<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended April 2, 1999
Commission File Number 001-11403
SEAGATE TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-2612933
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
920 Disc Drive, Scotts Valley, California 95066
(Address of principal executive offices) (Zip Code)
Telephone: (831) 438-6550
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
On April 2, 1999, 222,706,798 shares of the registrant's common stock were
issued and outstanding.
1
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INDEX
SEAGATE TECHNOLOGY, INC.
PART I FINANCIAL INFORMATION PAGE NO.
- ----------------------------------------------------------------------------
Item 1. Financial Statements (Unaudited)
Consolidated condensed statements of operations--
Three and nine months ended April 2, 1999 and
April 3, 1998 3
Consolidated condensed balance sheets--
April 2, 1999 and July 3, 1998 4
Consolidated condensed statements of cash flows--
Nine months ended April 2, 1999 and
April 3, 1998 5
Notes to consolidated condensed financial statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
PART II OTHER INFORMATION
- ------------------------------
Item 1. Legal Proceedings 29
Item 6. Exhibits and Reports on Form 8-K 30
SIGNATURES 31
2
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SEAGATE TECHNOLOGY, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In Millions, Except Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
April 2, April 3, April 2, April 3,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue $1,805 $1,675 $5,159 $5,244
Cost of sales 1,371 1,471 3,976 4,554
Product development 143 155 440 443
Marketing and administrative 135 119 401 374
Amortization of goodwill and
other intangibles 9 9 29 31
In-process research and development - - - 216
Restructuring costs 60 142 60 347
Unusual items - - 78 (22)
------ ------ ------ ------
Total Operating Expenses 1,718 1,896 4,984 5,943
Income (Loss) from Operations 87 (221) 175 (699)
Interest income 28 23 81 74
Interest expense (12) (13) (37) (38)
Other 2 10 10 (71)
------ ------ ------ ------
Other Income (Expense), net 18 20 54 (35)
------ ------ ------ ------
Income (loss) before income taxes 105 (201) 229 (734)
Provision (benefit) for income taxes 23 (72) 72 (182)
------ ------ ------ ------
Net Income (Loss) $ 82 $ (129) $ 157 $ (552)
------ ------ ------ ------
Net income (loss) per share:
Basic $ 0.35 $(0.53) $ 0.65 $(2.27)
Diluted 0.34 (0.53) 0.63 (2.27)
Number of shares used in
per share computations:
Basic 236.6 242.6 242.2 243.4
Diluted 243.9 242.6 247.3 243.4
</TABLE>
See notes to consolidated condensed financial statements.
3
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SEAGATE TECHNOLOGY, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In Millions)
(Unaudited)
<TABLE>
<CAPTION>
April 2, July 3,
1999 1998 (1)
---- --------
<S> <C> <C>
ASSETS
- ------
Cash and cash equivalents $ 354 $ 666
Short-term investments 1,247 1,161
Accounts receivable, net 917 799
Inventories 360 508
Deferred income taxes 236 243
Other current assets 126 238
--------- ---------
Total Current Assets 3,240 3,615
Property, equipment and leasehold improvements, net 1,661 1,669
Goodwill and other intangibles, net 132 169
Other assets 196 192
--------- ---------
Total Assets $ 5,229 $ 5,645
========= =========
LIABILITIES
- -----------
Accounts payable $ 628 $ 577
Accrued employee compensation 211 175
Accrued expenses 653 602
Accrued income taxes 9 20
Current portion of long-term debt 1 1
--------- ---------
Total Current Liabilities 1,502 1,375
Deferred income taxes 499 435
Other liabilities 168 194
Long-term debt, less current portion 703 704
--------- ---------
Total Liabilities 2,872 2,708
--------- ---------
STOCKHOLDERS' EQUITY
- --------------------
Common stock 3 3
Additional paid-in capital 1,954 1,929
Retained earnings 1,352 1,298
Accumulated other comprehensive income (3) -
Deferred compensation (45) (55)
Treasury common stock at cost (904) (238)
--------- ---------
Total Stockholders' Equity 2,357 2,937
--------- ---------
Total Liabilities and Stockholders' Equity $ 5,229 $ 5,645
========= =========
</TABLE>
(1) The information in this column was derived from the Company's audited
consolidated balance sheet as of July 3, 1998.
See notes to consolidated condensed financial statements.
4
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SEAGATE TECHNOLOGY, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In Millions)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
------------------------
April 2, April 3,
1999 1998
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 157 $ (552)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 507 497
Deferred income taxes 73 13
In-process research and development - 216
Non-cash portion of restructuring charge 34 202
Other, net 38 38
Changes in operating assets and liabilities:
Accounts receivable (118) 210
Inventories 129 181
Accounts payable 20 (269)
Accrued income taxes 13 (61)
Accrued expenses and employee compensation (23) (160)
Other assets and liabilities, net 170 (61)
------- -------
Net cash provided by operating activities 1,000 254
INVESTING ACTIVITIES:
Acquisition of property, equipment and leasehold
improvements, net (420) (547)
Purchases of short-term investments (5,332) (3,283)
Maturities and sales of short-term investments 5,243 3,326
Acquisition of Quinta, net of cash acquired - (194)
Equity investments (5) (22)
Other, net (26) 9
------- -------
Net cash used in investing activities (540) (711)
FINANCING ACTIVITIES:
Sale of common stock 74 37
Purchase of treasury stock (843) (105)
Other, net (1) -
------- -------
Net cash used in financing activities (770) (68)
Effect of exchange rate changes on cash and cash equivalents (2) 4
------- -------
Increase (decrease) in cash and cash equivalents (312) (521)
Cash and cash equivalents at the beginning of the period 666 1,047
------- -------
Cash and cash equivalents at the end of the period $ 354 $ 526
======= =======
</TABLE>
See notes to consolidated condensed financial statements.
5
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SEAGATE TECHNOLOGY, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
---------------------
The consolidated condensed financial statements have been prepared by the
Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. The Company believes the disclosures
included in the unaudited consolidated condensed financial statements, when
read in conjunction with the consolidated financial statements of the
Company as of July 3, 1998 and notes thereto, are adequate to make the
information presented not misleading.
The consolidated condensed financial statements reflect, in the opinion of
management, all material adjustments necessary to summarize fairly the
consolidated financial position, results of operations and cash flows for
such periods. Such adjustments are of a normal recurring nature.
The results of operations for the three and nine month periods ended April
2, 1999 are not necessarily indicative of the results that may be expected
for the entire year ending July 2, 1999.
The Company operates and reports financial results on a fiscal year of 52 or
53 weeks ending on the Friday closest to June 30. Accordingly, fiscal 1998
was 53 weeks and ended on July 3, 1998 and fiscal 1999 will be 52 weeks and
will end on July 2, 1999.
2. Net Income (Loss) Per Share
---------------------------
For the periods in which the Company had net income, basic net income per
share was based on the weighted average number of shares of common stock
outstanding during the period. For the same periods diluted net income per
share further included the effect of dilutive stock options outstanding
during the period. For the periods in which the Company had a net loss, the
net loss per share was computed using only the weighted average number of
shares of common stock outstanding during the period. The following table
sets forth the computation of basic and diluted net income (loss) per share.
6
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<TABLE>
<CAPTION>
(In Millions Except Three Months Ended Nine Months Ended
Per Share Data) ------------------ -----------------
April 2, April 3, April 2, April 3,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic Net Income (Loss) Per
- ---------------------------
Share Computation
- -----------------
Numerator:
Net income (loss) $ 82 $ (129) $ 157 $ (552)
------- --------- -------- --------
Denominator:
Weighted average number of
common shares outstanding
during the period 236.6 242.6 242.2 243.4
------- --------- -------- --------
Basic net income (loss)
per share $ 0.35 $ (0.53) $ 0.65 $ (2.27)
======= ========= ======== ========
Diluted Net Income (Loss) Per
- -----------------------------
Share Computation
- -----------------
Numerator:
Net income (loss) $ 82 $ (129) $ 157 $ (552)
------- --------- -------- --------
Denominator:
Weighted average number of
common shares outstanding
during the period 236.6 242.6 242.2 243.4
Incremental common shares
attributable to exercise of
outstanding options (assuming
proceeds would be used to
purchase treasury stock) 7.3 - 5.1 -
------- --------- -------- --------
Total 243.9 242.6 247.3 243.4
------- --------- -------- --------
Diluted net income (loss)
per share $ 0.34 $ (0.53) $ 0.63 $ (2.27)
======= ========= ======== ========
</TABLE>
Incremental common shares attributable to exercise of outstanding options
(assuming proceeds would be used to purchase treasury stock) of 2.9 million and
4.6 million for the three and nine months ended April 3, 1998, respectively,
were not included in the diluted net loss per share computation because the
effect would be antidilutive.
7
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3. Balance Sheet Information
-------------------------
(In millions)
April 2, July 3,
1999 1998
---- ----
Accounts Receivable:
Accounts receivable $ 971 $ 853
Allowance for non-collection (54) (54)
-------- --------
$ 917 $ 799
======== ========
Inventories:
Components $ 139 $ 172
Work-in-process 48 87
Finished goods 173 249
-------- --------
$ 360 $ 508
======== ========
Property, Equipment and Leasehold Improvements:
Property, equipment and leasehold improvements $ 3,419 $ 3,242
Allowance for depreciation and amortization (1,758) (1,573)
-------- --------
$ 1,661 $ 1,669
======== ========
4. Income Taxes
------------
The effective tax rate used to record the provision for income taxes for
the nine months ended April 2, 1999 was 32% compared with a 25% effective
tax rate used to record the benefit from income taxes for the comparable
period last year. The 32% effective tax rate used to record the provision
for income taxes for the nine months ended April 2, 1999 and the 25%
effective tax rate used to record the benefit for income taxes in the
comparable period last year include the effects of non-deductible charges
from the Quinta Corporation acquisition and certain non-recurring
restructuring costs. Excluding the non-deductible charges from the Quinta
Corporation acquisition and certain non-recurring restructuring costs, the
pro-forma effective tax rate used to record the provision for income taxes
for the nine months ended April 2, 1999 would have been 28%. The pro-forma
effective tax rate of 28% is less than the U.S. statutory rate because a
portion of the Company's anticipated foreign operating income is not
subject to foreign income taxes and is considered to be permanently
reinvested in non-U.S. operations.
5. Supplemental Cash Flow Information
----------------------------------
(In millions)
Nine Months Ended
-----------------
April 2, April 3,
1999 1998
---- ----
Cash Transactions:
Cash paid for interest $ 52 $ 52
Cash paid for income taxes, net of refunds (115) 15
8
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6. Restructuring Costs
-------------------
During the quarter ended April 2, 1999, the Company recorded a
restructuring charge of $72 million and reversed $12 million of
restructuring accruals originally recorded in fiscal year 1998, resulting
in a net restructuring charge of $60 million in the quarter. The $12
million reversal was 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.
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 Company anticipates that the remaining implementation
of the fiscal 1998 restructuring plan will be substantially complete as of
July 2, 1999.
During the quarter ended April 2, 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 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
9
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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.
Of the equipment located at the microchip facility in Scotland, $19 million
has been sold. The Company is seeking a sub-lessee for this facility and
expects to dispose of the remaining equipment at this facility by the end
of fiscal year 1999.
The Company is seeking a buyer for its suspension business. However, it
does not appear likely at this time that a buyer will be located.
In connection with the fiscal 1999 restructuring, the Company currently
expects a workforce reduction of approximately 1,250 employees.
Approximately 227 of the 1,250 employees had been terminated as of April 2,
1999. The Company anticipates that the implementation of the restructuring
plan will be substantially complete by the end of March 2000.
The following table summarizes the Company's restructuring activities:
<TABLE>
<CAPTION>
Severance Intangibles
and Excess & Other Contract
In millions Benefits Facilities Equipment Assets Cancellations Other Total
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Reserve balances,
July 3, 1998 $ 9 $ 20 $ - $ - $ 5 $10 $ 44
Fiscal 1999
restructuring
charges 10 19 37 4 1 1 72
Cash charges (9) (13) - - - (1) (23)
Non-cash charges - (4) (37) (4) - - (45)
Adjustments and
reclassifications (3) 3 - - (3) 1 (2)
--------------------------------------------------------------------------------------
Reserve balances,
April 2, 1999 $ 7 $ 25 $ - $ - $ 3 $11 $ 46
======================================================================================
</TABLE>
7. Acquisition of Quinta
---------------------
In April and June 1997, the Company invested an aggregate of $20 million to
acquire approximately ten percent (10%) of the outstanding stock of Quinta,
a developer of ultra-high capacity disc drive technologies, including a new
optically-assisted Winchester (OAW) technology. In August 1997, the Company
completed the acquisition of Quinta. Pursuant to the purchase agreement
with Quinta, the shareholders of Quinta, other than Seagate, received cash
payments aggregating $230 million upon 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
10
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to receive the remaining $77 million and the $14 million that had been
accrued but unpaid in fiscal 1998 in equal installments beginning September
30, 1998 and ending March 31, 2000. In the quarter ended October 2, 1998,
the Company recorded a charge to operations for the remaining $77 million.
The entire $96 million, comprising the $19 million charged to operations in
fiscal 1998 and the $77 million charged to operations in fiscal 1999,
reflects research and development expense.
8. Foreign Currency Derivatives
----------------------------
The Company may enter into foreign currency forward exchange and option
contracts to manage exposure related to certain foreign currency
commitments and anticipated foreign currency denominated expenditures
primarily in Singapore, Thailand and Malaysia. The goal of the Company's
hedging program is to economically guarantee or lock in the exchange rates
on a portion of the Company's local currency cash flows and not to
eliminate all short-term earnings volatility. Because not all economic
hedges qualify as accounting hedges, unrealized gains and losses may be
recognized in advance of the actual foreign currency cash flows. This
mismatch of accounting gains and losses and foreign currency cash flows was
especially pronounced for the first and second quarters of fiscal 1998 as a
result of the declines in the value of the Thai baht and Malaysian ringgit
relative to the U.S. dollar. Accordingly, the Company's results for the
nine months ended April 3, 1998 include other expenses of approximately $76
million for unrealized losses on foreign currency forward exchange
contracts. Based on uncertainty in the Southeast Asian foreign currency
markets, the Company has temporarily suspended its hedging program.
9. Comprehensive Income
--------------------
As of July 4, 1998 the Company adopted Statement of Financial Accounting
Standards No. 130 ("SFAS 130"), Reporting Comprehensive Income. SFAS 130
establishes new rules for the reporting and display of comprehensive income
and its components; however, the adoption of SFAS 130 had no impact on the
Company's net income or stockholders' equity. SFAS 130 requires unrealized
gains or losses on the Company's available-for-sale securities and foreign
currency translation adjustments, which prior to adoption were reported
separately in stockholders' equity to be included in other comprehensive
income. The components of comprehensive income, net of related tax, for
the three and nine months ended April 2, 1999 and April 3, 1998 were as
follows (in millions):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------- -------------------
April 2, April 3, April 2, April 3,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss) $ 82 $ (129) $ 157 $ (552)
Unrealized gain (loss) on securities (3) 1 (2)
Foreign currency translation adjustments - - (1) -
----- ------ ------ ------
Comprehensive income (loss) $ 79 $ (128) $ 154 $ (551)
===== ====== ====== ======
</TABLE>
11
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The components of accumulated other comprehensive income, net of related
tax, at April 2, 1999 and July 3, 1998 were as follows (in millions):
April 2, July 3,
1999 1998
---- ----
Unrealized gain (loss) on securities $ (1) $ 1
Foreign currency translation adjustments (2) (1)
---------- ----------
Accumulated other comprehensive income $ (3) $ -
========== ==========
10. VERITAS Combination
-------------------
The Company, its majority-owned subsidiary, Seagate Software, Inc.
("Seagate Software") and Seagate Software Network & Storage Management
Group, Inc. ("NSMG"), Seagate Software's subsidiary, announced on October
5, 1998 that they had entered into an Agreement and Plan of Reorganization
(the "Plan") as of such date with VERITAS Holding Corporation ("New
VERITAS") and VERITAS Software Corporation ("VERITAS"). The Plan was
amended and restated on April 15, 1999. VERITAS provides end-to-end
storage management software solutions.
The Plan provides for the contribution by the Company, Seagate Software and
certain of their respective subsidiaries to New VERITAS of (a) the
outstanding stock of NSMG and certain other Seagate Software subsidiaries,
and (b) those assets used primarily in the network 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 issuance of options to purchase New VERITAS commons stock to those
NSMG Business employees who become employees of New VERITAS or its
subsidiaries. As part of the Plan, New VERITAS will also assume certain
liabilities of the NSMG Business. The contribution of the NSMG Business to
New VERITAS will be accounted for as a non-monetary transaction using the
fair value of the assets exchanged.
At the closing of the contribution, New VERITAS will issue approximately
34 million shares of its common stock to Seagate Software. Shortly after
the closing of the option exchange offer to NSMG Business employees, New
VERITAS will issue additional shares of its common stock to Seagate
Software and options to the participating employees of New VERITAS such
that the aggregate number of shares of New VERITAS received by Seagate
Software subject to the options issued in the exchange offer equals
approximately 40% of the fully diluted capitalization of New VERITAS
(assuming conversion of all convertible securities, including the VERITAS
convertible debentures, and exercise of all assumed options and warrants)
at the effective time of the closing.
In connection with the contribution of the NSMG Business to New VERITAS,
VERITAS will become a wholly-owned subsidiary of New VERITAS through a
merger with a subsidiary of New VERITAS of which VERITAS will be the
surviving entity. Upon consummation of the merger, the former security
holders of VERITAS will be issued New VERITAS securities representing
approximately 60% of the fully diluted capitalization of New VERITAS as of
the closing.
On April 22, 1999, the Securities and Exchange Commission declared
effective the Registration Statement on Form S-4 filed by New VERITAS in
connection with the NSMG
12
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contribution, the exchange offer to the NSMG Business employees and the
merger of a wholly owned subsidiary of New VERITAS with and into VERITAS.
The closing of the merger remains subject to approval by the stockholders
of VERITAS and Seagate Software, and other customary closing conditions.
The meetings of the stockholders of Seagate Software and VERITAS to
consider the proposed transactions and certain related matters are
scheduled for May 27, 1999.
On April 23, 1999, the Securities and Exchange Commission declared
effective a Registration Statement on Form S-4 related to the offer by the
Company to exchange shares of its common stock for shares of Seagate
Software's common stock. The offer commenced on April 26, 1999 and will
remain open until June 7, 1999 unless terminated in accordance with the
offering circular filed with the Securities and Exchange Commission on
Schedule 14D-1 on April 26, 1999. All holders of Seagate Software common
stock and vested optionees are entitled to participate in the Company's
exchange offer.
The NSMG combination and the merger of a wholly owned subsidiary of New
VERITAS with and into VERITAS are expected to occur on May 28, 1999. The
New VERITAS exchange offer will close on June 7, 1999 except with respect
to those persons in the United Kingdom for whom the New VERITAS exchange
offer will close shortly thereafter.
In connection with the NSMG contribution, the Company and Seagate
Software anticipate recording a substantial gain and certain expenses. It
is currently anticipated that the NSMG contribution will occur on May 28,
1999, and accordingly, the gain will be recorded in the fourth quarter of
fiscal 1999. The expenses will include a one-time write-off of in-process
research and development during fiscal 1999 as well as amortization of
goodwill and intangibles over four years following the NSMG contribution.
The magnitude of the gain and expenses will depend on several factors,
including the price of the VERITAS common stock prior to the NSMG
contribution and the number of shares of New VERITAS stock Seagate
Software receives. The Company and Seagate Software will account for
Seagate Software's investment in VERITAS using the equity method.
Historically, NSMG has had higher gross margins as a percent of sales
than the Company. Therefore, if the transaction with New VERITAS occurs
as anticipated, it could result in lower gross margins for the Company.
The Company's gross margins for the nine months ended April 2, 1999 and
the year ended July 3, 1998 were 22.9% and 14.5% respectively. Without
NSMG, such gross margins would have been 20.6% and 12.6% respectively.
However, under the equity method of accounting, the Company will record
Seagate Software's equity interest in the net income or loss of New
VERITAS each quarter. This equity income or loss will be classified as
non-operating income (loss) on the Company's statements of operations.
11. Litigation
----------
See Part II, Item 1 of this Form 10-Q for a description of legal
proceedings.
13
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SEAGATE TECHNOLOGY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Certain Forward-Looking Information:
- ------------------------------------
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. These statements include the statements
relating to continued price erosion in the first paragraph under "Results of
Operations," the statements relating to the Company's change in its method of
doing business with its North American distributors in the first paragraph under
"Results of Operations," the statements relating to restructuring activities in
the sixth paragraph under "Results of Operations," the statements relating to
the effective tax rate in the eighth paragraph under "Results of Operations,"
the statements relating to the merger between Veritas and NSMG beginning in the
ninth paragraph under "Results of Operations," the statements regarding capital
expenditures in the third paragraph under "Liquidity and Capital Resources," the
statements below under "Factors Affecting Future Operating Results" and the
statements under "Part II Other Information - Item 1. Legal Proceedings," among
others. These forward-looking statements are based on current expectations and
entail various risks and uncertainties that could cause actual results to differ
materially from those projected in the forward-looking statements. Such risks
and uncertainties are set forth below under "Factors Affecting Future Operating
Results."
Results of Operations:
- ----------------------
Revenue for the quarter ended April 2, 1999 was $1.805 billion, as compared with
$1.675 billion for the comparable year-ago quarter, and $1.801 billion for the
immediately preceding quarter ended January 1, 1999. The increase in revenue
from the comparable year-ago quarter was due primarily to a higher level of unit
shipments with an improved mix of the Company's products partially offset by a
continuing decline in the average unit sales prices of the Company's products as
a result of intensely competitive market conditions. Increased sales volume and
a favorable shift in product mix toward newer products accounted for $0.8
billion of the revenue increase offset by $0.7 billion of price erosion.
Revenue for the nine months ended April 2, 1999 was $5.159 billion as compared
with $5.244 billion for the comparable year-ago period. Price erosion accounted
for $1.9 billion of the revenue decline partially offset by $1.8 billion due to
improved volume and product mix. The Company expects that price erosion in the
data storage industry will continue for the foreseeable future. This
competition and continuing price erosion could adversely affect the Company's
results of operations in any given quarter and such adverse effects often cannot
be anticipated until late in any given quarter. Seagate is changing its method
of doing business with its North American distributors. In the future,
shipments to North American distributors will be on a consignment basis.
Generally speaking, this change will delay Seagate's revenue recognition until
the product is sold by the distributor. The Company expects substantially all
Seagate product inventory, held by its North American distributors, will be
owned by Seagate as of the end of June 1999. The transition to this new method
of doing business and the delay in the timing of revenue recognition will result
in lower revenue from distribution for the fourth quarter of fiscal 1999 than
would have been recognized using the Company's former method.
Gross margin as a percentage of revenue was 24.0% and 22.9% for the three and
nine months ended April 2, 1999, compared with 12.2% and 13.2% for the
comparable year-ago periods and 23.8% for the immediately preceding quarter
ended January 1, 1999. The increase in gross margin
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as a percentage of revenue from both year-ago periods was primarily due to cost
savings as a result of the Company's restructuring activities and an intensive
program of cost reduction resulting in lower average unit costs per disc drive
produced. Cost reductions included reduced scrap and rework as well as
reductions in other manufacturing costs. In addition, in the comparable year-ago
quarter ended April 3, 1998, the Company recorded $17 million in special net
charges primarily for inventory and equipment valuation adjustments and vendor
liability charges related to the Company's fiscal 1998 restructuring plan.
Product development expenses for the three and nine months ended April 2, 1999
were $143 million and $440 million, respectively, a decrease of $12 million and
$3 million when compared to the comparable year-ago periods. These expenses
represented 7.9% and 8.5%, respectively, of revenue for the three and nine
months ended April 2, 1999 compared with 9.3% and 8.4%, respectively, for the
comparable year-ago periods. The decrease in expenses from the comparable year-
ago quarter was primarily due to a $14 million accrual in the year-ago quarter
for payments to former shareholders of Quinta Corporation, a wholly owned
subsidiary of the Company acquired in August 1997, for achievement of certain
product development milestones. This decrease was partially offset by an
increase of $5 million in salaries and related costs. The decrease in expenses
from the comparable year-ago nine month period was primarily due to a decrease
of $25 million in occupancy costs partially offset by increases of $13 million
in salaries and related costs, and $10 million in depreciation. The decrease of
$25 million in occupancy costs from the comparable year-ago nine month period
was primarily due to the closure of certain of the Company's product design
centers pursuant to its January 1998 restructuring plan.
Marketing and administrative expenses for the three and nine months ended April
2, 1999 were $135 million and $401 million, respectively, an increase of $16
million and $27 million when compared with the comparable year-ago periods.
These expenses represented 7.5% and 7.8%, respectively, of revenue for the three
and nine months ended April 2, 1999 compared with 7.1% for both comparable year-
ago periods. The increase in expenses from the comparable year-ago quarter was
primarily due to increases of $9 million in marketing and administrative
expenses related to the Company's software products and services, and $6 million
in salaries and related costs. The increase in expenses from the comparable
year-ago nine month period was primarily due to increases of $22 million in
marketing and administrative expenses related to the Company's software products
and services, $9 million in salaries and related costs, $7 million in accruals
for profit sharing and management bonuses and $5 million in legal expenses.
These increases were partially offset by a decrease of $20 million in occupancy
costs. The decrease of $20 million in occupancy costs from the comparable year-
ago nine month period was primarily due to the closure of certain of the
Company's facilities pursuant to its January 1998 restructuring plan.
Amortization of goodwill and other intangibles for the three and nine months
ended April 2, 1999 was $9 million and $29 million, respectively. Amortization
was unchanged and decreased by $2 million, respectively, when compared with the
comparable year-ago periods. The decrease in amortization from the comparable
year-ago nine month period was primarily due to the inclusion in amortization
expense of the write-downs of goodwill and the write-offs and write-downs, in
the year-ago period, of certain intangible assets related to past acquisitions
of software companies whose value had become permanently impaired.
During the quarter ended April 2, 1999, the Company recorded a restructuring
charge of $72 million and reversed $12 million of restructuring accruals
recorded in fiscal year 1998, resulting in a net restructuring charge of $60
million in the quarter. The $12 million reversal was 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. The $72 million restructuring
charge was a result
15
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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 Mexico; and closure of the Company's
recording media substrate facility in Mexico. In connection with this
restructuring, the Company currently expects a workforce reduction of
approximately 1,250 employees. Approximately 227 of the 1,250 employees had been
terminated as of April 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 restructuring plan will be substantially complete by the
end of March 2000.
Net other income decreased by $2 million and increased by $89 million,
respectively, for the three and nine months ended April 2, 1999 when compared
with the comparable year-ago periods. The decrease in net other income from the
comparable year-ago quarter was primarily due to an increase of $2 million in
the charge for minority interest as a result of higher income in the Company's
majority-owned subsidiary in Shenzhen, China, and a gain of $5 million on sales
of the Company's investment in Overland Data, Inc. in the year-ago quarter ended
April 3, 1998. These decreases were partially offset by an increase of $5
million in interest income primarily due to higher average invested cash in the
quarter ended April 2, 1999. The increase in net other income from the
comparable year-ago nine month period was primarily due to $76 million of
expenses related to mark-to-market adjustments, in the period ended January 2,
1998, on certain of the Company's foreign currency forward exchange contracts
for the Thai baht and the Malaysian ringgit, a decrease of $5 million in the
charge for minority interest as a result of lower income in the Company's
majority-owned subsidiary in Shenzhen, China, and an increase of $7 million in
interest income primarily due to higher average invested cash during the nine
months ended April 2, 1999.
The effective tax rate used to record the provision for income taxes for the
nine months ended April 2, 1999 was 32% compared with a 25% effective tax rate
used to record the benefit from income taxes for the comparable period last
year. The 32% effective tax rate used to record the provision for income taxes
for the nine months ended April 2, 1999 and the 25% effective tax rate used to
record the benefit for income taxes in the comparable period last year include
the effects of non-deductible charges from the Quinta Corporation acquisition
and certain non-recurring restructuring costs. Excluding the non-deductible
charges from the Quinta Corporation acquisition and certain non-recurring
restructuring costs, the pro-forma effective tax rate used to record the
provision for income taxes for the nine months ended April 2, 1999 would have
been 28%. The pro-forma effective tax rate of 28% is less than the U.S.
statutory rate because a portion of the Company's anticipated foreign operating
income is not subject to foreign income taxes and is considered to be
permanently reinvested in non-U.S. operations. While the Company expects its
effective tax rate on operating income for the fourth quarter of fiscal 1999 to
approximate 28%, the actual effective tax rate is expected to differ from 28%
due to the impending sale of the Seagate Software Network and Storage Management
Group.
The Company, its majority-owned subsidiary, Seagate Software, Inc. ("Seagate
Software") and Seagate Software Network & Storage Management Group, Inc.
("NSMG"), Seagate Software's subsidiary, announced on October 5, 1998 that they
had entered into an Agreement and Plan of Reorganization (the "Plan") as of such
date with VERITAS Holding Corporation ("New VERITAS") and VERITAS Software
Corporation ("VERITAS"). The Plan was amended and
16
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restated on April 15, 1999. VERITAS provides end-to-end storage management
software solutions.
The Plan provides for the contribution by the Company, Seagate Software and
certain of their respective subsidiaries to New VERITAS of (a) the outstanding
stock of NSMG and certain other Seagate Software subsidiaries, and (b) those
assets used primarily in the network 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 issuance of options to
purchase New VERITAS commons stock to those NSMG Business employees who become
employees of New VERITAS or its subsidiaries. As part of the Plan, New VERITAS
will also assume certain liabilities of the NSMG Business. The contribution of
the NSMG Business to New VERITAS will be accounted for as a non-monetary
transaction using the fair value of the assets exchanged.
At the closing of the contribution, New VERITAS will issue approximately 34
million shares of its common stock to Seagate Software. Shortly after the
closing of the option exchange offer to NSMG Business employees, New VERITAS
will issue additional shares of its common stock to Seagate Software and
options to the participating employees of New VERITAS such that the aggregate
number of shares of New VERITAS received by Seagate Software subject to the
options issued in the exchange offer equals approximately 40% of the fully
diluted capitalization of New VERITAS (assuming conversion of all convertible
securities, including the VERITAS convertible debentures, and exercise of all
assumed options and warrants) at the effective time of the closing.
In connection with the contribution of the NSMG Business to New VERITAS, VERITAS
will become a wholly-owned subsidiary of New VERITAS through a merger with a
subsidiary of New VERITAS of which VERITAS will be the surviving entity. Upon
consummation of the merger, the former security holders of VERITAS will be
issued New VERITAS securities representing approximately 60% of the fully
diluted capitalization of New VERITAS as of the closing.
On April 22, 1999, the Securities and Exchange Commission declared effective the
Registration Statement on Form S-4 filed by New VERITAS in connection with the
NSMG contribution, the exchange offer to the NSMG Business employees and the
merger of a wholly owned subsidiary of New VERITAS with and into VERITAS. The
closing of the merger remains subject to approval by the stockholders of VERITAS
and Seagate Software, and other customary closing conditions. The meetings of
the stockholders of Seagate Software and VERITAS to consider the proposed
transactions and certain related matters are scheduled for May 27, 1999.
On April 23, 1999, the Securities and Exchange Commission declared effective a
Registration Statement on Form S-4 related to the offer by the Company to
exchange shares of its common stock for shares of Seagate Software's common
stock. The offer commenced on April 26, 1999 and will remain open until June 7,
1999 unless terminated in accordance with the offering circular filed with the
Securities and Exchange Commission on Schedule 14D-1 on April 26, 1999. All
holders of Seagate Software common stock and vested optionees are entitled to
participate in the Company's exchange offer.
The NSMG combination and the merger of a wholly owned subsidiary of New VERITAS
with and into VERITAS are expected to occur on May 28, 1999. The New VERITAS
exchange offer will close on June 7, 1999 except with respect to those persons
in the United Kingdom for whom the New VERITAS exchange offer will close shortly
thereafter.
In connection with the NSMG contribution, the Company and Seagate Software
anticipate
17
<PAGE>
recording a substantial gain and certain expenses. It is currently anticipated
that the NSMG contribution will occur on May 28, 1999, and accordingly, the
gain will be recorded in the fourth quarter of fiscal 1999. The expenses will
include a one-time write-off of in-process research and development during
fiscal 1999 as well as amortization of goodwill and intangibles over four
years following the NSMG contribution. The magnitude of the gain and expenses
will depend on several factors, including the price of the VERITAS common
stock prior to the NSMG contribution and the number of shares of New VERITAS
stock Seagate Software receives. The Company and Seagate Software will account
for Seagate Software's investment in VERITAS using the equity method.
Historically, NSMG has had higher gross margins as a percent of sales than the
Company. Therefore, if the transaction with New VERITAS occurs as anticipated,
it could result in lower gross margins for the Company. The Company's gross
margins for the nine months ended April 2, 1999 and the year ended July 3,
1998 were 22.9% and 14.5% respectively. Without NSMG, such gross margins would
have been 20.6% and 12.6% respectively. However, under the equity method of
accounting, the Company will record Seagate Software's equity interest in the
net income or loss of New VERITAS each quarter. This equity income or loss
will be classified as non-operating income (loss) on the Company's statements
of operations.
Liquidity and Capital Resources:
- --------------------------------
At April 2, 1999, the Company's cash, cash equivalents and short-term
investments totaled $1.601 billion, a decrease of $226 million from the July 3,
1998 balance. This decrease was primarily a result of expenditures for
property, equipment and leasehold improvements, and the repurchase of 26.4
million shares of the Company's common stock for $843 million, partially offset
by net cash provided by operating activities. Until required for other
purposes, the Company's cash and cash equivalents are maintained in highly
liquid investments with remaining maturities of 90 days or less at the time of
purchase. The Company's short-term investments primarily consist of readily
marketable debt securities with remaining maturities of more than 90 days at the
time of purchase.
As of April 2, 1999, the Company had committed lines of credit of $83 million
that can be used for standby letters of credit and bankers' guarantees. At
April 2, 1999, $66 million of these lines of credit were utilized.
The Company expects investments in property and equipment in the current fiscal
year to approximate $700 million, of which approximately $454 million had been
incurred as of April 2, 1999. The Company plans to finance these investments
from existing cash balances and cash flows from operations. The $454 million
year-to-date investment comprised $190 million for manufacturing facilities and
equipment for the recording head operations in the United States, Northern
Ireland and Malaysia; $174 million for manufacturing facilities and equipment
related to the Company's subassembly and disc drive final assembly and test
facilities in the United States, Far East and the United Kingdom; $50 million
for expansion of the Company's thin-film media operations in California,
Singapore, Northern Ireland and Mexico; and $40 million for other purposes.
During the nine months ended April 2, 1999, the Company acquired 26.4 million
shares of its common stock for $843 million. The repurchase of a portion of
these shares completed a stock repurchase program announced in June 1997 in
which up to $600 million worth of the Company'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
the Company's
18
<PAGE>
common stock was authorized to be acquired in the open market.
Factors Affecting Future Operating Results:
- -------------------------------------------
We compete in the data storage industry, and there are a number of factors that,
in the past, have affected all of the companies in our industry, including us.
Many of these factors may also impact our business in the future.
Slowdown in demand for computer systems may cause a decline in demand for our
products
Our products are components in computer systems. The demand for computer
systems has been volatile in the past and often has had an exaggerated effect on
the demand for our disc drive and tape drive products, in any given period. In
the past, unexpected slowdowns in demand for computer systems have generally
caused sharp declines in demand for disc drives and tape drive products. We
expect that this situation will occur again in the future and that demand for
our disc drive and tape drive products may be reduced. Causes of the declines
in demand in the past for our products have included the announcement or
introduction of major operating system or semiconductor improvements, such as
Windows 95 or the Pentium II. We believe these announcements and introductions
caused consumers to defer their purchases and made existing inventory obsolete.
In our industry, the supply of drives periodically exceeds demand. When this
happens, the over supply of available products causes us to have higher than
anticipated inventory levels and we experience intense price competition from
other disc drive and/or tape drive manufacturers.
Our financial results will vary
We often experience a high volume of sales at the end of the quarter, so we may
not be able to determine that our fixed costs are too high relative to sales
until late in any given quarter. Since this happens late in the quarter, we do
not have enough time to reduce these costs. As a result, we would not be as
profitable or may even incur a loss. In addition, our 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,
. our 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 our disc drive products due to an
oversupply of disc drives in the world market,
. manufacturing delays or interruptions, particularly at our major
manufacturing facilities in Malaysia, Thailand, China and Singapore,
. acceptance by customers of competing technologies in lieu of our products,
. variations in the cost of components for our products,
. limited access to components that we obtain from a single or a limited number
of suppliers,
. our inability to reduce our fixed costs to match revenues in any quarter
because of our vertical manufacturing strategy,
. the impact of changes in foreign currency exchange rates on the cost of our
products and the effective price of such products to foreign consumers, and
. competition and consolidation in the data storage industry.
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<PAGE>
For example, our revenue decreased to $5.159 billion in the first nine months of
fiscal 1999 from $5.244 billion in the first nine months of fiscal 1998 as a
result of increased competition that resulted in significant price decreases.
This decrease in revenue was partially offset by improved volume and product
mix. In addition, our future operating results may also be adversely affected
if we receive an adverse judgment or settlement in any of the legal proceedings
to which we are a party.
We face 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 our competitors have offered new or existing products at
lower prices as part of a strategy to gain or retain market share and customers.
We expect these practices to occur again in the future. We also expect that
price erosion in our industry will continue for the foreseeable future. Because
we may need to reduce our prices to retain our market share, the competition
could adversely affect our results of operations in any given quarter. We have
experienced and expect to continue to experience intense competition from a
number of domestic and foreign companies including the other leading independent
disc drive manufacturers, as well as large integrated multinational
manufacturers such as:
. Fujitsu Limited,
. International Business Machines Corporation,
. NEC Corporation,
. Samsung Electronics Co. Ltd., and
. 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 announced that it had entered into agreements with
Dell Computer Corporation and EMC Corporation under which IBM will likely supply
a substantial portion of Dell's and EMC's disc drive needs. Although sales to
Dell and EMC have never individually accounted for 10% or more of our
consolidated revenue, we face risks that IBM and other integrated multinational
manufacturers will enter into similar agreements with a substantial number of
our customers to supply those customers' disc drive requirements as part of a
more expansive agreement.
We also face indirect competition from present and potential customers,
including several of the computer manufacturers listed above, that
continuously evaluate whether to manufacture their own drives or purchase them
from outside sources. If our customers decide to manufacture their own drives,
it could have a material adverse effect on our business, results of operations
and financial condition.
We also compete with manufacturers of products that use alternative data storage
and retrieval technologies. Products based upon such alternative technologies,
including optical recording technology and semiconductor memory (flash memory,
SRAM and DRAM), may compete with our products.
We may not be able to compete successfully against current or future
competitors. If we fail to compete successfully, our business, operating
results and financial condition may be materially adversely affected.
20
<PAGE>
We may not develop products in time to meet changing technologies
Our 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 our products have
been shortened, and we have been required to constantly develop and introduce
new cost-effective drive products within time to market windows that become
progressively shorter. We had research and development expenses of $420
million, $459 million and $585 million in fiscal 1996, 1997 and 1998,
respectively.
When we develop new disc and tape drive products with higher capacity and more
advanced technology, our operating results may decline because the increased
difficulty and complexity associated with producing such disc drives increases
the likelihood of reliability, quality or operability problems. If our products
suffer increases in failures, are of low quality or are not reliable, customers
may reduce their purchases of our products and our manufacturing rework and
scrap costs and service and warranty costs may increase. In addition, a decline
in the reliability of our products may make us less competitive as compared with
other disc and tape drive manufacturers.
Our 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
digital video and video-on-demand. If delivery of our products is delayed, our
original equipment manufacturer ("OEM") customers may use our competitors'
products in order to meet their production requirements. In addition, if
delivery of those OEMs' computer systems into which our 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, our operating results may be significantly adversely
impacted.
Consumers have shown that they want to purchase personal computers costing less
than $1,000. We are producing and selling low cost disc drives to meet the
demand for disc drives that are components of low cost personal computers.
However, we may not be able to produce disc drives that meet our quality and
performance standards at a cost low enough to yield gross margins 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. We are continuing research and development of
smaller drives, because we believe that to compete successfully to supply
components for mobile, laptop, notebook and ultraportable computers, we must
supply a smaller product. We intend to re-enter this market with a durable, low
power application in the future, although there can be no assurance that we will
be able to do so successfully.
Our 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. Our strategy of vertical integration has allowed us to
21
<PAGE>
internally manufacture many of the critical components used in our products. We
have pursued a strategy of vertical integration of our manufacturing processes
in order to reduce costs, control quality and assure availability and quality of
certain components.
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 our operating results and
financial condition. In addition, a strategy of vertical integration has in the
past and could continue to delay our ability to introduce products containing
market-leading technology, because we 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 we have 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.
We have 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 we have experienced production delays when we were unable to obtain
sufficient quantities of certain components. Any prolonged interruption or
reduction in the supply of any key components could have a material adverse
effect on our business, operating results and financial condition. We rely on
single or limited source suppliers for certain components used in our products.
We may not be able to obtain components that meet our specifications and quality
standards at prices that enable us to earn a profit on the finished products.
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 our suppliers substantially increased the price of such
components, and we have incurred increased costs for certain of these components
as a result of supply shortages. If we experience any extended interruption or
reduction in the supply of any key components, our business, results of
operations and financial condition could be materially adversely affected.
If our customers delay or cancel orders, our revenues will be adversely affected
The data storage industry has been characterized by large volume OEM purchase
agreements and large distributor orders. Typically, our OEM purchase agreements
permit the OEMs to cancel orders and reschedule delivery dates without
significant penalties. In the past, orders from many of our 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 our results of operations in the past, and
may again in the future. Our distributors and OEMs typically furnish us with
non-binding indications of their near-term requirements, with product deliveries
based on weekly confirmations. To the extent actual orders from distributors and
OEMs decrease from their non-binding forecasts, such variances could have a
material adverse effect on our business, results of operations and financial
condition.
22
<PAGE>
We face risks from our international operations
Seagate Technology has significant offshore operations including manufacturing
facilities, sales personnel and customer support operations. We have
manufacturing facilities in Singapore, Thailand, the People's Republic of China,
Scotland, Northern Ireland, Malaysia, Indonesia and Mexico, in addition to those
in the United States. Our 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 our products more expensive than products
sold by other manufacturers that are priced in one of the affected currencies.
Therefore, foreign customers may reduce purchases of our products. We
anticipate that the recent turmoil in financial markets and the recent
deterioration of the underlying economic conditions in certain countries,
including those in Asia, may have an impact on our sales to customers located in
or whose end-user customers are located in those countries due to:
. 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,
. 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
We face risks from the spin-off of our Network & Storage Management Group
We consolidated our software businesses into a single entity called Seagate
Software in 1996. Seagate Software's business consists of two primary
divisions, Network & Storage Management Group and Information Management Group.
We announced the NSMG combination on October 5, 1998. Seagate Technology's
Seagate Software subsidiary and Seagate Software employees who will become New
VERITAS employees and who hold stock options in Seagate Software will receive
approximately 40% of the fully diluted equity in New VERITAS.
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<PAGE>
We face a number of risks prior to and after the closing of the NSMG combination
including:
. our management personnel may be distracted from the day to day operations by
the NSMG combination and may not be able to identify and address business
issues because of the time demands of closing the NSMG combination,
. Information Management Group employees may be distracted by concerns about
whether we will continue to operate that business or spin it off, and may
not meet critical deadlines in their assigned tasks,
. Network & Storage Management Group customers may delay or cancel orders due
to uncertainty about the spin-off,
. the ongoing OEM relationship with the Network & Storage Management Group and
our tape drive operations may be disrupted and we may not be able to meet
our customers' order deadlines or needs as a result,
. we have agreed not to compete in certain storage management software
businesses for a specified period of time after the closing of the NSMG
combination and may not be able to benefit from future opportunities in
that market,
. we will not have significant influence over the management of New VERITAS,
although initially we will have two representatives on its board of
directors, but our financial statements and results of operations will
reflect 40% of New VERITAS' operations which may impact our stock price,
and
. we will only be permitted to sell our interest in New VERITAS in limited
increments in compliance with certain SEC rules or to bear the expense of
filing a registration statement.
Acquisition related accounting charges will delay and reduce our profits
We intend to continue our expansion into complementary data technology
businesses through internal growth as well as acquisitions. Acquisitions
involve numerous risks, including difficulties in the assimilation of the
operations and products of the acquired businesses and the potential loss of key
employees or customers of the acquired businesses. We expect that we will
continue to incur substantial expenses as we acquire other businesses including
charges for the write-off of in-process research and development. Our operating
results have fluctuated in the past and may fluctuate in the future because of
the timing of such write-offs. For example, we incurred a charge to operations
in the first quarter of fiscal 1998 of approximately $214 million for the write-
off of in-process research and development related to our acquisition of Quinta
Corporation. We anticipate a substantial charge to operations in the fourth
quarter of fiscal 1999 for the write-off of in-process research and development
related to the contribution of the Network & Storage Management Group business
to New VERITAS, and will experience ongoing charges related to the amortization
of purchased intangibles.
Systems failures could adversely affect our business
Seagate Technology's operations are dependent on our ability to protect our
computer equipment and the information stored in our databases from damage by
fire, natural disaster, power loss, telecommunications failures, unauthorized
intrusion and other catastrophic events. We believe that we have taken prudent
measures to reduce the risk of interruption in our operations. However, we
cannot be sure that these measures are sufficient. Any damage or failure that
causes interruptions in our operations could have a material adverse effect on
our business, results of operations and financial condition.
24
<PAGE>
We may experience Year 2000 computer problems that harm our 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.
Our Products. We are assessing the capability of our products to determine
whether or not they are in Year 2000 compliance. Although we believe our disc
and tape drive products and certain of our software products are in Year 2000
compliance, we have 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. We are taking measures to inform our customers that
those products are not and will not be Year 2000 compliant. To assist our
customers in evaluating their Year 2000 issues, our Seagate Software subsidiary
has developed a list 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.
We are incurring various costs to provide customer support and customer
satisfaction services regarding Year 2000 issues and anticipate that these
expenditures will continue in fiscal 1999 and thereafter. In addition, we have
contacted our major customers to determine whether their products into which our
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 our 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. Our customer agreements typically contain provisions designed to
limit our liability for such claims. It is possible, however, that these
measures will not provide protection from liability claims, as a result of
existing or future federal, state or local laws or ordinances or unfavorable
judicial decisions. If any such claims are brought against Seagate Technology,
regardless of their merit, our business, financial
25
<PAGE>
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.
Our Systems. We have also initiated a comprehensive program to address Year
2000 readiness in our internal systems and with our customers and suppliers.
Our program has been designed to address our most critical internal systems
first and to gather information regarding the Year 2000 compliance of products
supplied to Seagate Technology and into which our products are integrated.
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
continue to be on schedule. As participation in the Year 2000 readiness
projects increases throughout the company, additional systems are being added
for assessment and audit. Approximately 2,100 items were identified, and as of
April 1999, 210 items remain unresolved, with most scheduled for completion by
July 1999. An initial inventory of non-information technology systems was
completed in the third quarter of 1997. A second inventory in the second and
third 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.
We are using the following phased approach to Year 2000 readiness: inventory,
assessment, disposition, test and audit. As of April 1999, the risk assessment
phase is 98% complete, the disposition phase is 95% complete, and the test phase
is 91% complete; we believe that we will resolve all non-compliant items by July
1999. Anticipated dates of completion of each phase are as follows:
1. Inventory.............................. Complete
2. Assessment............................. May 1, 1999
3. Disposition............................ July 1, 1999
4. Test................................... July 1, 1999
5. Audit.................................. August 1, 1999
These activities are intended to encompass all major categories of systems in
use by Seagate Technology, including manufacturing, engineering, sales, finance
and human resources. To date, we have not incurred material costs related to
assessment and remediation of Year 2000 readiness. We currently expect that the
total cost of our Year 2000 readiness programs, excluding redeployed resources,
will not exceed $10 million over the next fiscal year. This total cost estimate
does not include potential costs related to any customer or other claims or the
costs of internal software or hardware replaced in the normal course of
business. The total cost 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.
We are installing and testing new computer software for our financial,
accounting, inventory control, order processing and other management information
systems. In the course of these upgrades we are identifying Year 2000
dependencies in such systems and are implementing changes to such systems to
make them Year 2000 compliant. The successful implementation of these new
systems is crucial to the efficient operation of our business. We cannot
provide any assurance that we will implement our new systems in an efficient and
timely manner or that the new systems will be adequate to support our
operations. Problems with installation or initial operation of the new systems
could cause substantial management difficulties in operations planning,
financial reporting and management and thus could have a material adverse effect
on our business, financial condition and results of operations. We do not expect
the cost of bringing our
26
<PAGE>
systems into Year 2000 compliance to have a material effect on our financial
condition or results of operations.
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 March 1999, 99% of such suppliers have responded affirmatively and been
approved. Efforts continue to validate the remaining suppliers, but 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 do 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 our primary banking activities can be accommodated
by our two major multi-national banking partners with the exception of payroll
in certain Asian countries that must be handled in local currency. We are
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.
Because Seagate Technology's core and mission-critical systems are either
complete or in the final stages of completion, we do not consider failure of
these systems to be within a reasonable Year 2000 worst case scenario. We
believe we are primarily at risk due to failures within external infrastructures
such as utilities and transportation systems. We are currently examining these
risk areas to develop responses and action plans. These include a potential
business shutdown at all locations on December 30, 1999, and where feasible,
power down on December 31, 1999 with controlled startup prior to business
resumption on January 3, 2000.
While we currently expect that the Year 2000 issues will not pose significant
operational problems, we could experience material adverse effects on our
business if the implementation of new systems is delayed. We could also
experience material adverse effects on our business if we fail to fully identify
all Year 2000 dependencies in our systems and in the systems of our suppliers,
customers and financial institutions. Those material adverse effects could
include delays in the delivery or sale of Seagate Technology's products.
Therefore, we are developing contingency plans for continuing operations in the
event such problems arise.
Our stock price will fluctuate
Our stock price has varied greatly as has the volume of shares of our common
stock that are traded. We expect these fluctuations to continue due to factors
such as:
. announcements of new products, services or technological innovations by us
or our competitors,
. announcements of major restructurings by us or our competitors such as the
recent announcement by IBM, Dell and Hewlett Packard,
. quarterly variations in our results of operations as a result of our fixed
short-term cost structure and volatility in the demand for our products,
. changes in revenue or earnings estimates by the investment community and
speculation in the press or investment community stemming from our past
performance, concerns about
27
<PAGE>
demand for our 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 our revenue growth rates or the growth rates of our competitors,
. sales of large blocks of our stock that may lead to investors' concerns that
our performance will falter and leading those investors to flood the market
to liquidate their holdings of our shares, and
. adverse impacts on our operating results if we receive an adverse judgment
or settlement in any of the legal proceedings to which we are a party, such
as the impact on our earnings in fiscal 1997 from the costs resulting from
the settlement of a lawsuit by Amstrad PLC.
The stock market may from time to time experience extreme price and volume
fluctuations. Many technology companies have experienced such fluctuations. In
addition, our stock price may be affected by general market conditions and
domestic and international macroeconomic factors unrelated to our performance.
Often such fluctuations have been unrelated to the operating performance of the
specific companies. The market price of our common stock may experience
significant fluctuations in the future. For example, our stock price fluctuated
from a high of $45 3/4 to a low of $17 3/4 during fiscal year 1998 as a result
of a variety of factors, some of which were beyond our control, such as economic
conditions in Asia.
We face risks from the conversion to a 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 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 Deutsche 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 transactions and properly handling the
existing currencies and the Single European Currency. We are still assessing
the impact that the introduction and use of the Single European Currency will
have on our internal systems. We will take corrective actions based on such
assessment but do not presently expect that the introduction and use of the
Single European Currency will materially affect our foreign exchange and hedging
activities or use of derivative instruments or will result in any material
increase in our costs. While we will continue to evaluate the impact of the
Single European Currency introduction over time, based on currently available
information, we do not believe that the introduction and use of the Single
European Currency will have a material adverse impact on our financial condition
or overall trends in results of operations, nor have the introduction and use of
the Single European Currency had such effects to date.
28
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
The following discussion contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These statements relate to the Company's legal
proceedings described below. Litigation is inherently uncertain and may result
in adverse rulings or decisions. Additionally, the Company may enter into
settlements or be subject to judgments that may, individually or in the
aggregate, have a material adverse effect on the Company's results of
operations. Accordingly, actual results could differ materially from those
projected in the forward-looking statements.
Patent Litigation
- -----------------
In November 1992, Rodime, PLC ("Rodime") filed a complaint in Federal Court for
the Central District of California, alleging infringement of U.S. Patent No. B1
4,638,383 and various state law unfair competition claims. It was the opinion
of the Company's patent counsel that the Company's products do not infringe any
valid claims of the Rodime patent in suit and thus the Company refused Rodime's
offer of a license for its patents. Other companies, however, such as IBM,
Hewlett-Packard and a number of Japanese companies have reportedly made payments
to and taken licenses from Rodime. On October 24, 1997 the Court entered a
Final Judgment against Rodime and in favor of Seagate. Rodime appealed from the
final judgment, and arguments on appeal were heard by the Court of Appeals for
the Federal Circuit on September 3, 1998. On April 13, 1999, the Federal
Circuit issued a decision which vacated the judgments of the District Court on
non-infringement and no liability under Rodime's state claims, affirmed the
exclusion of Rodime's consequential business damages, and remanded the case to
the District Court for further proceedings. The Company intends to vigorously
defend itself in further proceedings in the appeal brought by Rodime, as well as
in any further proceeding in the District Court.
On October 5, 1994, a patent infringement action was filed against the Company
by an individual, James M. White, in the U.S. District Court for the Northern
District of California for alleged infringement of U.S. Patent Nos. 4,673,996
and 4,870,519. Both patents relate to air bearing sliders. On February 12,
1999 the Company entered into a settlement agreement with Mr. White, and on
February 22, 1999, the Court dismissed the action, with prejudice.
On December 16, 1996, a patent infringement action was filed against the Company
by an individual, Virgle Hedgcoth, in the U.S. District Court for the Northern
District of California, San Jose Division, for alleged infringement of U.S.
Patent Nos. 4,735,840; 5,082,747; and 5,316,864. These patents relate to
sputtered magnetic thin-film recording discs for computers and their
manufacture. Additionally, on July 1, 1997, Mr. Hedgcoth filed a patent
infringement action against the Company in the same Court for alleged
infringement of a fifth patent, U.S. Patent No. 5,262,970, issued May 6, 1997.
Mr. Hedgcoth passed away on April 8, 1998, and the Court subsequently
substituted Susan Ann Alexander Hedgcoth as a party Plaintiff in place of Mr.
Hedgcoth. On December 4, 1998, the Company entered into a settlement agreement
with Ms. Hedgcoth which resulted in a dismissal of the action, with prejudice,
on February 11, 1999.
Papst Licensing, GmbH, has given the Company notice that it believes certain
former Conner Peripherals, Inc. ("Conner") disc drives infringe several of its
patents covering the use of spindle motors in disc drives. It is the opinion of
the Company's patent counsel that the former Conner
29
<PAGE>
disc drives do not infringe any claims of the patents and that the asserted
claims of the patents are invalid. The Company also believes that subsequent to
the merger with Conner, the Company's earlier paid-up license under Papst's
patents extinguishes any ongoing liability. The Company also believes it enjoys
the benefit of a license under Papst's patents since Papst Licensing had granted
a license to motor vendors of Conner.
In the normal course of business, the Company receives and makes inquiry with
regard to other possible intellectual property matters including alleged patent
infringement. Where deemed advisable, the Company may seek or extend licenses
or negotiate settlements.
Other Matters
- -------------
The Company is involved in a number of other judicial and administrative
proceedings incidental to its business. Although occasional adverse decisions
(or settlements) may occur, the Company believes that the final disposition of
such matters will not have a material adverse effect on the Company's financial
position or results of operations.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
The following exhibits are included herein:
27. Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K have been filed with the Securities and Exchange
Commission during the three months ended April 2, 1999.
30
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SEAGATE TECHNOLOGY, INC.
------------------------
(Registrant)
DATE: May 14, 1999 BY: /s/ Charles C. Pope
_______________________
CHARLES C. POPE
Executive Vice President
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
DATE: May 14, 1999 BY: /s/ Stephen J. Luczo
_______________________
STEPHEN J. LUCZO
Chief Executive Officer and President
(Principal Executive Officer
and Director)
31
<PAGE>
SEAGATE TECHNOLOGY, INC.
INDEX TO EXHIBITS
Exhibit
Number
_______
27 Financial Data Schedule
32
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED CONDENSED BALANCE SHEET AS OF APRIL 2, 1999 AND THE CONSOLIDATED
CONDENSED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED APRIL 2, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUL-02-1999
<PERIOD-START> JUL-04-1998
<PERIOD-END> APR-02-1999
<CASH> 354
<SECURITIES> 1,247
<RECEIVABLES> 971
<ALLOWANCES> 54
<INVENTORY> 360
<CURRENT-ASSETS> 3,240
<PP&E> 3,419
<DEPRECIATION> 1,758
<TOTAL-ASSETS> 5,229
<CURRENT-LIABILITIES> 1,502
<BONDS> 703
0
0
<COMMON> 3
<OTHER-SE> 2,354
<TOTAL-LIABILITY-AND-EQUITY> 5,229
<SALES> 5,159
<TOTAL-REVENUES> 5,159
<CGS> 3,976
<TOTAL-COSTS> 3,976
<OTHER-EXPENSES> 607
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 37
<INCOME-PRETAX> 229
<INCOME-TAX> 72
<INCOME-CONTINUING> 157
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 157
<EPS-PRIMARY> 0.65
<EPS-DILUTED> 0.63
</TABLE>
