Directors
Seagate Technology, Inc.
920 Disc Drive
Scotts Valley, California 95066
Board of Directors
Seagate Software, Inc.
915 Disc Drive
Scotts Valley, California 95066
Re: Forced Exchange of Seagate Technology, Inc. Shares for Seagate
Software, Inc. Shares
Ladies and Gentlemen:
We have acted as tax advisors to Seagate Technology, Inc., a Delaware
Corporation, ("Seagate Technology") in connection with its proposed acquisition
of the common shares of Seagate Software, Inc., a Delaware Corporation and a
majority-owned subsidiary of Seagate Technology, ("Seagate Software") in
exchange for common shares of Seagate Technology in a reverse triangular merger
(the "Reorganization"). The proposed exchange of Seagate Technology shares for
Seagate Software shares will occur pursuant to the terms of the "Agreement and
Plan of Reorganization" attached as Appendix A to the Seagate Technology
Registration Statement Form S-4 (the "Registration Statement") filed in
connection with this transaction, and approved by the Board of Directors of
Seagate Technology on September 2, 1999, as evidenced by the minutes thereof
(the "Plan of Reorganization"). The Reorganization and certain proposed
transactions incident thereto are described in the Registration Statement which
includes the Proxy Statement/Prospectus of Seagate Technology (the "Proxy
Statement/ Prospectus"). This opinion is being rendered pursuant to the
requirements of Item 21(a) of Form S-4 under the Securities Act of 1933, as
amended. Unless otherwise indicated, any capitalized terms used herein and not
otherwise defined have the meaning ascribed to them in the Proxy
Statement/Prospectus.
In connection with this opinion, we have examined and are familiar with the Plan
of Reorganization, the Registration Statement, and such other presently existing
documents, records and matters of law as we have deemed necessary or appropriate
for purposes of our opinion. In addition, we have assumed (i) that the
Reorganization will be
<PAGE>
Board of Directors Board of Directors Page 2
Seagate Technology, Inc. Seagate Software, Inc. September 2, 1999
consummated in the manner contemplated by the Proxy Statement/Prospectus and in
accordance with the provisions of the Plan of Reorganization, (ii) the truth and
accuracy of the representations and warranties made by Seagate Technology and
Seagate Software in the Plan of Reorganization, and (iii) the truth and accuracy
of the certificates of representations to be provided to us by Seagate
Technology and Seagate Software.
Based upon and subject to the foregoing, the discussion contained in the
Registration Statement under the caption "Material United States income tax
consequences of the merger," subject to the limitations and qualifications
described therein, expresses our opinion as to the material U.S. Federal income
tax consequences if the Reorganization is effected in accordance with the terms
of the Plan of Reorganization. Because this opinion is being delivered prior to
the Effective Time of the Reorganization, it must be considered prospective and
dependent on future events. There can be no assurance that changes in the law
will not take place which could affect the U.S. Federal income tax consequences
of the Reorganization or that contrary positions may not be taken by the
Internal Revenue Service.
This opinion is furnished to you solely for use in connection with the
Registration Statement. We hereby consent to the filing of this opinion as an
exhibit to the Registration Statement. We also consent to the reference to our
firm name wherever appearing in the Registration Statement with respect to the
discussion of the material U.S. Federal income tax consequences of the
Reorganization, including the Proxy Statement/ Prospectus constituting a part
thereof, and any amendment thereto. In giving this consent, we do not thereby
admit that we are in the category of persons whose consent is required under
Section 7 of the Securities Act of 1933, as amended, or the rules and
regulations of the Securities and Exchange Commission thereunder, nor do we
thereby admit that we are experts with respect to any part of such Registration
Statement within the meaning of the term "experts" as used in the Securities Act
of 1933, as amended, or the rules and regulations of the Securities and Exchange
Commission thereunder.
Very truly yours,
/s/ Ernst & Young LLP
<PAGE>
EXHIBIT 8.2
650 PAGE MILL ROAD
PALO ALTO, CALIFORNIA 94304-1050
TELEPHONE 650-493-9300 FACSIMILE 650-493-6811
WWW.WSGR.COM
September 3, 1999
Seagate Technology, Inc.
920 Disc Drive
Scotts Valley, California 95067
Seagate Software, Inc.
915 Disc Drive
Scotts Valley, California 95066
Re: Agreement and Plan of Reorganization among Seagate Technology,
Inc., Seagate Software, Inc. and Seagate Daylight Merger Corp.
Ladies and Gentlemen:
We have acted as counsel to Seagate Technology, Inc., a Delaware
corporation ("STI") and Seagate Software, Inc., a Delaware Corporation, ("SSI")
in connection with the proposed merger (the "Merger") of Seagate Daylight Merger
Corp., a Delaware Corporation and wholly-owned transitory merger subsidiary of
STI ("Sub") with and into SSI pursuant to an Agreement and Plan of Merger dated
as of September 2, 1999, (the "Merger Agreement"). The Merger is described in
the Registration Statement on Form S-4 (the "Registration Statement") of STI.
This opinion is being rendered pursuant to the requirements of Item 21(a) of
Form S-4 under the Securities Act of 1933, as amended. Unless otherwise
indicated, any capitalized terms used herein and not otherwise defined have the
meaning ascribed to them in the Registration Statement.
In connection with this opinion, we have examined and are familiar
with the Registration Statement, and such other presently existing documents,
records and matters of law as we have deemed necessary or appropriate for
purposes of our opinion. In addition, we have assumed that the Merger will be
consummated in the manner contemplated by and in accordance with the provisions
of the Merger Agreement.
