<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended October 1, 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 October 1, 1999, 208,304,096 shares of the registrant's common stock were
issued and outstanding.
<PAGE>
INDEX
SEAGATE TECHNOLOGY, INC.
PART I FINANCIAL INFORMATION PAGE NO.
- --------- ---------------------------------------------------- --------
Item 1. Financial Statements (Unaudited)
Consolidated condensed statements of operations--
Three months ended October 1, 1999 and
October 2, 1998 3
Consolidated condensed balance sheets--
October 1, 1999 and July 2, 1999 4
Consolidated condensed statements of cash flows--
Three months ended October 1, 1999 and
October 2, 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 27
Item 6. Exhibits and Reports on Form 8-K 28
SIGNATURES 29
2
<PAGE>
SEAGATE TECHNOLOGY, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In Millions, Except Per Share Data)
(Unaudited)
Three Months Ended
------------------
October 1, October 2,
1999 1998
---- ----
Revenue $1,682 $1,553
Cost of sales 1,404 1,232
Product development 140 141
Marketing and administrative 118 131
Amortization of goodwill and
other intangibles 9 9
Restructuring costs 112 -
Unusual items - 77
------ ------
Total Operating Expenses 1,783 1,590
Loss from Operations (101) (37)
Interest income 21 26
Interest expense (13) (13)
Activity related to equity interest in VERITAS (99) -
Gain on sale of VERITAS stock 193 -
Other (1) 3
------ ------
Other Income, net 101 16
------ ------
Loss before income taxes - (21)
Provision (benefit) for income taxes (2) 9
------ ------
Net Income (Loss) $ 2 $ (30)
====== ======
Net income (loss) per share:
Basic $ 0.01 $(0.12)
Diluted 0.01 (0.12)
Number of shares used in
per share computations:
Basic 218.6 245.0
Diluted 224.1 245.0
See notes to consolidated condensed financial statements.
3
<PAGE>
SEAGATE TECHNOLOGY, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In Millions)
(Unaudited)
October 1, July 2,
1999 1999 (1)
---- ---------
ASSETS
- ------
Cash and cash equivalents $ 342 $ 396
Short-term investments 1,073 1,227
Accounts receivable, net 810 872
Inventories 404 451
Deferred income taxes 286 252
Other current assets 116 114
------- --------
Total Current Assets 3,031 3,312
Property, equipment and leasehold improvements, net 1,584 1,687
Investment in VERITAS Software, net 1,442 1,745
Goodwill and other intangibles, net 134 144
Other assets 433 184
------- --------
Total Assets $ 6,624 $ 7,072
======= ========
LIABILITIES
- -----------
Accounts payable $ 636 $ 714
Accrued employee compensation 174 205
Accrued expenses 575 577
Accrued income taxes 179 43
Current portion of long-term debt 1 1
------- --------
Total Current Liabilities 1,565 1,540
Deferred income taxes 1,080 1,103
Other liabilities 179 163
Long-term debt, less current portion 703 703
------- --------
Total Liabilities 3,527 3,509
------- --------
STOCKHOLDERS' EQUITY
- --------------------
Common stock 3 3
Additional paid-in capital 1,993 1,991
Retained earnings 2,340 2,355
Accumulated other comprehensive income (loss) 138 (7)
Deferred compensation (39) (43)
Treasury common stock at cost (1,338) (736)
------- --------
Total Stockholders' Equity 3,097 3,563
------- --------
Total Liabilities and Stockholders' Equity $ 6,624 $ 7,072
======= ========
(1) The information in this column was derived from the Company's audited
consolidated balance sheet as of July 2, 1999.
See notes to consolidated condensed financial statements.
4
<PAGE>
SEAGATE TECHNOLOGY, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In Millions)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
-------------------
October 1, October 2,
1999 1998
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 2 $ (30)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 173 165
Deferred income taxes (150) 4
Non-cash portion of restructuring charge 76 -
Activity related to equity interest in VERITAS 101 -
Gain on sale of VERITAS stock (193) -
Other, net 5 7
Changes in operating assets and liabilities:
Accounts receivable 62 37
Inventories 41 39
Accounts payable (80) (72)
Accrued income taxes 139 (12)
Accrued expenses and employee compensation (62) 11
Other assets and liabilities, net 39 12
---------- ----------
Net cash provided by operating activities 153 161
INVESTING ACTIVITIES:
Acquisition of property, equipment and leasehold
improvements, net (117) (107)
Purchases of short-term investments (699) (2,209)
Maturities and sales of short-term investments 850 1,937
Proceeds from sale of VERITAS stock 397 -
Other, net (18) (22)
---------- ----------
Net cash provided by (used in) investing activities 413 (401)
FINANCING ACTIVITIES:
Sale of common stock 20 7
Purchase of treasury stock (639) (1)
Other, net (1) -
---------- ----------
Net cash provided by (used in) financing activities (620) 6
Effect of exchange rate changes on cash and cash equivalents - (1)
---------- ----------
Decrease in cash and cash equivalents (54) (235)
Cash and cash equivalents at the beginning of the period 396 666
---------- ----------
Cash and cash equivalents at the end of the period $ 342 $ 431
========== ==========
</TABLE>
See notes to consolidated condensed financial statements.
5
<PAGE>
SEAGATE TECHNOLOGY, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
---------------------
The consolidated condensed financial statements have been prepared by the
Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. The Company
believes the disclosures included in the unaudited consolidated condensed
financial statements, when read in conjunction with the consolidated
financial statements of the Company as of July 2, 1999 and notes thereto,
are adequate to make the information presented not misleading.
The consolidated condensed financial statements reflect, in the opinion of
management, all material adjustments necessary to summarize fairly the
consolidated financial position, results of operations and cash flows for
such periods. Such adjustments are of a normal recurring nature.
The results of operations for the three month period ended October 1, 1999
are not necessarily indicative of the results that may be expected for the
entire fiscal year ending June 30, 2000.
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 was 52 weeks and ended on July 2, 1999 and fiscal 2000 will be 52
weeks and will end on June 30, 2000.
2. Net Income (Loss) Per Share
---------------------------
For the period 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 period diluted net income per
share further included the effect of dilutive stock options outstanding
during the period. For the period in which the Company had a net loss, the
net loss per share was computed using only the weighted average number of
shares of common stock outstanding during the period. The following table
sets forth the computation of basic and diluted net income (loss) per
share:
6
<PAGE>
<TABLE>
<CAPTION>
(In Millions, Except Three Months Ended
------------------
Per Share Data) October 1, October 2,
1999 1998
---- ----
<S> <C> <C>
Basic Net Income (Loss) Per
---------------------------
Share Computation
-----------------
Numerator:
Net income (loss) $ 2 $ (30)
---------- ----------
Denominator:
Weighted average number of
common shares outstanding
during the period 218.6 245.0
---------- ----------
Basic net income (loss)
per share $ 0.01 $ (0.12)
========== ==========
Diluted Net Income (Loss) Per
-----------------------------
Share Computation
-----------------
Numerator:
Net income (loss) $ 2 $ (30)
---------- ----------
Denominator:
Weighted average number of
common shares outstanding
during the period 218.6 245.0
Incremental common shares
attributable to exercise of
outstanding options (assuming
proceeds would be used to
purchase treasury stock) 5.5 -
---------- ----------
Total 224.1 245.0
---------- ----------
Diluted net income (loss)
per share $ 0.01 $ (0.12)
========== ==========
</TABLE>
Options to purchase 3.1 million and 17.0 million shares of common stock
were outstanding during the quarters ended October 1, 1999 and October 2,
1998, 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.
7
<PAGE>
3. Balance Sheet Information
-------------------------
(In millions)
<TABLE>
<CAPTION>
October 1, July 2,
1999 1999
---- ----
<S> <C> <C>
Accounts Receivable:
Accounts receivable $ 867 $ 925
Allowance for non-collection (57) (53)
---------- ---------
$ 810 $ 872
========== =========
Inventories:
Components $ 114 $ 143
Work-in-process 59 54
Finished goods 231 254
---------- ---------
$ 404 $ 451
========== =========
Property, Equipment and Leasehold Improvements:
Property, equipment and leasehold improvements $ 3,510 $ 3,533
Allowance for depreciation and amortization (1,926) (1,846)
---------- ---------
$ 1,584 $ 1,687
========== =========
</TABLE>
4. Income Taxes
------------
The Company recorded a $2 million benefit from income taxes for the three
months ended October 1, 1999 compared with a $9 million provision for
income taxes for the comparable period last year. The $2 million benefit
from income taxes resulted primarily from applying a 39% combined U.S.
federal and state rate, instead of the Company's 28% effective tax rate, to
certain net expense items including restructuring charges, gain on sale of
VERITAS Software Corporation ("VERITAS") common stock and activity related
to the Company's equity interest in VERITAS. The 28% effective tax rate is
less than the statutory rate because a portion of the Company's earnings
from certain foreign operations is considered to be permanently reinvested
offshore and is not subject to foreign income taxes.
5. Supplemental Cash Flow Information
----------------------------------
(In millions)
<TABLE>
<CAPTION>
Three Months Ended
-------------------
October 1, October 2,
1999 1998
---- ----
<S> <C> <C>
Cash Transactions:
Cash paid for interest $ 26 $ 26
Cash paid for income taxes, net of refunds 4 15
</TABLE>
8
<PAGE>
6. Restructuring Costs
-------------------
During the quarter ended October 1, 1999, the Company recorded a
restructuring charge of $112 million. This was a result of a restructuring
plan established to align the Company's global workforce and manufacturing
capacity with existing and anticipated future market requirements and
necessitated by the Company's improved productivity and operating
efficiencies (the "fiscal 2000 restructuring plan"). These actions include
workforce reductions, capacity reductions including closure of facilities
or portions of facilities, write-off of excess equipment and consolidation
of operations in the Company's recording media operations, disc drive
assembly and test facilities, printed circuit board assembly manufacturing,
recording head operations, customer service operations, sales and marketing
group, and research and development activities. The restructuring charges
were comprised of $48 million for the write-off of excess manufacturing,
assembly and test equipment formerly utilized in Singapore, Thailand, and
Northern California; $28 million for the write-off of owned facilities
located in Singapore; $27 million for employee termination costs; $5
million in lease termination and holding costs; $2 million in renovation
costs to restore facilities in Singapore and Northern California to their
pre-lease condition; and $2 million in contract cancellations associated
with one of the Singapore facilities. Prior to this period, there was no
indication of permanent impairment of the assets associated with the
closure and consolidation of facilities.
In connection with the restructuring activities, the Company plans to
reduce its workforce by approximately 10,400 employees. Approximately
2,600 of the 10,400 employees had been terminated as of October 1, 1999.
As a result of employee terminations and the write-off of equipment and
facilities in connection with implementing the fiscal 2000 restructuring
plan, the Company estimates that annual salary and depreciation expense
will be reduced by approximately $43 million and $38 million, respectively.
The Company anticipates that the implementation of the fiscal 2000
restructuring plan will be substantially complete by June 30, 2000.
In connection with the restructuring plan implemented in fiscal 1999,
approximately 631 of the planned workforce reduction of 1,250 employees had
been terminated as of October 1, 1999. As a result of employee terminations
and the write-off or write-down of equipment and facilities in connection
with implementing the fiscal 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 fiscal 1999 restructuring plan
will be substantially complete by the end of March 2000.
The following table summarizes the Company's restructuring activities for
the three months ended October 1, 1999:
9
<PAGE>
<TABLE>
<CAPTION>
Severance
and Excess Contract
In millions Benefits Facilities Equipment Cancellations Other Total
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Reserve balances,
July 2, 1999 $ 4 $ 18 $ - $ 3 $ 11 $ 36
FY2000 restructuring charge 27 33 48 2 2 112
Cash charges (9) (2) - - - (11)
Non-cash charges - (28) (48) - - (76)
----------------------------------------------------------------------
Reserve balances,
October 1, 1999 $ 22 $ 21 $ - $ 5 $ 13 $ 61
======================================================================
</TABLE>
7. Business Segments
-----------------
The Company has three operating segments, disc drives, software and tape
drives, however, only the disc drive business is a reportable segment under
the criteria of SFAS 131. The "other" category in the following tables
consists of tape drives, software, 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 131.
The following tables summarize the Company's operations by business
segment:
In millions
<TABLE>
<CAPTION>
Three Months Ended
------------------
October 1, October 2,
1999 1998
---- ----
<S> <C> <C>
Revenue:
Disc Drives $1,566 $1,391
Other 116 162
------ ------
Consolidated $1,682 $1,553
====== ======
Gross Profit:
Disc Drives $ 231 $ 238
Other 47 83
------ ------
Consolidated $ 278 $ 321
====== ======
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
October 1, July 2,
1999 1999
---- ----
<S> <C> <C>
Total Assets:
Disc Drives $ 16,784 $ 16,553
Other 378 586
-------- --------
Operating Segments 17,162 17,139
Investment in VERITAS 1,442 1,745
Eliminations (11,980) (11,812)
-------- --------
Consolidated $ 6,624 $ 7,072
======== ========
</TABLE>
8. Comprehensive Income
--------------------
During the quarter ended October 1, 1999, Gadzoox Networks Inc.
("Gadzoox"), a company in which Seagate Technology holds a 19.89% interest,
completed an initial public offering of its common stock. The Company is
required to account for its investment under Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt
and Equity Securities" ("SFAS 115"). The Company has identified this
investment as "available-for-sale". Under SFAS 115, an available-for-sale
security is recorded at fair value on the balance sheet and unrealized
holding gains and losses are reported, net of taxes, in a separate
component of stockholders' equity called accumulated other comprehensive
income, until realized. The Company recorded an unrealized gain on
securities, net of tax, of $146 million to record its investment in Gadzoox
at fair value as of October 1, 1999.
The components of comprehensive income, net of related tax, for the three
months ended October 1, 1999 and October 2, 1998 were as follows (in
millions):
<TABLE>
<CAPTION>
Three Months Ended
------------------
October 1, October 2,
1999 1998
---- ----
<S> <C> <C>
Net income (loss) $ 2 $ (30)
Unrealized gain on securities 145 5
Foreign currency translation adjustments - -
-------- --------
Comprehensive income (loss) $ 147 $ (25)
======== ========
</TABLE>
The components of accumulated other comprehensive income, net of related
tax, at October 1, 1999 and July 2, 1999 were as follows (in millions):
<TABLE>
<CAPTION>
October 1, July 2,
1999 1999
---- ----
<S> <C> <C>
Unrealized gain (loss) on securities $ 140 $ (5)
Foreign currency translation adjustments (2) (2)
--------- --------
Accumulated other comprehensive income (loss) $ 138 $ (7)
========= ========
</TABLE>
11
<PAGE>
9. Equity Investment in VERITAS Software Corporation
-------------------------------------------------
Pursuant to a registration statement declared effective by the Securities
and Exchange Commission on August 9, 1999, the Company's Seagate Software,
Inc. ("Seagate Software") subsidiary sold 8,232,667 shares of VERITAS
Software Corporation common stock for proceeds of $397 million, net of
underwriting discounts and commissions. Seagate Software acquired such
shares in connection with the Company's contribution of the Network &
Storage Management Group business to VERITAS. The sale resulted in a
pre-tax gain of $193 million. 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
without the prior consent of Morgan Stanley & Co., Inc. Certain exceptions
to this limitation apply, including transfers to affiliated entities. As of
October 1, 1999, Seagate Software owns approximately 35% of the outstanding
shares of VERITAS. The Company accounts for its investment in VERITAS under
the equity method and records its equity interest in VERITAS' net income
(loss) on a one-quarter lag.
Summarized income statement information for VERITAS for the three months
ended June 30, 1999 is as follows (in millions):
Revenue $ 115
Gross profit 99
Net loss (162)
The Company's recorded equity in the net loss of VERITAS was a loss of $2
million for the quarter ended October 1, 1999, and differs from the
Company's proportionate share of VERITAS' reported net loss for the quarter
ended June 30, 1999. This difference is primarily because the Company
eliminates from VERITAS' net income (loss) the effect of VERITAS'
accounting for the NSMG contribution, including VERITAS' write-off of
in-process research and development and amortization expense related to
intangible assets. In addition, the Company's recorded equity interest in
the net loss of VERITAS includes the results of VERITAS only for the one
month period subsequent to the NSMG contribution on May 28, 1999.
The Company's activity related to equity interest in VERITAS for the period
ended October 1, 1999 includes the recorded equity in the net loss of
VERITAS of $2 million as described above, as well as the Company's
amortization expense for intangible assets relating to the investment in
VERITAS amounting to $97 million.
10. Subsequent Events - Seagate Software Reorganization
----------------------------------------------------
On October 20, 1999, the stockholders of Seagate Software, a majority-owned
subsidiary of the Company, approved the merger of Seagate Daylight Merger
Corp., a wholly-owned subsidiary of the Company, with and into Seagate
Software. Seagate Software's assets consist of the assets of the
Information Management Group ("IMG") and an investment in the common stock
of VERITAS Software Corporation.
The merger was effected on October 20, 1999. As a result of the merger,
Seagate Software is a wholly-owned subsidiary of the Company. In the
merger, Seagate Software's stockholders and optionees received payment in
the form of 3.24 shares of the Company's common stock per share of Seagate
Software common stock. All outstanding Seagate Software stock options held
by current employees of Seagate Software were accelerated immediately prior
to the merger. Seagate Technology issued 8,993,566 shares to former
optionees and stockholders of Seagate Software other than Seagate
Technology and its other subsidiaries.
In connection with the reorganization, Seagate Software has also formed a
wholly-owned subsidiary that will assume the name "Seagate Software, Inc."
Seagate Software will be renamed "Seagate Software Holdings, Inc." Seagate
Software intends to 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 will be established for this subsidiary, and current
and future employees of the IMG business will be eligible to participate in
the plan.
12
<PAGE>
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 $25 million. The Company 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. The Company
estimates that the settlement of earlier stock awards will result in
immediate compensation expense in the period the transaction closes of
approximately $285 million.
11. Litigation
----------
See Part II, Item 1 of this Form 10-Q for a description of legal
proceedings.
13
<PAGE>
SEAGATE TECHNOLOGY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Certain Forward-Looking Information:
- ------------------------------------
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. These statements include the statements
relating to continued price erosion in the first paragraph under "Results of
Operations," the statements relating to restructuring activities in the fifth
paragraph under "Results of Operations," the statements relating to the
estimated savings resulting from the Company's restructuring activities in the
fifth paragraph under "Results of Operations," the statements regarding capital
expenditures in the third paragraph under "Liquidity and Capital Resources," the
statements below under "Factors Affecting Future Operating Results" and the
statements under "Part II Other Information - Item 1. Legal Proceedings," among
others. These forward-looking statements are based on current expectations and
entail various risks and uncertainties that could cause actual results to differ
materially from those projected in the forward-looking statements. Such risks
and uncertainties are set forth below under "Factors Affecting Future Operating
Results."
Results of Operations:
- ----------------------
Revenue for the quarter ended October 1, 1999 was $1.682 billion, as compared
with $1.553 billion for the comparable year-ago quarter ended October 2, 1998,
and $1.643 billion for the immediately preceding quarter ended July 2, 1999. The
increase in revenue from both comparable periods was due primarily to a higher
level of unit shipments and, with respect to the year-ago quarter, an improved
mix of the Company's products. These factors were 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 accounted for $0.6 billion of the revenue
increase over the year-ago quarter. This was offset, however, by $0.5 billion
of price erosion. Increased sales volume accounted for $0.3 billion of the
revenue increase offset by $0.3 billion of price erosion when compared to the
immediately preceding quarter. The Company expects that price erosion in the
data storage industry will continue for the foreseeable future. Industry
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.
Gross margin as a percentage of revenue was 16.5% for the three months ended
October 1, 1999, compared with 20.7% for the comparable year-ago period and
22.5% for the immediately preceding quarter ended July 2, 1999. The decrease in
gross margin as a percentage of revenue from both prior periods was partially
due to the Company's contribution of the Network & Storage Management Group (the
"NSMG business") to VERITAS Software Corporation ("VERITAS") during the quarter
ended July 2, 1999. Excluding the NSMG business, the Company's gross margins
would have been 18.4% and 21.1%, respectively, for the quarters ended October 2,
1998 and July 2, 1999. In addition, the decrease in gross margins from both
prior periods was a result of price erosion due to intense price competition in
the quarter ended October 1, 1999. These decreases were partially offset by
cost savings as a result of the Company's intensive program to reduce costs
resulting in lower average unit costs per disc drive produced.
Product development expenses for the three months ended October 1, 1999 were
$140 million, a decrease of $1 million when compared to both the comparable
year-ago quarter and the
14
<PAGE>
immediately preceding quarter ended July 2, 1999. These expenses represented
8.3% of revenue for the three months ended October 1, 1999 compared with 9.1%
for the comparable year-ago period and 8.6% for the immediately preceding
quarter. The decrease in expenses from the comparable year-ago period was
primarily due to a decrease of $9 million in product development expenses
related to the Company's NSMG business partially offset by increased investment
in product development for the Company's core business, resulting in increases
of $5 million in salaries and related costs, and $4 million in occupancy costs.
The decrease in expenses from the immediately preceding quarter was primarily
due to a decrease of $6 million in product development expenses related to the
Company's NSMG business partially offset by increased investment in product
development for the Company's core business resulting in an increase of $4
million in salaries and related costs.
Marketing and administrative expenses for the three months ended October 1, 1999
were $118 million, a decrease of $13 million when compared with the comparable
year-ago quarter and a decrease of $14 million from the immediately preceding
quarter ended July 2, 1999. These expenses represented 7.0% of revenue for the
three months ended October 1, 1999 compared with 8.4% for the comparable year-
ago period and 8.0% for the immediately preceding quarter. The decrease in
expenses from the comparable year-ago period was primarily due to decreases of
$25 million in marketing and administrative expenses related to the Company's
NSMG business, $6 million in advertising and promotion expenses, and $5 million
in occupancy costs. These decreases were partially offset by increases of $6
million in marketing and administrative expenses related to the Company's
Information Management Group ("IMG") software products and services, $6 million
in the provision for bad debts, $5 million in outside services, and $4 million
in salaries and related costs. The decrease in expenses from the immediately
preceding quarter was primarily due to decreases of $19 million in marketing and
administrative expenses related to the Company's NSMG business, $4 million in
marketing and administrative expenses related to the Company's IMG software
products and services, $3 million in advertising and promotion expenses, and $3
million in legal expenses. These decreases were offset by increases of $6
million in the provision for bad debts, $5 million in salaries and related
costs, and $4 million in outside services.
During the quarter ended October 1, 1999, the Company recorded a restructuring
charge of $112 million. This was a result of a restructuring plan established to
align the Company's global workforce and manufacturing capacity with existing
and anticipated future market requirements and necessitated by the Company's
improved productivity and operating efficiencies (the "fiscal 2000 restructuring
plan"). These actions include workforce reductions, capacity reductions
including closure of facilities or portions of facilities, write-off of excess
equipment and consolidation of operations in the Company's recording media
operations, disc drive assembly and test facilities, printed circuit board
assembly manufacturing, recording head operations, customer service operations,
sales and marketing group, and research and development activities. In
connection with this restructuring, the Company plans to reduce its workforce by
approximately 10,400 employees. Approximately 2,600 of the 10,400 employees had
been terminated as of October 1, 1999. As a result of employee terminations and
the write-off of equipment and facilities in connection with implementing the
fiscal year 2000 restructuring plan, the Company estimates that annual salary
and depreciation expense will be reduced by approximately $43 million and $38
million, respectively. The Company anticipates that the implementation of the
fiscal 2000 restructuring plan will be substantially complete by June 30, 2000.
As the Company continues to implement operational efficiencies such as advanced
manufacturing processes and high-volume automation, the Company expects it will
incur additional restructuring charges in the future.
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Net other income increased by $85 million for the three months ended October 1,
1999 when compared with the comparable year-ago period and decreased by $1.459
billion from the immediately preceding quarter ended July 2, 1999. The increase
in net other income from the comparable year-ago quarter was primarily due to a
gain on sale of VERITAS stock of $193 million partially offset by activity
related to the Company's equity interest in VERITAS of $99 million. The decrease
in net other income from the immediately preceding quarter was primarily due to
the net gain of $1.670 billion on the contribution of the Company's NSMG
business to VERITAS in the quarter ended July 2, 1999 partially offset by the
gain on sale of VERITAS stock of $193 million in the quarter ended October 1,
1999.
Pursuant to a registration statement declared effective by the Securities and
Exchange Commission on August 9, 1999, the Company's Seagate Software subsidiary
sold 8,232,667 shares of VERITAS Software Corporation common stock for proceeds
of $397 million, net of underwriting discounts and commissions. Seagate Software
acquired such shares in connection with the Company's contribution of the NSMG
business to VERITAS. The sale resulted in a pre-tax gain of $193 million. 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 without the prior consent of Morgan Stanley &
Co., Inc. Certain exceptions to this limitation apply, including transfers to
affiliated entities. As of October 1, 1999, Seagate Software owns approximately
35% of the outstanding shares of VERITAS. The Company accounts for its
investment in VERITAS under the equity method and records its equity interest in
VERITAS' net income (loss) on a one-quarter lag.
The Company recorded a $2 million benefit from income taxes for the three months
ended October 1, 1999 compared with a $9 million provision for income taxes for
the comparable period last year. The $2 million benefit from income taxes
resulted primarily from applying a 39% combined U.S. federal and state rate,
instead of the Company's 28% effective tax rate, to certain net expense items
including restructuring charges, gain on sale of VERITAS Software Corporation
("VERITAS") common stock and activity related to the Company's equity interest
in VERITAS. The 28% effective tax rate is less than the statutory rate because a
portion of the Company's earnings from certain foreign operations is considered
to be permanently reinvested offshore and is not subject to foreign income
taxes.
Liquidity and Capital Resources:
- --------------------------------
At October 1, 1999, the Company's cash, cash equivalents and short-term
investments totaled $1.415 billion, a decrease of $208 million from the July 2,
1999 balance. This decrease was primarily a result of expenditures for property,
equipment and leasehold improvements, and the repurchase of 21.3 million shares
of the Company's common stock for $639 million, partially offset by proceeds
from sale of VERITAS stock and 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 October 1, 1999, the Company had committed lines of credit of $70 million
that can be used for standby letters of credit and bankers' guarantees. At
October 1, 1999, $69 million of these lines of credit were utilized.
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The Company expects investments in property and equipment in the current fiscal
year to approximate $700 million, of which approximately $119 million had been
incurred as of October 1, 1999. The Company plans to finance these investments
from existing cash balances and cash flows from operations. The $119 million
year-to-date investment comprised $50 million for manufacturing facilities and
equipment related to the Company's subassembly and disc drive final assembly and
test facilities in the United States and the Far East; $38 million for
manufacturing facilities and equipment for the recording head operations in the
United States, Northern Ireland and Malaysia; $17 million to upgrade the
capabilities of the Company's thin-film media operations in California and
Northern Ireland; and $14 million for other purposes.
During the three months ended October 1, 1999, the Company acquired 21.3 million
shares of its common stock for $639 million. The repurchase of a portion of
these shares completed the June 1997 stock repurchase program as amended in
February 1999. The remainder of the shares were repurchased under an April 1999
amendment to the program in which up to an additional 25 million shares of the
Company's common stock may be acquired in the open market.
During the quarter ended October 1, 1999, Gadzoox Networks Inc. ("Gadzoox"), a
company in which Seagate Technology holds a 19.89% interest, completed an
initial public offering of its common stock. The Company is required to account
for its investment under Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115").
The Company has identified this investment as "available-for-sale". Under SFAS
115, an available-for-sale security is recorded at fair value on the balance
sheet and unrealized holding gains and losses are reported, net of taxes, in a
separate component of stockholders' equity called accumulated other
comprehensive income, until realized. The Company recorded an unrealized gain on
securities, net of tax, of $146 million to record its investment in Gadzoox at
fair value as of October 1, 1999.
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 at such time 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 the data storage industry, the supply of drives periodically exceeds demand.
When this happens, the over supply of available products causes the Company to
have higher than anticipated inventory levels and it experiences intense price
competition from other disc drive and/or tape
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drive manufacturers.
Our financial results will vary
We often experience a high volume of sales at the end of a quarter, so we may be
unable to determine whether our fixed costs are too high relative to sales until
late in any given quarter. As a result, we often do not have enough time to
reduce these fixed costs. Consequently, our net income would be reduced or we
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, and the related margins of the various 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 used in manufacturing 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 revenue in any quarter
because of our vertical manufacturing strategy;
. our ability to develop, introduce and market new products and product
enhancements in a timely fashion;
. 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.
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. See Part II, Item 1, Legal Proceedings.
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 continue 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 independent disc
drive manufacturers, as well as large integrated multinational manufacturers
such as:
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INTEGRATED INDEPENDENT
---------- -----------
Fujitsu Limited Maxtor Corporation
International Business Machines Corporation Quantum Corporation
NEC Corporation Western Digital Corporation
Samsung Electronics Co. Ltd.
Toshiba Corporation
Integrated multinational manufacturers are formidable competitors because they
possess greater resources and are able to access their customers without having
to consider the profitability of the disc drive business in pricing their
components. For example, IBM recently entered into agreements with both EMC and
Dell under which IBM will likely supply a substantial portion of EMC and Dell's
disc drive needs. We face the risk 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, who are
continuously evaluating whether to manufacture their own drives or whether to
purchase their drives from outside sources. If our customers 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 become competition for 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.
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 quickly in order to meet market windows that
become progressively shorter. We had research and development expenses of $581
million, $585 million and $459 million in fiscal 1999, 1998 and 1997,
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 increased failure rates, are of low quality or are not reliable,
customers may reduce their purchases of our products. Our manufacturing rework
and scrap costs and our service and warranty costs may also increase. In
addition, a decline in the
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reliability of our products may reduce our competitiveness in the data storage
industry.
Our products are used in combination with other hardware, such as
microprocessors, and other software. The Company's future success will also
require strong demand by consumers and businesses for computer systems, storage
upgrades to computer systems and multimedia applications. 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. If customers elect to wait to make their
purchases 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.
The Company 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 successfully compete in the supply of
components for mobile, laptop, notebook and ultraportable computers, we must
produce 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 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.
The Company'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 our
financial condition. In addition, a strategy of vertical integration has delayed
in the past and could continue to delay in the future our ability to introduce
products containing market-leading technology. Such delays may be due to the
fact that we may not have developed the technology in-house or because we do not
have access to inexpensive external sources of supply. 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
The Company 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
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components. Any prolonged interruption or reduction in the supply of a key
component could have a material adverse effect on our business, our operating
results and our financial condition. We may 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 the Company 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, a few 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 our customers delay or cancel orders, our revenue 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 OEMs' 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 OEMs and foreign distributors typically furnish us
with non-binding indications of their near-term requirements, with their product
deliveries based on weekly confirmations. To the extent actual orders from
foreign distributors and OEMs are reduced from their non-binding forecasts, the
Company's business, results of operations and financial condition could be
adversely effected.
We face risks from our international operations
The Company 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,
Northern Ireland, Malaysia, 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;
. 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.
The Company's products are priced predominately in U.S. dollars even when sold
to customers who are located abroad. The currency instability in Asian and
other financial markets may make our products more expensive than the 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 turmoil in international financial markets and the
deterioration of the underlying economic conditions in the recent past in many
countries, including those in Asia, may
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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 contribution of our Network & Storage Management Group to
VERITAS
We consolidated our software businesses into a single entity called Seagate
Software in 1996. Seagate Software's business consisted of two primary
divisions, Network & Storage Management Group ("NSMG") and Information
Management Group. We contributed NSMG to a newly formed company, New VERITAS,
consisting of NSMG and VERITAS Software Corporation on May 28, 1999. The
Company's Seagate Software subsidiary currently owns approximately 35% of the
outstanding shares of New VERITAS.
We face a number of risks from the closing of the NSMG combination including:
. Information Management Group employees may be distracted by concerns about
whether we will continue to operate their business or spin it off, and they
may not meet critical deadlines in their assigned tasks;
. the ongoing OEM relationship with NSMG 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
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;
. we do not have significant control over the management of New VERITAS,
although currently we have two representatives on its board of directors;
. our financial statements and results of operations reflect 35% of New
VERITAS' operations which may impact our stock price; and
. we are only permitted to sell our interest in New VERITAS in limited
increments.
Acquisition related accounting charges will 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
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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 also incurred a charge to operations in
the fourth quarter of fiscal 1999 related to the contribution of the NSMG
business to New VERITAS of approximately $85 million for the write-off of in-
process research and development, and we will experience ongoing charges related
to that contribution for amortization of purchased intangibles currently
amounting to approximately $100 million per quarter.
Systems failures could adversely affect our business
The Company'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.
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. This could result in a system failure or a
miscalculation causing disruptions of operations, including among other things,
a temporary inability to process transactions, send invoices, or engage in
normal business activities. The Company considers a product to be in "Year 2000
compliance" if
. the product's performance and functionality are unaffected by processing of
dates prior to, during and after the year 2000; but only if
. all products (for example hardware, software and firmware) used with the
product properly exchange accurate date data with it.
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 the Company, 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 that the Company has incurred in
relation 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 the Company or Seagate Software. The Company 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
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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 2000 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. The Company
has received assurances of Year 2000 compliance from its major US customers.
Many offshore customers have not responded and are under no contractual
obligation to provide us with Year 2000 compliance information. The Company 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 the Company,
regardless of their merit, our business, financial condition and results of
operations could be materially adversely affected due to increased warranty
costs, customer satisfaction issues and the costs from 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 the Company and into which our products are integrated. The Company
conducted a Year 2000 inventory of information technology systems in the first
quarter of 1997. Risk assessment was substantially completed and remediation
activities were fully completed by the end of the second quarter of 1997.
Approximately 2,200 items were identified, and as of October 1999, all items
have been resolved with the exception of one phased deployment in some of our
Asian plants which is on schedule to be completed by the end of October 1999.
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 were Year
2000 compliant. The remaining one-third have been made compliant except for six
items, which are still being worked on but are not significant to the operations
of the Company.
We are using the following phased approach to achieve Year 2000 readiness:
inventory, assessment, disposition, test and audit. Of these phases inventory,
assessment, disposition and test are complete and audit is 99% complete.
These activities are intended to encompass all major categories of systems in
use by the Company, 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
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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.
The Company's material third party relationships include relationships with
suppliers, customers and financial institutions. The Company has identified 600
suppliers which are critical to our operations, and we have surveyed each for
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 had responded affirmatively and had been approved. In May 1999,
we initiated an onsite validation process for those suppliers considered most
critical. This phase was completed in September 1999; three suppliers failed the
on-site validation process and plans are being developed for these three which
may include alternate sources or additional inventory for sole source suppliers.
In addition, the Company has joined the High Tech Consortium for Year 2000 to
pool supply chain efforts with other companies in our industry.
The Company'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 Year 2000 compliance measures for the Company's core and mission-
critical systems are complete, we do not consider failure of these systems to be
within a reasonable Year 2000 worst case scenario. We believe that we are
primarily at risk due to failures within external infrastructures such as
utilities and transportation systems. We are currently examining these risks
with the idea of developing responses and action plans. These may include a
business shutdown at some locations on December 31, 1999 and, where justified
due to external risk factors, systems will be placed on standby or powered down
on December 31, 1999 with controlled startup prior to business resumption on
January 3, 2000.
While we currently do not expect Year 2000 issues to pose significant
operational problems, we could 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 the
Company's products. Therefore, we are developing contingency plans for
continuing operations in the event such problems arise.
Our dependence on key personnel
Our future performance depends to a significant degree upon the continued
service of our key members of management as well as marketing, sales, and
product development personnel. The loss of one or more of our key personnel
would have a material adverse effect on our business, operating results, and
financial condition. We believe our future success will also depend in large
part upon our ability to attract and retain highly skilled management,
marketing, sales, and product development personnel. We have experienced
intense competition for such personnel and there can be no assurance that we
will be able to retain our key employees or that we will be successful
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in attracting, assimilating and retaining them in the future.
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 the
Company or its competitors;
. announcements of major restructurings by the Company or its competitors;
. 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 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 liquidate
their holdings of our shares;
. 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; and
. price erosion.
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 $44 1/4 to a low of $16 1/8 during fiscal 1999.
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PART II
OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
The following discussion contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These statements relate to the Company's legal proceedings
described below. Litigation is inherently uncertain and may result in adverse
rulings or decisions. Additionally, the Company may enter into settlements or be
subject to judgments 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.
Intellectual Property 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 is 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 the Company. Rodime appealed from
the final judgment, and on April 13, 1999, the Court of Appeals for 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 filed a petition to the
U.S. Supreme Court on October 1, 1999, to review the federal Circuit's decision
and intends to vigorously defend itself in any further proceedings in the
District Court.
Papst Licensing, GmbH ("Papst"), has given the Company notice that it believes
certain former Conner Peripherals, Inc. ("Conner") disc drives infringe several
of its patents covering the use of spindle motors in disc drives. It is the
opinion of the Company's patent counsel that the former Conner disc drives do
not infringe any valid claims of the patents. 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. Papst is currently
involved in litigation with other disc drive and disc drive motor manufacturers.
Ronald Maynard and Microdomain Corporation filed suit in Santa Clara County
Superior Court against Quinta Corporation, the Quinta Venture, the four Quinta
founders as individuals, Sierra Ventures, Read-Rite Corporation and the Company
alleging misappropriation of trade secrets, breach of contract, conspiracy,
unfair competition and unjust enrichment. Quinta, Read-Rite and the Company
filed a cross-complaint against Ronald Maynard for misappropriation of trade
secrets, breach of contract and fraud. Trial is set for March 6, 2000. The
Company believes the Maynard lawsuit is without merit and intends to vigorously
defend the case and pursue its claims against Maynard.
In November 1997, TeraStor Corporation filed a cross-complaint against the
Company in an action pending in the Superior Court of California, County of
Santa Clara entitled Maxoptix Corporation
27
<PAGE>
v. TeraStor Corporation and Gordon Knight. The cross-complaint alleges causes of
action against the Company for unfair business practices, misappropriation of
trade secrets, attempted monopolization, refusal to deal, breach of contract,
specific performance, breach of the covenant of good faith and fair dealing,
fraud, negligent misrepresentation, intentional interference with prospective
economic advantage and negligent interference with prospective economic
advantage. The allegations against the Company arose out of the Company's
dealings with TeraStor pursuant to a joint development agreement concerning the
development of magneto optical recording heads. In December 1997, TeraStor
sought a preliminary injunction against the Company seeking to prevent certain
Company employees who formerly worked with TeraStor under the joint development
agreement from engaging in work related to the Company's Quinta subsidiary. In
January 1998, the Court denied TeraStor's motion for injunctive relief. The
Company has asserted cross-claims against TeraStor for trade secret
misappropriation, fraud, negligent misrepresentation, breach of contract,
declaratory relief, recission, violation of Business & Professions Code Section
17200, common law unfair competition, intentional interference with contractual
relations, negligent interference with contractual relations, and inducing
breach of fiduciary duty. The Company also filed claims against Rick Wilmer and
Amyl Ahola, two former Seagate employees employed by TeraStor, for breach of
contract and breach of fiduciary duty. Discovery is ongoing and trial is
currently set to begin on June 5, 2000. The Company denies TeraStor's
allegations and intends to vigorously defend itself.
On February 26, 1999, the Lemelson Medical, Education & Research Foundation
filed a lawsuit against 88 defendants in the U.S. District Court for the
District of Arizona, alleging that the Company infringes 16 patents relating to
the use of machine vision, computer image analysis and automatic ID or bar code
scanners in its manufacturing processes. On August 7, 1999, the Company entered
into a settlement agreement with the Lemelson Foundation, and the lawsuit was
dismissed with prejudice on August 26, 1999.
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 October 1, 1999 except for the
following:
On September 3, 1999, a report on Form 8-K was filed presenting pro forma
financial information as if the contribution of NSMG to VERITAS and the purchase
of the Seagate Software minority interest by the Company had occurred at the
beginning of fiscal 1999.
28
<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: October 27, 1999 BY: /s/ Charles C. Pope
-----------------------
CHARLES C. POPE
Executive Vice President
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
DATE: October 27, 1999 BY: /s/ Stephen J. Luczo
-----------------------
STEPHEN J. LUCZO
Chief Executive Officer and President
(Principal Executive Officer
and Director)
29
<PAGE>
SEAGATE TECHNOLOGY, INC.
INDEX TO EXHIBITS
Exhibit
Number
_______
27 Financial Data Schedule
30
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED CONDENSED BALANCE SHEET AS OF OCTOBER 1, 1999 AND THE CONSOLIDATED
CONDENSED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED OCTOBER 1, 1999 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-03-1999
<PERIOD-END> OCT-01-1999
<CASH> 342
<SECURITIES> 1,073
<RECEIVABLES> 867
<ALLOWANCES> 57
<INVENTORY> 404
<CURRENT-ASSETS> 3,031
<PP&E> 3,510
<DEPRECIATION> 1,926
<TOTAL-ASSETS> 6,624
<CURRENT-LIABILITIES> 1,565
<BONDS> 703
0
0
<COMMON> 3
<OTHER-SE> 3,094
<TOTAL-LIABILITY-AND-EQUITY> 6,624
<SALES> 1,682
<TOTAL-REVENUES> 1,682
<CGS> 1,404
<TOTAL-COSTS> 1,404
<OTHER-EXPENSES> 261
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13
<INCOME-PRETAX> 0
<INCOME-TAX> (2)
<INCOME-CONTINUING> 2
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2
<EPS-BASIC> 0.01
<EPS-DILUTED> 0.01
</TABLE>