Based upon and subject to the foregoing, the discussion contained in
the Registration Statement under the subcaption "U.S. Consequences" under the
captions "Material tax consequences to optionees who do not exercise their
Seagate Software options prior to the merger and receive Seagate Technology
stock in cancellation of their options" and "Material tax consequences to
<PAGE>
Seagate Technology, Inc.
Seagate Software, Inc.
September 3, 1999
Page 2
optionees who exercise their options prior to the merger," all under the heading
"Material Income Tax Consequences of the Merger," subject to the limitations and
qualifications described therein, reflects our opinion as to the material United
States federal income tax consequences of the exercise of and the failure to
exercise incentive and nonstatutory stock options. Because this opinion is
being delivered prior to the Merger, it must be considered prospective and
dependent on future events. There can be no assurance that changes in the law
will not take place which could affect the Federal income tax consequences of
the exercise of incentive and nonstatutory stock options or that contrary
positions may not be taken by the Internal Revenue Service.
This opinion is furnished to you solely for use in connection with the
Registration Statement. We hereby consent to the filing of this opinion as an
exhibit to the Registration Statement. We also consent to the reference to our
firm name wherever appearing in the Registration Statement with respect to the
discussion of the material United States federal income tax consequences of the
exercise of incentive and nonstatutory stock options, and any amendment thereto.
In giving this consent, we do not thereby admit that we are in the category of
persons whose consent is required under Section 7 of the Securities Act of 1933,
as amended, or the rules and regulations of the Securities and Exchange
Commission thereunder, nor do we thereby admit that we are experts with respect
to any part of such Registration Statement within the meaning of the term
"experts" as used in the Securities Act of 1933, as amended, or the rules and
regulations of the Securities and Exchange Commission thereunder.
Very truly yours,
/s/ Wilson Sonsini Goodrich & Rosati
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
-2-
<PAGE>
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated July 15, 1999 (except for the Subsequent Events
note, as to which the date is August 17, 1999), with respect to the
consolidated financial statements of Seagate Technology, Inc. included in the
Proxy Statement of Seagate Software, Inc. that is made part of the Registration
Statement (Form S-4) and Prospectus of Seagate Technology, Inc. for the
registration of shares of its common stock.
We also consent to the incorporation by reference therein of our report
dated July 15, 1999 (except for the Subsequent Events note, as to which the
date is August 17, 1999), with respect to the consolidated financial statements
and schedule of Seagate Technology, Inc. included in its Annual Report (Form
10-K) for the year ended July 2, 1999, filed with the Securities and Exchange
Commission.
/s/ Ernst & Young LLP
San Jose, California
August 31, 1999
<PAGE>
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated July 23, 1999, with respect to the consolidated
financial statements of Seagate Software, Inc. included in the Proxy Statement
of Seagate Software, Inc. that is made part of the Registration Statement
(Form S-4) and Prospectus of Seagate Technology, Inc. for the registration of
shares of its common stock.
We also consent to the incorporation by reference therein of our report
dated July 23, 1999, with respect to the consolidated financial statements and
schedule of Seagate Software, Inc. included in its Annual Report (Form 10-K)
for the year ended July 2, 1999, filed with the Securities and Exchange
Commission.
/s/ Ernst & Young LLP
San Jose, California
August 30, 1999
<PAGE>
EXHIBIT 99.1
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS SEAGATE
SOFTWARE, INC. SPECIAL MEETING OF STOCKHOLDERS
The undersigned stockholder of Seagate Software, Inc., a Delaware
corporation, hereby acknowledges receipt of the Notice of Special Meeting
of Stockholders and Proxy Statement/Prospectus, each dated September ,
1999, and hereby appoints Gregory B. Kerfoot and Susan J. Wolfe, and each
of them, proxies and attorneys-in-fact, with full power to each of
substitution, on behalf and in the name of the undersigned, to represent
the undersigned at the Special Meeting of Stockholders of Seagate
Software, Inc. to be held on , 1999 at a.m., at the
offices of the Company, 915 Disc Drive, Scotts Valley, California 95066
and at any adjournments thereof and to vote all shares of Common Stock
which the undersigned would be entitled to vote if then and there
personally present, on the matters set forth on the reverse side:
THIS PROXY WILL BE VOTED AS DIRECTED OR, IF NO DIRECTION IS
INDICATED, WILL BE VOTED "FOR" THE MERGER, AND AS SAID PROXIES DEEM
ADVISABLE ON SUCH OTHER MATTERS AS MAY COME BEFORE THE MEETING. EITHER OF
SUCH ATTORNEYS OR SUBSTITUTES SHALL HAVE AND MAY EXERCISE ALL OF THE
POWERS OF SAID ATTORNEYS-IN-FACT HEREUNDER.
CONTINUED AND TO BE SIGNED ON REVERSE SIDE
1. Proposal to approve the merger of Seagate Daylight Merger Corp., a
wholly owned subsidiary of Seagate Technology, Inc., with and into
Seagate Software, Inc., in accordance with the terms of the Agreement
and Plan of Reorganization dated September 2, 1999 among Seagate
Technology, Seagate Daylight Merger Corp. and Seagate Software. As a
result of the merger, Seagate Software will become a wholly owned
subsidiary of Seagate Technology.
[_] FOR [_] AGAINST [_] ABSTAIN
and upon such other matter or matters which may properly come before
the meeting and any adjournment(s) thereof.
(This Proxy should be dated, signed by the
stockholder(s) exactly as his or her name appears
hereon, and returned promptly in the enclosed
envelope. Persons signing in a fiduciary capacity
should so indicate. If shares are held by joint
tenants or as community property, both should
sign.)
Signature:________________ Date: Signature:_________________ Date:
