<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
FORM 10-K/A
Amendment No. 1
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended July 3, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 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
incorporation or organization) Identification Number)
920 Disc Drive
Scotts Valley, California 95067
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (831) 438-6550
_________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange
------------------- ---------------------
on which Registered
-------------------
Common Stock, Par Value $0.01 per share New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None.
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K/A or any amendment to
this Form 10-K/A. [X]
The aggregate market value of the Common Stock held by non-affiliates of the
registrant, based upon the closing price of Common Stock on July 3, 1998 as
reported by the New York Stock Exchange, was $5.182 billion. Shares of Common
Stock held by each officer, each director and by each person who owns 5% or more
of the outstanding Common Stock have been excluded in that such persons may be
deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
The number of shares outstanding of the registrant's Common Stock as of July
3, 1998 was 244,757,152.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the following documents are incorporated by reference into Parts I,
II, III and IV of this Form 10-K/A Report: (1) Proxy Statement for registrant's
1998 Annual Meeting of Stockholders (the "Proxy Statement") and (2) registrant's
Annual Report to Stockholders for the fiscal year ended July 3, 1998 (the
"Annual Report to Stockholder").
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Report:
1. Financial Statements. The following Consolidated Financial Statements of
Seagate Technology, Inc. and Report of Independent Auditors are incorporated by
reference in Item 8:
Report of Independent Auditors
Consolidated Balance Sheets July 3, 1998 and June 27, 1997.
Consolidated Statements of Operations Years Ended July 3, 1998; June 27,
1997; and June 28, 1996.
Consolidated Statements of Stockholders' Equity Years Ended July 3, 1998;
June 27, 1997; and June 28, 1996.
Consolidated Statements of Cash Flows Years Ended July 3, 1998; June 27,
1997; and June 28, 1996.
Notes to Consolidated Financial Statements.
2. Financial Statement Schedules. The following consolidated financial
statement schedule of Seagate Technology, Inc. is filed as part of this Report
and should be read in conjunction with the Consolidated Financial Statements of
Seagate Technology, Inc.:
II--Valuation and Qualifying Accounts................. 24
Schedules not listed above have been omitted because they are not applicable
or are not required or the information required to be set forth therein is
included in the Consolidated Financial Statements or notes thereto.
3. Exhibits:
Notes
-----
3.1 Certificate of Incorporation of Registrant, as amended. (A)
3.2 By-Laws of Registrant, as amended. (B)
4.1 Indenture, dated as of March 1, 1997 (the "Indenture"),
between Seagate Technology, Inc. (the "Company") and First
Trust of California, National Association, as Trustee. (C)
4.2 Officers' Certificate pursuant to Section 301 of the
Indenture, without Exhibits, establishing the terms of the
Company's senior notes and senior debentures. (C)
4.3 Form of Senior Note. (C)
4.4 Form of Senior Debenture. (C)
10.1 1983 Incentive Stock Option Plan and form of Stock Option
Agreement. (E)
10.2 Seagate Technology Employee Stock Purchase Plan, as amended.
10.3 Registrant's Executive Stock Plan. (I)
10.4 Conner Peripherals, Inc. 1986 Incentive Stock Plan. (I)
10.5 Building Agreement for Land At Private Lot A14547 in Yio Chu
Kang dated May 30, 1996 between Seagate Technology
International and Jurong Town Corporation. (K)
10.6 Lease Agreement dated July 18, 1994 between Universal
Appliances Limited and Seagate Technology (Thailand)
Limited. (K)
10.7 1991 Incentive Stock Option Plan and Form of Option
Agreement, as amended. (K)
10.8 Acquisition Agreement dated as of September 29, 1989 by and
among Seagate Technology, Inc. and Control Data Corporation,
<PAGE>
Imprimis Technology Incorporated and Magnetic Peripherals,
Inc. (G)
10.9 Amended and Restated Directors' Option Plan and Form of
Option Agreement. (H)
10.10 Amended and Restated Archive Corporation Stock Option and
Restricted Stock Purchase Plan--1981. (I)
10.11 Amended and Restated Archive Corporation Incentive Stock
Option Plan--1981. (I)
10.12 Conner Peripherals, Inc.--Arcada Holdings, Inc. Stock
Option Plan. (J)
10.13 Arcada Holdings, Inc. 1994 Stock Option Plan. (J)
10.14 Separation Agreement and Release between the Registrant and
Alan F. Shugart dated as of July 29, 1998. (K)
13.1 Portions of the 1998 Annual Report to Stockholders. *
21.1 Subsidiaries of the Registrant. (K)
23.1 Consent of Ernst & Young LLP, Independent Auditors. *
24.1 Power of Attorney. (K)
27 Financial Data Schedule (K)
(A) Incorporated by reference to exhibits filed in response to Item 16,
"Exhibits," of the Company's Registration Statement on Form S-3 (File No.
33-13430) filed with the Securities and Exchange Commission on April 14,
1987.
(B) Incorporated by reference to exhibits filed in response to Item 14 (a),
"Exhibits," of the Company's Form 10-K, as amended, for the year ended June
30, 1990.
(C) Incorporated by reference to exhibits filed in response to Item 7(b),
"Financial Statements and Exhibits" of the Company's Current Report on
Form 8-K dated March 4, 1997.
(E) Incorporated by reference to exhibits filed in response to Item 14(a),
"Exhibits," of the Company's Form 10-K for the year ended June 30, 1983.
(G) Incorporated by reference to exhibits filed in response to Item 7(c),
"Exhibits," of the Company's Current Report on Form 8-K dated October 2,
1989.
(H) Incorporated by reference to exhibits filed in response to Item 14(a),
"Exhibits," of the Company's Form 10-K for the year ended June 30, 1991.
(I) Incorporated by reference to exhibits filed with Registrant's Registration
Statement on Form S-8 (registration number 333-00697) as filed with the
Commission on February 5, 1996.
(J) Incorporated by reference to exhibits filed with Registrant's Registration
Statement on Form S-8 (registration number 333-01059) as filed with the
Commission on February 21, 1996.
(K) Previously filed.
* Filed herewith.
(b) Reports on Form 8-K. No reports on Form 8-K were filed by the Company
during the quarter ended July 3, 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this amended report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized.
Seagate Technology, Inc.
By: *
_________________
Stephen J. Luczo
Chief Executive Officer,
President, Chief Operating Officer
and a Director
Dated: April 19, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
amended report on Form 10-K has been signed by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- ------------------------------------- ------------------------------ -------------------
<S> <C> <C>
* President and Chief April 19, 1999
- ------------------------------------- Executive Officer and a
(Stephen J. Luczo) Director (Principal Executive
Officer)
/s/ Charles C. Pope Senior Vice President and April 19, 1999
- ------------------------------------- Chief Financial Officer
(Charles C. Pope) (Principal Financial and
Accounting Officer)
* Co-Chairman of the Board April 19, 199
- -------------------------------------
(Gary B. Filler)
* Co-Chairman of the Board April 19, 1999
- -------------------------------------
(Lawrence Perlman)
* Director April 19, 1999
- -------------------------------------
(Kenneth Haughton)
* Director April 19, 1999
- -------------------------------------
(Robert A. Kleist)
* Director April 19, 1999
- -------------------------------------
(Thomas P. Stafford)
* Director April 19, 1999
- -------------------------------------
(Laurel L. Wilkening)
</TABLE>
*By: /s/ Charles C. Pope
---------------------
Charles C. Pope
Attorney-in-fact
<PAGE>
Notes
-----
3.1 Certificate of Incorporation of Registrant, as amended. (A)
3.2 By-Laws of Registrant, as amended. (B)
4.1 Indenture, dated as of March 1, 1997 (the "Indenture"),
between Seagate Technology, Inc. (the "Company") and First
Trust of California, National Association, as Trustee. (C)
4.2 Officers' Certificate pursuant to Section 301 of the
Indenture, without Exhibits, establishing the terms of the
Company's senior notes and senior debentures. (C)
4.3 Form of Senior Note. (C)
4.4 Form of Senior Debenture. (C)
10.1 1983 Incentive Stock Option Plan and form of Stock Option
Agreement. (E)
10.2 Seagate Technology Employee Stock Purchase Plan, as amended.
10.3 Registrant's Executive Stock Plan. (I)
10.4 Conner Peripherals, Inc. 1986 Incentive Stock Plan. (I)
10.5 Building Agreement for Land At Private Lot A14547 in Yio Chu
Kang dated May 30, 1996 between Seagate Technology
International and Jurong Town Corporation. (K)
10.6 Lease Agreement dated July 18, 1994 between Universal
Appliances Limited and Seagate Technology (Thailand)
Limited. (K)
10.7 1991 Incentive Stock Option Plan and Form of Option
Agreement, as amended. (K)
10.8 Acquisition Agreement dated as of September 29, 1989 by and
among Seagate Technology, Inc. and Control Data Corporation,
<PAGE>
Imprimis Technology Incorporated and Magnetic Peripherals,
Inc. (G)
10.9 Amended and Restated Directors' Option Plan and Form of
Option Agreement. (H)
10.10 Amended and Restated Archive Corporation Stock Option and
Restricted Stock Purchase Plan--1981. (I)
10.11 Amended and Restated Archive Corporation Incentive Stock
Option Plan--1981. (I)
10.12 Conner Peripherals, Inc.--Arcada Holdings, Inc. Stock
Option Plan. (J)
10.13 Arcada Holdings, Inc. 1994 Stock Option Plan. (J)
10.14 Separation Agreement and Release between the Registrant and
Alan F. Shugart dated as of July 29, 1998. (K)
13.1 Portions of the 1998 Annual Report to Stockholders. *
21.1 Subsidiaries of the Registrant. (K)
23.1 Consent of Ernst & Young LLP, Independent Auditors. *
24.1 Power of Attorney. (K)
27 Financial Data Schedule (K)
(A) Incorporated by reference to exhibits filed in response to Item 16,
"Exhibits," of the Company's Registration Statement on Form S-3 (File No.
33-13430) filed with the Securities and Exchange Commission on April 14,
1987.
(B) Incorporated by reference to exhibits filed in response to Item 14 (a),
"Exhibits," of the Company's Form 10-K, as amended, for the year ended June
30, 1990.
(C) Incorporated by reference to exhibits filed in response to Item 7(b),
"Financial Statements and Exhibits" of the Company's Current Report on
Form 8-K dated March 4, 1997.
(E) Incorporated by reference to exhibits filed in response to Item 14(a),
"Exhibits," of the Company's Form 10-K for the year ended June 30, 1983.
(G) Incorporated by reference to exhibits filed in response to Item 7(c),
"Exhibits," of the Company's Current Report on Form 8-K dated October 2,
1989.
(H) Incorporated by reference to exhibits filed in response to Item 14(a),
"Exhibits," of the Company's Form 10-K for the year ended June 30, 1991.
(I) Incorporated by reference to exhibits filed with Registrant's Registration
Statement on Form S-8 (registration number 333-00697) as filed with the
Commission on February 5, 1996.
(J) Incorporated by reference to exhibits filed with Registrant's Registration
Statement on Form S-8 (registration number 333-01059) as filed with the
Commission on February 21, 1996.
(K) Previously filed.
* Filed herewith.
(b) Reports on Form 8-K. No reports on Form 8-K were filed by the Company
during the quarter ended July 3, 1998.
<PAGE>
1 EXHIBIT 13.1
SEAGATE TECHNOLOGY, INC.
ANNUAL REPORT TO STOCKHOLDERS
SELECTED FINANCIAL DATA
SEAGATE TECHNOLOGY 1998
<TABLE>
<CAPTION>
Fiscal Year Ended July 3, June 27, June 28, June 30, July 1,
In millions, except per share data 1998 1997 1996 1995 1994
=========================================================================================================
<S> <C> <C> <C> <C> <C>
Revenue $6,819 $8,940 $8,588 $7,256 $5,865
Gross margin 989 2,022 1,581 1,373 1,171
Income (loss) from operations (686) 858 287 459 473
Income (loss) before extraordinary gain (530) 658 213 313 330
Net income (loss) (530) 658 213 319 330
Basic income (loss) per share before
extraordinary gain (2.17) 2.82 1.07 1.64 1.76
Basic net income (loss) per share (2.17) 2.82 1.07 1.67 1.76
Diluted income (loss) per share before
extraordinary gain (2.17) 2.62 .97 1.44 1.56
Diluted net income (loss) per share (2.17) 2.62 .97 1.47 1.56
Total assets 5,645 6,723 5,240 4,900 4,308
Long-term debt, less current portion 704 702 798 1,066 1,177
Stockholder's equity $2,937 $3,476 $2,466 $1,936 $1,635
Number of shares used in per share computations:
Basic 243.6 233.6 199.7 190.6 186.9
Diluted 243.6 257.9 236.1 244.7 235.8
</TABLE>
The 1998 results of operations include a $347 million restructuring charge, a
$223 million write-off of in-process research and development incurred primarily
in connection with the acquisition of Quinta Corporation, a $76 million charge
for mark-to-market adjustments on certain of the Company's foreign currency
forward exchange contracts and a $22 million reduction in the charge recorded in
1997 as a result of the adverse judgment in the Amstrad PLC litigation (see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations"). The 1997 results of operations include a $153 million charge as a
result of the adverse judgment in the Amstrad PLC litigation. The 1996 results
of operations include a $242 million restructuring charge as a result of the
merger with Conner Peripherals, Inc. and a $99 million write-off of in-process
research and development incurred in connection with the acquisition of software
companies. The 1995 results of operations include a $73 million write-off of
in-process research and development incurred in connection with business
acquisitions. Prior periods have been restated to reflect the merger with
Conner Peripherals, Inc. in February 1996 on a pooling of interests basis, a
two-for-one stock split, effected in the form of a stock dividend, in November
1996, and Statement of Financial Accounting Standards No. 128 ("SFAS 128"),
"Earnings Per Share," adopted in the second quarter of fiscal 1998.
<TABLE>
<CAPTION>
QUARTERLY/1998
Unaudited, in millions except per share data 1st 2nd 3rd 4th
<S> <C> <C> <C> <C>
------------
Revenue $ 1,896 $ 1,673 $ 1,675 $ 1,575
Gross margin 295 192 204 298
Income (loss) from operations (200) (277) (221) 12
Net income (loss) (240) (183) (129) 22
Net income (loss) per share:
Basic (.98) (.75) (.53) .09
Diluted (.98) (.75) (.53) .09
Price range per share:
Low $34-1/8 $18-7/16 $ 17-3/4 $19-7/16
High $45-3/4 $ 40-5/8 $27-3/16 $ 29-5/8
</TABLE>
<PAGE>
2
The results for the first quarter include a $216 million write-off of in-process
research and development incurred primarily in connection with the acquisition
of Quinta Corporation and a $63 million charge for mark-to-market adjustments on
certain of the Company's foreign currency forward exchange contracts. The
results for the second quarter include a $205 million restructuring charge, a
$22 million reduction in the $153 million charge recorded in 1997 as a result of
the adverse judgment in the Amstrad PLC litigation (See "Management's Discussion
and Analysis of Financial Condition and Results of Operations") and a $13
million charge for mark-to-market adjustments on certain of the Company's
foreign currency forward exchange contracts. The results for the third quarter
include a $142 million restructuring charge. The results for the fourth quarter
include a $7 million write-off of in-process research and development incurred
in connection with the acquisition of Eastman Software Storage Management Group,
Inc. in June 1998. Prior periods have been restated to reflect SFAS 128,
"Earnings Per Share," adopted in the second quarter of fiscal 1998.
<TABLE>
<CAPTION>
QUARTERLY/1997
Unaudited, in millions except per share data 1st 2nd 3rd 4th
<S> <C> <C> <C> <C>
Revenue $ 2,061 $ 2,400 $ 2,502 $ 1,977
Gross margin 393 541 631 457
Income from operations 174 289 347 48
Net income 129 213 257 59
Net income per share:
Basic .61 .94 1.04 .24
Diluted .53 .84 1.01 .23
Price range per share:
Low $18-1/16 $25-7/8 $37-3/8 $32-1/2
High $29-5/16 $42-3/4 $56-1/4 $54-1/4
</TABLE>
The results for the first quarter include the reversal of restructuring charges
of $10 million related to the completion of certain aspects of the restructuring
in connection with the merger with Conner Peripherals, Inc. at a lower cost than
originally estimated. The results for the third quarter include compensation
expense and in-process research and development charges of $13 million and $3
million, respectively, in connection with additional amounts paid with respect
to the June 1996 acquisition of Holistic Systems Ltd. The results for the
fourth quarter include a $153 million charge as a result of the adverse judgment
in the Amstrad PLC litigation (See "Management's Discussion and Analysis of
Financial Condition and Results of Operations") and restructuring charges of $3
million related to certain software operations. Prior periods have been
restated to reflect a two-for-one stock split, effected in the form of a stock
dividend, in November 1996 and SFAS 128, "Earnings Per Share," adopted in the
second quarter of fiscal 1998.
STOCK AND DIVIDEND INFORMATION
The Company's common stock trades on the New York Stock Exchange under the
symbol "SEG." The price range per share, reflected in the above tables, is the
highest and lowest sale prices for the Company's stock as reported by the New
York Stock Exchange during each quarter. The Company's present policy is to
retain its earnings to finance future growth. The Company has never paid cash
dividends and has no present intention to pay cash dividends. At July 3, 1998,
there were 7,821 stockholders of record of the Company's common stock.
<PAGE>
3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
SEAGATE TECHNOLOGY 1998
The following discussion should be read in conjunction with the five-year
summary of selected financial data and the Company's consolidated financial
statements and the notes thereto. All references to years represent fiscal years
unless otherwise noted. In November 1996, the Company effected a two-for-one
stock split in the form of a stock dividend. Prior periods have been restated to
reflect the stock split.
CERTAIN FORWARD-LOOKING INFORMATION
Certain statements in this Management's Discussion and Analysis ("MD&A"),
elsewhere in this Annual Report to Stockholders and in the Company's Annual
Report on Form 10-K/A for the Fiscal Year Ended July 3, 1998 into which this
MD&A is incorporated are forward-looking statements based on current
expectations, and entail various risks and uncertainties that could cause actual
results to differ materially from those projected in such forward-looking
statements. Certain of these risks and uncertainties are set forth below under
"Foreign Currency Risks," "Factors Affecting Future Operating Results,"
elsewhere in this MD&A, elsewhere in this Annual Report to Stockholders and in
the Company's Annual Report on Form 10-K/A for 1998. These forward-looking
statements include the statements relating to continued price erosion in the
first paragraph under "Results of Operations - 1998 vs 1997," the statements
relating to continued expansion into complementary markets and write-offs of in-
process research and development in the sixth paragraph under "Results of
Operations - 1998 vs 1997," the statements relating to the 1999 effective tax
rate in the tenth paragraph under "Results of Operations - 1998 vs 1997," the
statements relating to the IRS adjustments in the last paragraph under "Results
of Operations - 1998 vs 1997," the statements regarding the decline in value of
the Thai baht and Malaysian ringgit relative to the U.S. dollar and future
movements in currency exchange rates under "Disclosures about Market Risk -
Foreign Currency Risk," the statements regarding capital expenditures in the
third paragraph under "Liquidity and Capital Resources," the statements
regarding continued expansion into complementary markets in the sixth paragraph
under "Liquidity and Capital Resources," the statements regarding the
sufficiency of the Company's resources in the last paragraph under "Liquidity
and Capital Resources," the statements under "Factors Affecting Future Operating
Results," and the statements in the Litigation note to the consolidated
financial statements, among others.
BUSINESS
Seagate operates in a single industry segment by designing, manufacturing
and marketing products for storage, retrieval and management of data on computer
and data communications systems. These products include disc drives and disc
drive components, tape drives and software.
The Company designs, manufactures and markets a broad line of rigid
magnetic disc drives for use in computer systems ranging from desktop personal
computers to workstations and supercomputers as well as in multimedia
applications such as digital video and video-on-demand. The Company sells its
products to original equipment manufacturers for inclusion in their computer
systems or subsystems, and to distributors, resellers, dealers and retailers. In
addition, the Company markets a broad line of Travan, Digital Audio Tape (DAT)
and Advanced Intelligent Tape (AIT) products. These products are dedicated back-
up storage peripherals designed to meet the needs of market segments ranging
from desktop PCs to midrange servers.
The Company has pursued a strategy of vertical integration and accordingly
designs and manufactures rigid disc drive components including recording heads,
discs, substrates, motors and custom integrated circuits. It also assembles
certain of the key subassemblies for use in its products including printed
circuit board and head stack assemblies.
The Company has also invested in, and currently intends to continue
investigating opportunities to invest in software activities. The Company
anticipates that users of computer systems will increasingly rely upon
client/server network computing environments and believes that as this reliance
increases, users will demand software that more efficiently and securely stores,
manages and accesses data and transforms it into usable information. As such,
the Company has broadened its core competencies to include software products and
technologies to meet these requirements.
<PAGE>
4
Business Combinations - In Process Research and Development
The Company has a history of acquisitions and during the three most recent
fiscal years acquisitions included Quinta Corporation and Eastman Storage
Software Management Group in fiscal 1998, and Arcada Holdings, Inc., Holistic
Systems, Calypso Software Systems, Inc., and OnDemand Software, Inc. in fiscal
1996. No significant acquisitions occurred in fiscal 1997. In connection with
these acquisitions, the Company has recognized significant write-offs of in-
process research and development. The completion of the underlying in-process
projects acquired within each acquisition was the most significant and uncertain
assumption utilized in the valuation analysis of the in-process research and
development. Such uncertainties could give rise to unforeseen budget over runs
and/or revenue shortfalls in the event that the Company is unable to
successfully complete a certain R&D project. The Company is primarily
responsible for estimating the fair value of the purchased R&D in all
acquisitions accounted for under the purchase method. The nature of research
and development projects acquired, the estimated time and costs to complete the
projects and significant risks associated with the projects for the largest
acquisitions are described below.
Quinta Corporation
- ------------------
Quinta's research and development efforts revolve around Optically Assisted
Winchester ("OAW") technology. OAW refers to Quinta's newly designed recording
technology that, upon completion, would be implemented into Winchester hard disc
drives. OAW combines traditional magnetic recording technology with Winchester
hard disc drives and optical recording capabilities; optical recording
technology enables greater data storage capacity. By integrating advanced
optical features along with a highly fine and sophisticated tracking and
delivery system within the head design, OAW would multiply the areal density of
disc drives.
Through August 8, 1997, the acquisition date, Quinta had demonstrated
significant achievements in developing its technology. However, further
technological milestones were required before technological feasibility could be
achieved. Quinta's development process consists of the following development
milestones: (i) route light (optical fiber), (ii) flying head use, (iii)
recording media, (iv) mirror creation and demonstration (two stage servo), (v)
complete assembly, (vi) form factor containment, (vii) design verification test,
(viii) customer qualification, and (ix) delivery. Future products were expected
to include fixed and removable drives and cartridges. Seagate Technology
expected to introduce products incorporating Quinta's OAW technology within 12
months of the acquisition date.
At the time of completing the Quinta acquisition, the Company estimated that
additional R&D spending of $9.4 million and $3.9 million in fiscal 1998 and
1999, respectively, would be required to complete the project. Since that time,
Seagate has redirected its efforts so that the Company is focused less on the
development of a specific product and more on the advancement of optical
technology in general. As such, the spending elements associated with the
development of optical technology are embedded in the R&D budgets of the
Company's product design centers and component technology organizations.
At the present time the Company has no immediate plans to release a storage
device which makes specific use of Quinta's "Optically Assisted Winchester"
technology. Delay in releasing such a storage device is not expected to
materially affect the Company's future earnings.
Eastman Software Storage Management Group
- -----------------------------------------
Eastman Software SMG ("Eastman") was acquired in June 1999. Eastman develops a
hierarchical storage management product for Microsoft's Windows NT platform and
its two primary products are OPEN/stor for Windows NT and AvailHSM for NetWare.
By integrating Eastman's product line, Seagate will be able to convert its
Storage Migrator product into a stand-alone HSM application for Windows NT
environments. As of the date of acquisition, Seagate abandoned the AvailHSM
product and technology due to dated features and functionality; the valuation
analysis did not include a fair value for the AvailHSM product.
As for OPEN/stor at the date of acquisition, Seagate planned to phase out the
product over the following 12 to 15 months. Seagate's purpose for the
acquisition was for the next generation technologies that were underway at
Eastman, referenced by project names Sakkara and Phoenix. These projects were
complete re-writes of Eastman's prior generation technology that would allow the
product to be sold stand-alone upon completion. The anticipated release dates
for Sakkara and Phoenix were the 2nd quarter of fiscal year 1999 and the 4th
quarter of fiscal year 1999, respectively. As of the date of acquisition,
Seagate anticipated the costs to complete both Sakkara and Phoenix at
<PAGE>
5
approximately $1.8 million. Since the acquisition date, no changes have been
made to the original estimated release dates for all the projects acquired from
Eastman.
Arcada Software, Inc.
- ---------------------
Seagate purchased the outstanding minority interests of Arcada Holdings, Inc.
("Arcada") in February 1996 in connection with the pooling-of-interests with
Conner Peripherals, Inc. Arcada's technology at the date of acquisitions was
comprised of three main categories: (i) Desktop, (ii) NetWare, and (iii) Windows
NT. The majority of the original underlying code and base technology for the
NetWare and Windows NT product families was completed in the 1990 time frame.
The technologies, as of the date of valuation, were in need of significant re-
development to add features and utilities to the products such as disc grooming,
hierarchical storage management, upgraded graphical user interfaces, file and
server replication, and server mirroring in order to continue to meet
increasingly complex user needs.
As of the date of acquisition, Company management anticipated the costs to
complete the Desktop, NetWare, and Windows NT technologies at approximately $6.8
million, $4.5 million, and $7.5 million, respectively. Since the acquisition
date, all the projects originally acquired from Arcada were completed and
commercially released prior to the end of the fourth quarter of fiscal 1997.
Holistic Systems Ltd.
- ---------------------
Holistic Systems, Ltd. ("Holistic") was acquired in June 1996. Holistic's sole
software product is Holos, a product that enables users to develop and utilize
the wide variety of applications found in large scale management information
systems. As of the date of acquisition, Holistic was in the process of
developing the next generation of Holos, version 6.0, which was planned for
release during the fourth quarter of fiscal 1997.
As of the date of acquisition, Holistic had undergone or was in the process
of undergoing the re-write of the front-end code of the system from C to C++,
the re-write of the back-end code of the system in C, and the creation of the
Holos product to be object oriented. The estimated cost to complete, at the
date of acquisition, was approximately $3.5 million. Since the acquisition
date, the project originally acquired from Holistic was completed and
commercially released as planned in the fourth quarter of fiscal 1997.
RESULTS OF OPERATIONS
The following table sets forth certain items in the Company's Consolidated
Statements of Operations as a percentage of revenue for each of the three years
in the period ended July 3, 1998.
<TABLE>
<CAPTION>
PERCENTAGE OF REVENUE 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenue 100% 100% 100%
Cost of sales 85 77 82
------ ------ ------
Gross margin 15 23 18
Product development 9 5 5
Marketing and administrative 7 6 6
Amortization of goodwill and other intangibles 1 - -
In-process research and development 3 - 1
Restructuring 5 - 3
Unusual items - 2 -
------ ------ ------
Income (loss) from operations (10) 10 3
Other income, net - - 1
------ ------ ------
Income (loss) before income taxes (10) 10 4
Benefit (provision) for income taxes 2 (3) (1)
------ ------ ------
Net income (loss) 7% (8)% 3%
============================================================================================================
</TABLE>
1998 vs 1997---Revenue in 1998 was 24% lower than that reported in 1997. The
decrease in revenue from the prior year was due primarily to a continuing
decline in the average unit sales prices of the Company's products as a result
of intensely competitive market conditions, a lower level of unit shipments
reflecting continuing weakness in demand for the Company's disc drive products
and a shift in mix away from the Company's higher priced products. The price
<PAGE>
6
erosion accounted for $1.6 billion of the revenue decline while volume issues
accounted for $0.4 billion. The Company expects that price erosion in the data
storage industry will continue for the foreseeable future. This competition and
continuing price erosion may adversely affect the Company's results of
operations in any given quarter and such an adverse effect often cannot be
anticipated until late in any given quarter.
The decrease in gross margin as a percentage of revenue from the prior year
was primarily due to a continuing decline in the average unit sales prices of
the Company's disc drive products, particularly its desktop products, as a
result of intensely competitive market conditions, lower consolidated revenue
and a shift in mix away from the Company's higher performance disc drives,
partially offset by reductions in manufacturing costs. In 1997 desktop gross
margins improved over 1996 primarily due to strong demand for these products.
This strong demand resulted in most of the Company's desktop disc drive products
going on allocation and thus stabilizing prices. In 1998 the situation changed.
There was excess capacity in the industry for desktop disc drives which resulted
in severe price erosion. Because of these factors, as well as poor time-to-
market performance with respect to the Company's products, desktop gross margins
declined substantially in 1998. Gross margin as a percentage of revenue has
improved each quarter for the last three quarters ending January 1, 1999. Disc
drive gross margins are expected to improve slightly in the quarter ending April
2, 1999, and to continue to improve in the future as the Company's time to
market for disc drive products improves, cost structures are enhanced and
manufacturing and operational efficiencies improve. The Company's overall
average unit sales price on its disc drive products was $219, $206, $208 and
$229 for the four quarters of fiscal 1998, respectively. Additionally, there was
an increase in revenue (34%) of the Company's Seagate Software, Inc. subsidiary
("Seagate Software") which subsidiary's products generally have higher gross
margins. Excluding the gross margin of Seagate Software, the Company's gross
margins would have been 11% and 22% in 1998 and 1997, respectively.
Product development expenses increased by $126 million (27%) compared with
1997, primarily due to increases of $39 million in salaries and related costs,
$26 million in allocated occupancy costs and $19 million in payments or accruals
for such payments to former shareholders of Quinta Corporation ("Quinta"),
acquired by the Company in August 1997, for achievement of certain product
development milestones, and an overall increase in the Company's product
development efforts. The Company's product development activities include
efforts to improve its time-to-market performance, the development of ultra-high
capacity disc drive technologies, including a new optically-assisted Winchester
(OAW) technology being developed by Quinta and development efforts related to
its software and tape drive products. These increases in expenses were partially
offset by substantially reduced employee profit sharing and executive bonuses in
1998.
Marketing and administrative expenses increased by $9 million (2%) compared
with 1997, primarily due to increases of $22 million in advertising and
promotion expenses, $21 million in marketing and administrative expenses related
to the Company's software products and services, particularly those of Seagate
Software's Information Management Group and $17 million in salaries and related
costs. These increases in expenses were partially offset by decreases of $21
million in allocated occupancy costs, $15 million in employee profit sharing and
executive bonuses, $10 million in legal expenses and $6 million in the provision
for bad debts. The Company expects to take an $8 million to $10 million charge
in the first quarter of fiscal 1999 associated with a separation agreement
entered into between Alan F. Shugart, the Company's former Chief Executive
Officer, and the Company in July 1998.
Amortization of goodwill and other intangibles decreased by $10 million
(20%) compared with 1997, primarily due to the inclusion in amortization expense
of the write-down of goodwill and the write-offs and write-downs in 1997 of
certain intangible assets related to past acquisitions of software companies
whose value had become permanently impaired and the resultant subsequent $13
million reduction in amortization expense, partially offset by additional
amortization of $2 million related to goodwill and intangibles arising from the
Company's additional investment in Dragon Systems, Inc. ("Dragon") in September
1997.
Of the $223 million charge for the write-off of in-process research
and development, $214 million was a result of the August 1997 acquisition of
Quinta and $7 million was a result of the June 1998 acquisition of Eastman
Software Storage Management Group, Inc. ("ESSMG"). In April and June 1997,
Seagate invested an aggregate of $20 million to acquire approximately ten
percent (10%) of Quinta's stock. In August 1997, the Company completed the
acquisition of Quinta. Pursuant to the purchase agreement with Quinta, the
shareholders of Quinta, other than Seagate, received cash payments aggregating
$230 million upon the closing of the acquisition and were eligible to receive
additional cash payments aggregating $95 million upon the achievement of certain
product development and early production milestones. Of the $95 million, $19
million was paid or accrued in fiscal 1998. In July 1998, the Company
<PAGE>
7
and Quinta amended the purchase agreement to eliminate the product development
and early production milestones and provide that the former shareholders of
Quinta will be eligible to receive the remaining $76 million and the $14 million
that had been accrued but unpaid in fiscal 1998. In the first quarter of fiscal
1999, the Company expects to take a charge to operations for the remaining $76
million. The Company recognizes the uncertainty associated with the completion
of purchased in-process research and development. Such uncertainties could give
rise to unforeseen budget overruns and/or revenue shortfalls in the event that
the Company is unable to successfully complete a given research and development
project.
See Acquisitions note to the consolidated financial statements. The Company
intends to continue its expansion into software and other complementary data
technology markets and therefore currently intends to pursue discussions with
companies that fit with its strategy. As a result, the Company expects that it
will continue to incur charges for in-process research and development as it
acquires companies.
The Company recorded restructuring charges of $205 million in the second
quarter of 1998 and $142 million in the third quarter of 1998. The aggregate
charges of $347 million reflect steps the Company is taking to align worldwide
operations with current market conditions by reducing existing capacity in all
areas of the Company and improving the productivity of its operations and the
efficiency of its development efforts by consolidating manufacturing and R&D
operations. Actions include exiting production of mobile products; early
discontinuation of several other products; closing and selling the Clonmel,
Ireland drive manufacturing facility; closing and subleasing the San Jose and
Moorpark, CA design center facilities; aborting production expansion projects in
Cork, Ireland; and divesting the Company of the new Philippines manufacturing
facility, which was nearing completion.
The restructuring charges were comprised of employee related costs for
severance of $57 million; facilities costs for facilities the Company is no
longer using for current activities which include lease termination and holding
costs of $24 million for facilities located in California and the Far East, and
the write-off or write-down of owned and leased facilities located in
California, the Philippines and Ireland of $54 million; write-off or write-down
of $137 million for excess manufacturing, assembly and test equipment and
tooling formerly utilized primarily in California, Singapore, Thailand and
Ireland; write-off of intangibles and other assets including $9 million for
capital equipment deposits and $2 million for goodwill associated with
permanently impaired equipment; contract cancellations comprised of $43 million
for costs incurred to cancel outstanding purchase commitments existing prior to
the plan of restructure; and other costs comprised of the repayment of various
grants to the Industrial Development Agency of Ireland of $7 million and a
contingency of $14 million for adjustments to estimates used when the
restructuring charge was recorded.
The fiscal year 1998 aggregated restructuring reserve included asset write-
offs or write-downs of tangible assets totaling $200 million and intangible
assets totaling $2 million. During the quarter ended January 2, 1998, forecasted
production needs were much lower than the current capacity of the Company and
the Company recognized that the recent oversupply in the marketplace was not a
short-term anomaly. This oversupply was as a result of competitors in the drive
industry completing expansion plans at the same time that customer demand
flattened out in addition to efficiency improvements achieved in the Company's
manufacturing processes. In this period, the Company also decided to discontinue
production of all or a portion of products within the Elite, Bali, Cuda,
Explorer and Phoenix/Futura product families, rendering test and manufacturing
equipment unique to those products as excess. Prior to this period, there was no
indication of permanent impairment of the assets associated with the recent
excess capacity of the Company or the products to be discontinued. These assets
included owned facilities that the Company is vacating, manufacturing, assembly
and test equipment and tooling unique to production of discontinued products and
excess equipment as a result of consolidating facilities and leasehold
improvements for leased facilities to be vacated. Discounted future cash flows
and evaluations of the resale market for certain assets were used to estimate
fair value.
The Clonmel, Ireland facility was sold in May 1998 and the majority of the
other tangible assets have been disposed of or sold. The remaining assets are
the Philippines facility, two manufacturing facilities in Thailand and the
manufacturing equipment located at these facilities. The Philippines facility
remains vacant and the Company continues to actively seek a buyer. The Company
is marketing vacated leased facilities for sublease unless the remaining lease
term is so short as to make a sublease impractical. Two manufacturing facilities
continue to be utilized until a satisfactory agreement can be made with an
external vendor to supply parts currently manufactured at these locations. The
Company is actively seeking such an agreement. Until such time as a supplier is
qualified, the Company is continuing to depreciate the two manufacturing
facilities and the equipment at those locations. When these assets are
identified as available for sale, no further depreciation will be recorded.
<PAGE>
8
As a result of employee terminations and write-off or write-down of
equipment and facilities in connection with implementing the fiscal year 1998
restructuring plan, the Company estimates that annual salary and depreciation
expense will be reduced by approximately $170 million and $70 million,
respectively. The Company anticipates that the implementation of the
restructuring plan will be substantially complete by the end of December 1998.
Certain lease termination and holding costs related to vacated facilities
continue to be incurred and charged against the restructuring reserve until the
leases expire or the facilities are subleased.
Amstrad PLC ("Amstrad") initiated a lawsuit against the Company in 1992
concerning the Company's sale of allegedly defective disc drives to Amstrad. On
November 6, 1997, the Company and Amstrad settled all of the outstanding
disputes. The settlement resulted in a $22 million reduction in 1998 against the
$153 million charge recorded in 1997. The $22 million reduction and the $153
million charge are included in unusual items in the Consolidated Statements of
Operations for 1998 and 1997, respectively.
Net other income in 1998 decreased by $51 million, compared with 1997,
primarily due to charges for mark-to-market adjustments in 1998 of $76 million
on certain of the Company's foreign currency forward exchange contracts for the
Thai baht and the Malaysian ringgit offset by $10 million of other foreign
currency transaction gains. Additionally there was an increase in interest
expense of $16 million due to higher average levels of long-term debt
outstanding. These decreases in net other income were partially offset by a
decrease of $10 million in the charge for minority interest as a result of lower
income in the Company's majority-owned subsidiary in Shenzhen, China, an $8
million gain on sales of the Company's investment in Overland Data, Inc. and a
$6 million increase in interest income.
The Company recorded a $174 million benefit from income taxes at an
effective rate of 25% in 1998 compared with a $233 million provision for income
taxes at an effective rate of 26% in 1997. The change in income taxes was
primarily due to the loss from operations incurred in 1998. Excluding the
acquisition of Quinta, certain non-recurring restructuring costs and the
reversal of certain Amstrad litigation charges, the effective tax rate was
approximately 28% in 1998. Excluding the Amstrad litigation charge, the
effective tax rate was approximately 28% in 1997. While the Company expects the
1999 effective tax rate before unusual items to approximate 28%, the actual
effective tax rate may vary from this rate if, for example, the Company incurs
charges in connection with future acquisitions.
The Company provided income taxes at the U.S. statutory rate of 35% in 1998
on substantially all of its earnings from foreign subsidiaries compared with
approximately 66% of such earnings in 1997. A substantial portion of the
Company's Far East manufacturing operations at plant locations in Singapore,
Thailand, China and Malaysia operate free of tax under various tax holidays. The
tax holiday in Singapore expires in June 2005. The tax holidays in Chockchai,
Wellgrow and Korat, Thailand expire in June 2001, February 2004 and September
2004, respectively. The tax holidays in Shenzen and Wuxi, China expire in
December 1998 and December 2000, respectively. The tax holidays in Penang and
Perai, Malaysia expire in June 1999 and December 1999, respectively. The tax
holidays had no impact on the net loss in 1998. The net impact of these tax
holidays was to increase net income by approximately $71 million ($0.28 per
share, diluted) in 1997.
The Company received a statutory notice of deficiency dated June 27, 1997
from the Internal Revenue Service relative to taxable years 1991 through 1993
assessing potential deficiencies approximating $39 million plus interest and
approximately $6 million of penalties. The proposed adjustments to taxable
income relate primarily to re-allocations of income and expenses between the
Company and its Far East subsidiaries, the timing for deduction of accrued
domestic expenses and reserves and the allowable amount of domestic tax credits.
No assets have been levied as a result of the statutory notice of deficiency.
The Company petitioned the United States Tax Court on September 24, 1997 for a
re-determination of the deficiencies. The Company believes that the outcome of
this matter will not have a material adverse effect on its financial position or
results of operations.
The Company received a statutory notice of deficiency dated June 12, 1998
from the Internal Revenue Service relative to Conner's taxable years 1991 and
1992 assessing potential deficiencies approximating $11 million plus interest.
The proposed adjustments to taxable income relate primarily to re-allocations of
income and expenses between the Company and its Far East subsidiaries and the
timing for deduction of accrued domestic expenses and reserves. No assessments
have been levied as a result of the statutory notice of deficiency. The Company
believes it has meritorious defenses to the Internal Revenue Service adjustments
but has not yet determined the forum in which it
<PAGE>
9
will contest the proposed deficiencies. The Company believes that the outcome of
this matter will not have a material adverse effect on its financial position or
results of operations.
1997 VS 1996 Revenue in 1997 was 4% higher than that reported in 1996. The
increase in revenue over the prior year was primarily due to a higher level of
unit shipments and a shift in mix to the Company's higher priced products
partially offset by a continuing decline in the average unit sales prices of the
Company's products as a result of competitive market conditions. Volume issues
accounted for $1.6 billion of the revenue increase while price erosion accounted
for the $1.3 billion offset. Revenue decreased to $1.977 billion in the fourth
quarter of 1997 from $2.502 billion in the third quarter of 1997 as a result of
weakness in customer demand, primarily for the Company's higher performance
products. The decreased sales adversely impacted the Company's gross margins and
results of operations for the fourth quarter of 1997. The rigid disc drive
industry in which the Company operates is characterized by declining unit sales
prices over the life of a product.
The increase in gross margin as a percentage of revenue over the prior year
was primarily due to improvements in gross margins for the Company's desktop
disc drive products, as well as a shift in mix to the Company's newer, higher
capacity and higher performance disc drives, particularly those with capacities
greater than 4 gigabytes, and a reduction in manufacturing costs. These factors
were partially offset by a continuing decline in the average unit sales prices
of the Company's products as a result of competitive market conditions. Product
development expenses increased by $39 million (9%) compared with 1996, primarily
due to increases of $17 million in salaries and related costs, $11 million in
materials, $8 million in depreciation and $6 million in product development
expenses related to the Company's software products and services.
Marketing and administrative expenses increased by $7 million (1%) compared
with 1996, primarily due to an increase of $62 million in marketing and
administrative expenses related to the Company's software products and services.
These increases in expenses were substantially offset by cost savings in non-
software activities resulting from the combination of the operations of the
Company and Conner pursuant to the February 1996 merger of the two companies.
These cost savings consisted primarily of decreases of $13 million in salaries
and related costs, $12 million in outside services, $6 million in advertising
and promotion expenses, $6 million in legal expenses, $6 million in allocated
occupancy costs, $4 million in commissions and $4 million in telephone expenses.
Amortization of goodwill and other intangibles increased by $3 million (6%)
compared with 1996, primarily due to the write-offs and write-downs of certain
intangible assets related to past acquisitions of software companies whose value
had become permanently impaired and a full year of amortization in 1997, as
compared with a partial year in 1996, of certain intangible assets arising from
acquisitions of software companies in 1996. The increase in amortization from
1996 was partially offset by write-offs, in 1996, of certain intangible assets
related to past acquisitions of tape drive and software companies whose value
had become permanently impaired. See Acquisitions note to consolidated
financial statements.
The $3 million charge for in-process research and development in 1997 was
incurred in connection with additional amounts paid with respect to the June
1996 acquisition of Holistic Systems Ltd.
During fiscal year 1996, the Company recorded restructuring charges
totaling $242 million as a result of the merger with Conner Peripherals, Inc.
("Conner") which included employee related costs for severance of $37 million as
a result of the reduction of approximately 1,370 personnel whose duties were
made redundant, $21 million associated with change of control agreements for
Conner executives and $3 million associated with accelerated vesting of stock
for Conner executives; excess facilities costs including closure of duplicate
and excess facilities primarily in California, Singapore, Malaysia, Scotland and
Italy comprised of lease termination and holding costs of $29 million and write-
off or write-down of owned and leased facilities of $16 million; write-off or
write-down of manufacturing, assembly and test equipment and tooling of $41
million; intangibles primarily associated with the Company's tape drive products
of $14 million; other assets comprised of inventory associated with discontinued
products of $39 million, grant repayments related to closure of a distribution
center in Scotland of $2 million, and other assets of $1 million; professional
fees of financial advisors of $16 million and of attorneys and accountants of $9
million; contract cancellation costs and related legal fees in connection with
existing purchase commitments of $12 million; and other costs of $2 million.
Asset write-offs and write-downs for certain duplicated and excess assets
totaled $99 million for tangible assets and $14 million for intangible assets.
Asset impairment was identified when decisions were made as a result of
<PAGE>
10
the merger to close certain facilities and discontinue certain products to
eliminate duplicate product offerings in the newly merged company. These
permanently impaired assets included manufacturing, assembly and test equipment
and tooling unique to production of discontinued products, excess equipment as a
result of consolidating facilities and leasehold improvements of leased
facilities to be vacated. Discounted future cash flows were used to estimate
fair value and all tangible assets have been disposed of or sold.
As a result of employee terminations and write-offs and write-downs of
equipment and facilities in connection with implementing the fiscal year 1996
restructuring plan, the Company estimates that salary expense was reduced by
approximately $240 million per year and depreciation expense was reduced by
approximately $20 million per year. These savings were partially offset by
reduced revenue, resulting in a net savings of approximately $170 million per
year. Implementation of the restructuring plan was substantially complete as of
June 27, 1997. Certain lease termination and holding costs for vacant facilities
continue to be incurred and charged against the restructuring reserve until the
leases expire or the facilities are subleased.
In 1997, the Company reversed $10 million of its restructuring reserves as
a result of the completion of certain aspects of the restructuring plan at less
than the originally estimated cost. This reversal included employee termination
benefits of $5 million as a result of terminating fewer employees than
originally anticipated, excess facilities costs of $4 million as a result of
continuing to utilize certain facilities, and the settlement of certain
outstanding lease obligations at less than the originally estimated cost of $1
million. Reclassifications between cost categories were made as a result of
terminating fewer employees than originally planned and write-off of additional
equipment that became excess or obsolete as a result of the merger with Conner.
Partially offsetting the $10 million reversal was a $3 million charge for
restructuring costs recorded by Seagate Software.
Unusual items in 1997 consisted of a $153 million charge as a result of the
judgment adverse to the Company in the Amstrad litigation and $13 million for
compensation expense in connection with additional amounts paid with respect to
the June 1996 acquisition of Holistic Systems Ltd. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -Results of
Operations - 1998 vs 1997."
Net other income decreased by $11 million compared with 1996, primarily due
to an increase of $14 million in the charge for minority interest as a result of
higher income in the Company's majority-owned subsidiary in Shenzhen, China, an
increase of $8 million in amortization of premiums on foreign currency option
contracts and an increase of $6 million in mark-to-market losses on foreign
currency forward exchange contracts. These decreases in net other income were
partially offset by a reduction of $21 million in interest expense as a result
of the redemption or conversion of the Company's 5%, 6.5% and 6.75% convertible
subordinated debentures.
The provision for income taxes increased by $115 million in 1997, primarily
due to the increase in pretax earnings in 1997 partially offset by a decrease in
the effective tax rate from 36% in 1996 to 26% in 1997. The higher effective tax
rate in 1996 was primarily due to nondeductible charges associated with the
merger with Conner and other acquisitions. Excluding the Amstrad litigation
charge, the effective tax rate was approximately 28% in 1997. Excluding the
restructuring costs, nonrecurring merger-related costs and the write-off of in-
process research and development, the effective tax rate was approximately 30%
in 1996.
The Company provided income taxes at the U.S. statutory rate of 35% in 1997
on approximately 66% of its earnings from foreign subsidiaries compared with
approximately 64% of such earnings in 1996. A substantial portion of the
Company's Far East manufacturing operations in Singapore, Thailand, Malaysia and
China operate free of tax under various tax holidays. The net impact of these
tax holidays was to increase net income by approximately $71 million ($0.28 per
share, diluted) in 1997 and approximately $50 million ($0.21 per share, diluted)
in 1996.
DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk---The Company's exposure to market risk for changes in
interest rates relates primarily to the Company's investment portfolio and long-
term debt obligations. The Company does not use derivative financial
instruments in its investment portfolio. The Company places its investments
with high credit quality issuers and, by policy, limits the amount of credit
exposure to any one issuer. As stated in its policy, the Company is averse to
principal loss and ensures the safety and preservation of its invested funds by
limiting default risk, market risk and reinvestment risk.
<PAGE>
11
The Company mitigates default risk by investing in only the safest and
highest credit quality securities and by constantly positioning its portfolio to
respond appropriately to a significant reduction in a credit rating of any
investment issuer, guarantor or depository. The portfolio includes only
marketable securities with active secondary or resale markets to ensure
portfolio liquidity.
The Company has no cash flow exposure due to rate changes for long-term
debt obligations. The Company primarily enters into debt obligations to support
general corporate purposes including capital expenditures and working capital
needs.
The table below presents principal (or notional) amounts and related
weighted average interest rates by year of maturity for the Company's investment
portfolio and debt obligations. All investments mature, by policy, in three
years or less, except for certain types of investments that may mature in more
than three years but whose weighted average maturity is three years or less.
<TABLE>
<CAPTION>
Fair Value
Dollars in millions 1999 2000 2001 2002 2003 Thereafter Total July 3, 1998
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Cash equivalents
Fixed rate $ 574 $ - $ - $ - $ - $ - $ 574 $ 572
Average interest rate 5.37% - - - - - 5.37%
Short-term investments
Fixed rate 285 304 369 - - - 958 961
Average interest rate 5.81% 6.25% 6.05% - - - 6.04%
Variable rate 200 - - - - - 200 200
Average interest rate 5.62% - - - - - 5.62%
Total investment securities 1,059 304 369 - - - 1,732* 1,732
Average interest rate 5.54% 6.25% 6.05% - - - 5.77%
Long-Term Debt
Fixed rate - - - - - 700 700 693
Average interest rate - - - - - 7.33% 7.33%
</TABLE>
*Includes $2 million of accreted interest to be received at maturity.
Foreign Currency Risk---The Company transacts business in various foreign
countries. Its primary foreign currency cash flows are in emerging market
countries in Asia and in certain European countries. During 1998 and 1997, the
Company employed a foreign currency hedging program utilizing foreign currency
forward exchange contracts and purchased currency options to hedge local
currency cash flows from payroll, inventory, other operating expenditures and
fixed asset purchases in Singapore, Thailand, Malaysia, and Ireland. Under this
program, increases or decreases in the Company's local currency operating
expenses and other cash outflows, as measured in U.S. dollars, are partially
offset by realized gains and losses on the hedging instruments. The goal of
this hedging program is to economically guarantee or lock in the exchange rates
on the Company's foreign currency cash outflows rather than to eliminate the
possibility of short-term earnings volatility. Based on uncertainty in the
Southeast Asian foreign currency markets, the Company has temporarily suspended
purchasing foreign currency forward exchange and option contracts for the Thai
baht, Malaysian ringgit and Singapore dollar. The Company does not use foreign
currency forward exchange contracts or purchased currency options for trading
purposes.
Under the Company's foreign currency hedging program, gains and losses
related to qualified hedges of firm commitments and anticipated transactions are
deferred and are recognized in income or as adjustments of carrying amounts when
the hedged transaction occurs. All other foreign currency hedge contracts are
marked-to-market
<PAGE>
12
and unrealized gains and losses are included in current period net income.
Because not all economic hedges qualify as accounting hedges, unrealized gains
and losses may be recognized in income in advance of the actual foreign currency
cash flows. This mismatch of accounting gains and losses and foreign currency
cash flows was especially pronounced during the first and second quarters of
fiscal 1998 as a result of the declines in value of the Thai Baht and Malaysian
Ringgit, relative to the U.S. dollar. This mismatch resulted in a pre-tax charge
of $76 million for the year ended July 3, 1998.
The table below provides information as of June 27, 1997 and July 3, 1998
about the Company's derivative financial instruments, comprised of foreign
currency forward exchange contracts and purchased currency options. The
information is provided in U.S. dollar equivalent amounts, as presented in the
Company's financial statements. For foreign currency forward exchange contracts,
the table presents the notional amounts (at the contract exchange rates) and the
weighted average contractual foreign currency exchange rates. As of July 3,
1998, the Company had effectively closed out all of its foreign currency forward
exchange contracts by purchasing offsetting contracts. The amounts listed below
represent forward exchange contracts and offsets for which Seagate did not have
a legal right of offset. Seagate would not have incurred any incremental
accounting loss as of July 3, 1998 if any party had failed to perform. This was
because the estimated fair value of the offsetting forward sales contracts was
effectively zero.
<TABLE>
<CAPTION>
Notional Average Estimated
In millions, except average contract rate Amount Contract Rate Fair Value*
------------------------------------------
<S> <C> <C> <C>
As of June 27, 1997
Purchased foreign currency forward exchange contracts:
Malaysian ringgit $ 264 2.53 $ (1)
Singapore dollar 284 1.39 (5)
Thai baht 458 26.57 (5)
------ ----
$1,006 $(11)
Purchased currency options:
Malaysian ringgit $ 82 2.53 $ 1
Singapore dollar 244 1.39 1
------ ----
$ 326 $ 2
As of July 3, 1998
Foreign currency forward exchange contracts:
Malaysian ringgit:
Forward purchase contracts $ 40 3.10 $(11)
Forward sales contracts (29) 4.24 -
------ ----
$ 11 $(11)
Singapore dollar:
Forward purchase contracts $ 52 1.51 $ (7)
Forward sales contract (45) 1.73 -
------ ----
$ 7 $ (7)
Irish punt:
Forward purchase contracts $ 9 1.43 $ 0
Forward sales contracts 9 1.46 0
------ ----
$ - $ -
</TABLE>
*Equivalent to the unrealized net gain (loss) on existing contracts.
Other
For 1998, the net gain resulting from the remeasurement of foreign
financial statements into U.S. dollars was $17 million. Such net gains (losses)
did not have a significant effect on the results of operations for 1997 or 1996.
The effect of inflation on operating results for 1998, 1997 and 1996 has been
insignificant. The Company believes this is due to the absence of any
significant inflation factors in the industry in which the Company participates.
<PAGE>
13
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130"). SFAS 130 requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. This statement is effective for fiscal years
beginning after December 15, 1997, and will be adopted by the Company for its
fiscal year 1999. Adoption of this pronouncement is not expected to have a
material impact on the Company's financial statements.
Also in June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures About Segments of an Enterprise and Related Information
("SFAS 131"). SFAS 131 replaces Statement of Financial Accounting Standards No.
14 and changes the way public companies report segment information. This
statement is effective for fiscal years beginning after December 15, 1997 and
will be adopted by the Company for its fiscal year 1999. Adoption of this
pronouncement is not expected to have a material impact on the Company's
financial statements.
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities." This
statement establishes accounting and reporting standards for derivative
instruments and for hedging activities. It requires that derivatives be
recognized in the balance sheet at fair value and specifies the accounting for
changes in fair value. This statement is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999, and will be adopted by the Company
for its fiscal year 2000. The Company is in the process of assessing the impact
of this pronouncement on its financial statements.
In the second quarter of 1998, the Company implemented Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"). All earnings
per share amounts for all periods have been presented and, where necessary,
restated to conform to the requirements of SFAS 128. The adoption of SFAS 128
did not have a material impact on the Company's earnings per share.
In October 1995, the Financial Accounting Standards Board released Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). SFAS 123 provides an alternative to Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APBO 25") and requires additional disclosures. Effective with the Company's
fiscal year ended June 27, 1997, the Company has continued to account for its
employee stock plans in accordance with the provisions of APBO 25 while
providing the additional disclosures required by SFAS 123. Accordingly, SFAS
123 has no impact on the Company's financial position or results of operations.
Liquidity and Capital Resources
At July 3, 1998, the Company's cash, cash equivalents and short-term
investments totaled $1.827 billion, a decrease of $456 million from the prior
year-end balances. This decrease was primarily a result of expenditures of $709
million for property, equipment and leasehold improvements, the payment of $194
million in connection with the acquisition of Quinta, net of cash acquired, the
net payment of $123 million in connection with the adverse judgement in the
Amstrad PLC litigation and the repurchase of approximately 4 million shares of
the Company's common stock for $105 million, partially offset by net cash
provided by operating activities. Until required for other purposes, the
Company's cash and cash equivalents are maintained in highly liquid investments
with remaining maturities of 90 days or less at the time of purchase, while its
short-term investments primarily consist of readily marketable debt securities
with remaining maturities of more than 90 days at the time of purchase.
As of July 3, 1998, the Company had committed lines of credit of $61 million
which can be used for standby letters of credit or bankers' guarantees. At July
3, 1998, these lines of credit were fully utilized.
The Company made investments in property and equipment in 1998 totaling
$698 million. This amount comprised $248 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 Northern Ireland; $231
million for manufacturing facilities and equipment for the recording head
operations in the United States, Malaysia, Northern Ireland, the Philippines and
Thailand; $190 million for expansion of the Company's thin-film media operations
in California, Singapore, Northern Ireland and Mexico; and $29 million for other
purposes. The Company presently anticipates investments of approximately $700
million in property and equipment in 1999. The Company plans to finance these
investments from existing cash balances and future cash flows from operations.
<PAGE>
14
During the year ended July 3, 1998 the Company acquired approximately 4
million shares of its common stock for approximately $105 million. The
repurchase of these shares was primarily in connection with a stock repurchase
program announced in June 1997 in which up to $600 million of the Company's
common stock was authorized to be acquired in the open market.
During the year ended June 27, 1997, the Company issued senior debt securities
totaling $700 million principal amount with interest rates ranging from 7.125%
to 7.875% and maturities ranging from seven years to forty years.
In April and June 1997, Seagate invested an aggregate of $20 million to
acquire approximately ten percent (10%) of Quinta's stock. In August 1997, the
Company completed the acquisition of Quinta. Pursuant to the purchase agreement
with Quinta, the shareholders of Quinta, other than Seagate, received cash
payments aggregating $230 million upon the closing of the acquisition and were
eligible to receive additional cash payments aggregating $95 million upon the
achievement of certain product development and early production milestones. Of
the $95 million, $19 million was paid or accrued in fiscal 1998. In July 1998,
the Company and Quinta amended the purchase agreement to eliminate the product
development and early production milestones and provide that the former
shareholders of Quinta will be eligible to receive the remaining $76 million and
the $14 million that had been accrued but unpaid in fiscal 1998. The Company
intends to continue its expansion into software and other complementary data
technology markets and therefore currently intends to pursue discussions with
companies that fit with its strategy. The Company plans to finance this
expansion primarily through cash flows from operations and existing cash
balances.
The Company believes that its cash balances together with cash flows from
operations and its borrowing capacity will be sufficient to meet its working
capital needs for the foreseeable future.
Factors Affecting Future Operating Results
The data storage industry in which the Company competes is subject to a number
of risks, each of which has affected the Company's operating results in the past
and could impact the Company's future operating results. The demand for disc
drive and tape drive products depends principally on demand for computer systems
and storage upgrades to computer systems, which has historically been volatile.
Changes in demand for computer systems often have an exaggerated effect on the
demand for disc drive and tape drive products in any given period, and
unexpected slowdowns in demand for computer systems generally cause sharp
declines in demand for such products. In addition, the Company's future success
will require, in part, that the market for computer systems, storage upgrades to
computer systems and multimedia applications, such as digital video and video-
on-demand, and hence the market for disc drives, remains strong. Delays in the
development, introduction and ramping of production of new products has in the
past and may in the future significantly adversely impact operating results.
The data storage industry has been characterized by periodic situations in which
the supply of drives exceeds demand, resulting in higher than anticipated
inventory levels and intense price competition. Even during periods of
consistent demand, this industry is characterized by intense competition and
ongoing price erosion over the life of a given drive product. The Company
expects that competitors will offer new and existing products at prices
necessary to gain or retain market share and customers. The Company expects
that price erosion in the data storage industry will continue for the
foreseeable future. This competition and continuing price erosion could
adversely affect the Company's results of operations in any given quarter and
such adverse effect often cannot be anticipated until late in any given quarter.
In addition, the demand of drive customers for new generations of products has
led to short product life cycles that require the Company to constantly develop
and introduce new drive products on a cost-effective and timely basis. Many of
these new drive products require increased storage capacity and more advanced
technology. The increased difficulty and complexity associated with production
of higher capacity disc drives increases the likelihood of reliability, quality
or operability problems that could result in reduced bookings, increased
manufacturing rework and scrap costs, increased service and warranty costs and a
decline in the Company's competitive position. There is also significant demand
in the personal computer market for computer systems costing less than $1000.
The Company is positioning itself to participate in this market, however, there
can be no assurance that the Company will be able to produce disc drives for
this market at a cost low enough to yield gross margins comparable to those of
its current overall product mix. In addition, the Company's operating results
have been and may in the future be subject to significant quarterly fluctuations
as a result of a number of other factors, including the timing of orders from
and shipment of products to major customers, product mix, pricing, delays or
interruptions in the production of products, competing technologies, variations
in product cost, component availability due to single or limited sources of
supply, high fixed costs resulting from the Company's vertical integration
strategy, the Company's ability to attract and retain key technical employees,
foreign currency exchange fluctuations (see "Disclosures about
<PAGE>
15
Market Risk -Foreign Currency Risk"), increased competition and general economic
and industry fluctuations. For example, revenue decreased to $6.819 billion in
fiscal 1998 from $8.940 billion in fiscal 1997 as a result of increased
competition resulting in significant price decreases and continuing weakness in
demand for the Company's disc drive products. The Company's future operating
results may also be adversely affected by an adverse judgment or settlement in
the legal proceedings in which the Company is currently involved. See Litigation
note to the consolidated financial statements.
The Company has experienced and expects to continue to experience intense
competition from a number of domestic and foreign companies. These companies
include the other leading independent disc drive manufacturers as well as large
integrated multinational manufacturers such as Fujitsu Limited, Hyundai
Electronics America (Maxtor Corporation), International Business Machines
Corporation, NEC Corporation, Samsung Electronics Co. Ltd. and Toshiba
Corporation. Such competition could materially adversely affect the Company's
business, operating results and financial condition. There can be no assurance
that the Company will be able to compete successfully against current or future
competitors or that competitive pressures faced by the Company will not
materially adversely affect its business, operating results and financial
condition.
The cost, quality and availability of certain components, including heads,
media, application specific integrated circuits, motors, printed circuit boards
and custom semiconductors are critical to the successful production of disc
drives. The Company's strategy of vertical integration has allowed it to
internally manufacture many of the critical components used in its products. The
Company also relies on independent suppliers for certain components used in its
products. The Company has in the past experienced production delays when
unable to obtain sufficient quantities of certain components. Any prolonged
interruption or reduction in the supply of any key components could have a
material adverse effect on the Company's business, operating results and
financial condition. The Company has pursued a strategy of vertical integration
of its manufacturing process in order to reduce costs, control quality and
assure availability and quality of certain components. A strategy of vertical
integration entails a high level of fixed costs and requires a high volume of
production and sales to be successful. During periods of decreased production,
such as the Company is now experiencing, these high fixed costs have had, and
could in the future have, a material adverse effect on the Company's operating
results and financial condition. In addition, a strategy of vertical
integration has in the past and could continue to delay the Company's ability to
introduce products containing market-leading technology.
The Company has significant offshore operations. Offshore operations are
subject to certain inherent risks, including delays in transportation, changes
in governmental policies, tariffs and import/export regulations, political
unrest, fluctuations in currency exchange rates and geographic limitations on
management controls and reporting. There can be no assurance that the inherent
risks of offshore operations will not adversely affect the Company's business,
operating results and financial condition in the future. In addition, because
the Company's products are priced in U.S. dollars, the currency instability in
the Asian financial markets may have the effect of making the Company's products
more expensive to computer manufacturers and other users than those of other
disc drive manufacturers whose products may be priced in one of the affected
Asian currencies, and, therefore, those customers may reduce future purchases of
the Company's disc drive products. The Company anticipates that the recent
turmoil in Asian financial markets and the recent deterioration of the
underlying economic conditions in certain Asian countries may have an impact on
its sales to customers located in or whose end-user customers are located in
those countries due to the impact of currency fluctuations on the relative price
of the Company's products and restrictions on government spending imposed by the
International Monetary Fund (the "IMF") on those countries receiving the IMF's
assistance. In addition, customers in those countries may face reduced access
to working capital to fund purchases of disc drive components or software, such
as the Company's products, due to higher interest rates, reduced bank lending
due to contractions in the money supply or the deterioration in the customer's
or its bank's financial condition or the inability to access other financing.
The Company has incorporated its software acquisitions into a single entity
called Seagate Software and is offering employees of Seagate Software and
selected employees of the Company an opportunity to acquire an equity interest
in Seagate Software. The Company intends to continue its expansion into
software and other complementary data technology businesses through internal
growth as well as acquisitions.
Acquisitions involve numerous risks, including difficulties in the
assimilation of the operations and products of the acquired businesses and the
potential loss of key employees or customers of the acquired businesses. The
Company expects that it will continue to incur charges as it acquires
businesses, including charges for the write-off of
<PAGE>
16
in-process research and development. The timing of such write-offs has in the
past and may in the future lead to fluctuations in the Company's operating
results on a quarterly and annual basis. For example, the Company incurred a
charge to operations in the first quarter of fiscal 1998 of approximately $216
million for the write-off of in-process research and development, $214 million
of which was in connection with the acquisition of Quinta.
The Company's operations are dependent on its ability to protect its
computer equipment and the information stored in its databases against damage by
fire, natural disaster, power loss, telecommunications failures, unauthorized
intrusion and other catastrophic events. The Company believes it has taken
prudent measures to reduce the risk of interruption in its operations. However,
there can be no assurance that these measures are sufficient. Any damage or
failure that causes interruptions in the Company's operations could have a
material adverse effect on its business, results of operations and financial
condition.
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Computer programs
that have date-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. The Company considers a product to be in "Year
2000 compliance" if the product's performance and functionality are unaffected
by processing of dates prior to, during and after the year 2000, but only if all
products (for example hardware, software and firmware) used with the product
properly exchange accurate date data with it. The Company has a program to
assess the capability of its products to determine whether or not they are in
Year 2000 compliance. Although the Company believes its disc and tape drive
products and certain of its software products are in Year 2000 compliance, the
Company has determined that certain of its software products produced by Seagate
Software, which are not material to Seagate Technology, are not and will not be
Year 2000 compliant, and is taking measures to inform its customers of that
fact. To assist customers in evaluating their Year 2000 issues, Seagate
Software has developed a list which indicates those products that are Year 2000
compliant as stand-alone products. The list is located on Seagate Software's
World Wide Web page and is periodically updated when assessment of the Year 2000
compliance of additional products is completed. The incremental costs incurred
to date related to these programs are 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 and software and components provided by
companies other than Seagate or Seagate Software. The Company does not believe
it is legally responsible for costs incurred by customers related to ensuring
such customers' or end-users' Year 2000 capability. Nevertheless, the Company is
incurring various costs to provide customer support and customer satisfaction
services regarding Year 2000 issues and anticipates that these expenditures will
continue in fiscal 1999 and thereafter. In addition, the Company has contacted
its major customers to determine whether their products into which the Company's
products have been and will be integrated are Year 2000 compliant. The Company
has received assurances of Year 2000 compliance from a number of those customers
and the customers under existing contracts with the Company are under no
contractual obligation to provide such information to the Company. The Company
is taking steps with respect to new customer agreements to ensure that the
customers' products and internal systems are Year 2000 compliant. As used
herein, Year 2000 capable means, with respect to its disc drive and tape
products, that when used properly and in conformity with the product information
provided by the Company, the Company's product will accurately store, display,
process, provide and/or receive data from, into and between the twentieth and
twenty-first centuries, including leap year calculations, provided that all
other technology used in combination with the Seagate disc drive or tape product
properly exchanges date data with the Seagate product.
Even if the Company's products are Year 2000 compliant, the Company may be
named as a defendant in litigation against the vendors of all of the component
products of systems if some component of the systems are unable to properly
manage data related to the Year 2000.. The Company's agreements with customers
typically contain provisions designed to limit the Company's liability for such
claims. It is possible, however, that these measures will not provide
protection from liability claims, as a result of existing or future federal,
state or local laws or ordinances or unfavorable judicial decisions. Any such
claims, with or without merit, could result in a material adverse affect on the
Company's business, financial condition and results of operations, including
increased warranty costs, customer satisfaction issues and potential lawsuits.
The Company has initiated a comprehensive program to address Year 2000
readiness in its internal systems and with its customers and suppliers. The
Company's program has been designed to address its most critical internal
systems first and to gather information regarding the Year 2000 compliance of
products supplied to it and into which the Company's products are integrated.
Seagate Technology conducted a Year 2000 inventory of information
<PAGE>
17
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. Approximately 1400 items were identified,
and as of January 1999, 118 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 7000 items
were identified (non-information technology and embedded combined) of which
approximately two-thirds are Year 2000 compliant. As of January 1999, risk
assessment is 95% complete and we believe that we will resolve all non-compliant
items by July 1999.
The Company is using the following phased approach to Year 2000 readiness:
Inventory, Assessment, Disposition, Test and Audit. Anticipated dates of
completion of each phase are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
1. Inventory Complete
2. Assessment March 1, 1999
3. Disposition July 1, 1999
4. Test July 1, 1999
5. Audit August 1, 1999
</TABLE>
These activities are intended to encompass all major categories of systems
in use by the Company, including manufacturing, engineering, sales, finance and
human resources. The costs incurred to date related to these programs have not
been material. The Company currently expects that the total cost of its Year
2000 readiness programs, excluding redeployed resources, will not exceed $10
million over the next fiscal year. The 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 the
Company's Year 2000 readiness needs and are subject to change as the projects
proceed.
The Company is installing and testing new computer software for its
financial, accounting, inventory control, order processing and other management
information systems. In the course of these upgrades, the Company is identifying
Year 2000 dependencies in such systems and is 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 the Company's
business. There can be no assurance that the Company will implement its new
systems in an efficient and timely manner or that the new systems will be
adequate to support the Company's operations. Problems with installation or
initial operation of the new systems could cause substantial management
difficulties in operations planning, financial reporting and management and thus
could have a material adverse effect on the Company's business, financial
condition and results of operations. The cost of bringing the Company's systems
into Year 2000 compliance is not expected to have a material effect on the
Company's financial condition or results of operations.
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 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 January 1999, 97% 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 identifying alternate
sources or purchasing additional inventory from sole source suppliers.
The Company has also initiated formal communications with its significant
suppliers and financial institutions to determine the extent to which the
Company is vulnerable to those third parties' failure to remedy their own Year
2000 issue. To date the Company has contacted its significant suppliers and
financial institutions and has received assurances of Year 2000 compliance from
a number of those contacted. Most of the suppliers under existing contracts
with the Company are under no contractual obligation to provide such information
to the Company. The Company is taking steps with respect to new supplier
agreements to ensure that the suppliers' products and internal systems are Year
2000 compliant.
The Company's largest customers were also surveyed regarding their Year
2000 efforts. The Company does not currently anticipate any material impact due
to a Year 2000 related failure of a major customer. All of the Company's
financial institutions have been surveyed. All of the Company's primary banking
activities can be accommodated by the Company's two major multi-national banking
partners with the exception of payroll in certain Asian countries which must be
handled in local currency. The Company is following Year 2000 progress in these
areas
<PAGE>
18
closely and will develop specific contingency plans for meeting payroll if
the Company cannot obtain assurance that these local banks are fully prepared.
Because the Company's core and mission-critical systems are either complete
or in the final stages of completion, the Company does not consider failure of
these systems to be within a reasonable Year 2000 worst case scenario. The
Company believes it is primarily at risk due to failures within external
infrastructures such as utilities and transportation systems. The Company is
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 the Company currently expects that the Year 2000 issue will not pose
significant operational problems, delays in the implementation of new
information systems, or a failure to fully identify all Year 2000 dependencies
in the Company's systems and in the systems of its suppliers, customers and
financial institutions could have material adverse consequences, including
delays in the delivery or sale of products. Therefore, the Company is
developing contingency plans for continuing operations in the event such
problems arise.
The Company's stock price, like that of other technology companies, is
subject to significant volatility. The announcement of new products, services
or technological innovations or major restructurings by the Company or its
competitors, quarterly variations in the Company's results of operations,
changes in revenue or earnings estimates by the investment community and
speculation in the press or investment community are among the factors affecting
the Company's stock price. In addition, the stock price may be affected by
general market conditions and domestic and international macroeconomic factors
unrelated to the Company's performance. Because of the foregoing reasons,
recent trends should not be considered reliable indicators of future stock
prices or financial results.
The Company is in the process of addressing the issues raised by the
introduction of the Single European Currency ("Euro") as of January 1, 1999 and
during the transition period through January 1, 2002. The Company expects that
its internal systems that will be affected by the initial introduction of the
Euro will be Euro capable by January 1, 1999, and does not expect the costs of
system modifications to be material. The Company does not presently expect that
introduction and use of the Euro will materially affect the Company's foreign
exchange and hedging activities, or the Company's use of derivative instruments,
or will result in any material increase in costs to the Company. While the
Company will continue to evaluate the impact of the Euro introduction over time,
based on currently available information, management does not believe that the
introduction of the Euro currency will have a material adverse impact on the
Company's financial condition or overall trends in results of operations.
<PAGE>
19
CONSOLIDATED BALANCE SHEETS
SEAGATE TECHNOLOGY
<TABLE>
<CAPTION>
July 3, June 27,
In millions, except share data 1998 1997
<S> <C> <C>
Assets -------------------
Cash and cash equivalents $ 666 $1,047
Short-term investments 1,161 1,236
Accounts receivable, net 799 1,041
Inventories 508 808
Deferred income taxes 243 254
Other current assets 238 166
------ ------
Total Current Assets 3,615 4,552
------ ------
Property, equipment and leasehold improvements, net 1,669 1,787
Goodwill and other intangibles, net 169 199
Other assets 192 185
------ ------
Total Assets $5,645 $6,723
====== ======
Liabilities
Accounts payable $ 577 $ 863
Accrued employee compensation 175 200
Accrued expenses 405 505
Accrued warranty 197 198
Accrued income taxes 20 69
Current portion of long-term debt 1 1
------ ------
Total Current Liabilities 1,375 1,836
------ ------
Deferred income taxes 435 479
Accrued warranty 161 191
Other liabilities 33 39
Long-term debt, less current portion 704 702
------ ------
Total Liabilities 2,708 3,247
------ ------
Commitments and Contingencies
Stockholders' Equity
Preferred stock, $.01 par value -- 1,000,000 shares authorized;
none issued or outstanding - -
Common stock, $.01 par value -- 600,000,000 shares authorized;
shares issued -- 251,890,019 in 1998 and 1997 3 3
Additional paid-in capital 1,929 1,903
Retained earnings 1,299 1,947
Deferred compensation (55) (57)
Treasury common stock at cost; 7,132,867
shares in 1998 and 7,341,645 shares in 1997 (238) (319)
Foreign currency translation adjustment (1) (1)
------ ------
Total Stockholders' Equity 2,937 3,476
------ ------
Total Liabilities and Stockholders' Equity $5,645 $6,723
====== ======
</TABLE>
See notes to consolidated financial statements.
<PAGE>
20
CONSOLIDATED STATEMENTS OF OPERATIONS
SEAGATE TECHNOLOGY
<TABLE>
<CAPTION>
For the years ended July 3, June 27, June 28,
In millions, except per share data 1998 1997 1996
<S> <C> <C> <C>
-------------------------------
Revenue $6,819 $8,940 $8,588
Cost of sales 5,830 6,918 7,007
Product development 585 459 420
Marketing and administrative 502 493 486
Amortization of goodwill and other intangibles 40 50 47
In-process research and development 223 3 99
Restructuring 347 (7) 242
Unusual items (22) 166 -
------ ------ ------
Total Operating Expenses 7,505 8,082 8,301
------ ------ ------
Income (Loss) from Operations (686) 858 287
Interest income 98 92 94
Interest expense (51) (35) (56)
Other, net (65) (24) 6
------ ------ ------
Other Income (Expense), net (18) 33 44
Income (loss) before income taxes (704) 891 331
Benefit (provision) for income taxes 174 (233) (118)
------ ------ ------
Net Income (Loss) $ (530) $ 658 $ 213
====== ====== ======
Net income (loss) per share:
Basic $(2.17) $ 2.82 $ 1.07
Diluted (2.17) 2.62 .97
Number of shares used in per share computations:
Basic 243.6 233.6 199.7
Diluted 243.6 257.9 236.1
</TABLE>
See notes to consolidated financial statements.
<PAGE>
21
CONSOLIDATED STATEMENTS OF CASH FLOWS
SEAGATE TECHNOLOGY
<TABLE>
<CAPTION>
For the years ended July 3, June 27, June 28,
In millions, except per share data 1998 1997 1996
-------------------------------
<S> <C> <C> <C>
Operating Activities
Net income (loss) $ (530) $ 658 $ 213
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 664 607 417
Deferred income tax (33) 96 (85)
In-process research and development 223 3 99
Non-cash portion of restructuring charge 203 - -
Amstrad litigation charge - 153 -
Other, net 41 79 92
Changes in operating assets and liabilities:
Accounts receivable 242 30 (58)
Inventories 213 (84) (259)
Accounts payable (278) 169 (16)
Accrued expenses, employee compensation
and warranty (262) (63) 85
Accrued income taxes (37) 72 (16)
Other assets and liabilities 54 160 158
------- ------- -------
Net cash provided by operating activities 500 1,880 630
Investing Activities
Acquisition of property, equipment and
leasehold improvements, net (709) (941) (965)
Purchases of short-term investments (4,810) (4,473) (3,025)
Maturities and sales of short-term investments 4,889 3,907 3,131
Acquisitions of businesses, net of cash acquired (204) - (111)
Equity investments (27) (44) (11)
Other, net 13 19 38
------- ------- -------
Net cash used in investing activities (848) (1,532) (943)
Financing Activities
Issuance of long-term debt - 699 -
Repayment of long-term debt (1) (8) (16)
Sale of common stock 67 84 97
Purchase of treasury stock (105) (582) (124)
------- ------- -------
Net cash provided by (used in) financing activities (39) 193 (43)
Effect of exchange rate changes on
Cash and cash equivalents 6 2 1
------- ------- -------
Increase (decrease) in cash and cash equivalents (381) 543 (355)
Elimination of Conner's net cash activity for the
duplicated six months ended December 31, 1995 - - (32)
Cash and cash equivalents at the beginning of the year 1,047 504 891
------- ------- -------
Cash and cash equivalents at the end of the year $ 666 $ 1,047 $ 504
======= ======= =======
</TABLE>
See notes to consolidated financial statements.
<PAGE>
22
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
SEAGATE TECHNOLOGY
<TABLE>
<CAPTION>
For the years ended Foreign
July 3, 1998, June 27, Additional Treasury Currency
1997, and June 28, 1996 Common Stock Paid-In Retained Deferred Common Translation
Shares Amount Capital Earnings Compensation Stock Adjustment Total
In millions
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1995 194 $2 $ 686 $1,274 $ (3) $ (22) $ (1) $1,936
Purchase of treasury
stock at cost (124) (124)
Sale of stock 7 77 (20) 40 97
Acquisition of Arcada
minority interest 2 85 85
Issuance of restricted
stock, net of cancellations 2 59 (59) -
Amortization of
deferred compensation 4 4
Income tax benefit from
stock options exercised 47 47
Conversion of debentures
to common stock 9 200 (39) 106 267
Unrealized loss on
marketable securities (1) (1)
Net income 213 213
Elimination of Conner activity
for the duplicated six months
ended December 31, 1995 (1) (21) (37) (58)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at June 28, 1996 213 2 1,133 1,390 (58) - (1) 2,466
Purchase of treasury
stock at cost (582) (582)
Sale of stock 4 42 (71) 113 84
Issuance of restricted
stock, net of cancellations 7 (7) (7) 7 -
Amortization of
deferred compensation 8 8
Income tax benefit from
stock options exercised 52 52
Conversion of debentures
to common stock 35 1 669 (24) 143 789
Unrealized gain on
marketable securities 1 1
Net income 658 658
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at June 27, 1997 252 3 1,903 1,947 (57) (319) (1) 3,476
Purchase of treasury
stock at cost (105) (105)
Sale of stock (99) 166 67
</TABLE>
<PAGE>
23
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of restricted
stock, net of cancellations 6 (20) (6) 20 -
Amortization of
deferred compensation 8 8
Income tax benefit from
stock options exercised 12 12
Unrealized gain on
marketable securities 1 1
Other stock-based compensation 8 8
Net loss (530) (530)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at July 3, 1998 252 $ 3 $ 1,929 $ 1,299 $ (55) $ (238) $ (1) $ 2,937
====================================================================================================================================
</TABLE>
See notes to consolidated financial statements.
<PAGE>
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Summary of Significant Accounting Policies
Nature of Operations---Seagate Technology, Inc. (the "Company" or "Seagate")
operates in a single industry segment by designing, manufacturing and marketing
products for storage, retrieval and management of data on computer and data
communications systems. These products include disc drives and disc drive
components, tape drives and software. The Company sells its products to
original equipment manufacturers for inclusion in their computer systems or
subsystems, and to distributors, resellers, dealers and retailers.
Accounting Estimates---The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ materially from
those estimates.
The actual results with regard to warranty expenditures could have a
material unfavorable impact on the Company if the actual rate of unit failure or
the cost to repair a unit is greater than what the Company has used in
estimating the warranty expense accrual.
The actual results with regard to restructuring charges could have a
material unfavorable impact on the Company if the actual expenditures to
implement the restructuring plan are greater than what the Company estimated
when establishing the restructuring accrual.
Given the volatility of the markets in which the Company participates, the
Company makes adjustments to the value of inventory based on estimates of
potentially excess and obsolete inventory after considering forecasted demand
and forecasted average selling prices. However, forecasts are subject to
revisions, cancellations, and rescheduling. Actual demand will inevitably
differ from such anticipated demand, and such differences may have a material
effect on the financial statements.
Basis of Consolidation---The consolidated financial statements include the
accounts of the Company and its wholly-owned and majority-owned subsidiaries
after eliminations. Total outstanding minority interests are not material for
any period presented.
The Company operates and reports financial results on a fiscal year of 52
or 53 weeks ending on the Friday closest to June 30. Accordingly, fiscal 1998
ended on July 3, 1998, fiscal 1997 ended on June 27, 1997 and fiscal 1996 ended
on June 28, 1996. Fiscal year 1998 comprised 53 weeks and fiscal years 1997 and
1996 each comprised 52 weeks. All references to years in these notes to
consolidated financial statements represent fiscal years unless otherwise noted.
Certain amounts in prior year financial statements and notes thereto have
been reclassified to conform to current year presentation.
Foreign Currency Translation---The U.S. dollar is the functional currency for
most of the Company's foreign operations. Gains and losses on the translation
into U.S. dollars of amounts denominated in foreign currencies are included in
net income for those operations whose functional currency is the U.S. dollar and
as a separate component of stockholders' equity for those operations whose
functional currency is the local currency.
Derivative Financial Instruments---Seagate transacts business in various foreign
countries. Its primary currency cash flows are in emerging market countries in
Asia and in certain European countries. During 1998 and 1997, Seagate employed
a foreign currency hedging program utilizing foreign currency forward exchange
contracts and purchased currency options to hedge local currency cash flows for
payroll, inventory, other operating expenditures and fixed asset purchases in
Singapore, Thailand, and Malaysia. These local currency cash flows were
designated as either firm commitments or as anticipated transactions depending
upon the contractual or legal nature of local currency commitments in Singapore,
Thailand, and Malaysia. Anticipated transactions were hedged with purchased
currency options and with foreign currency forward exchange contracts; firm
commitments were hedged with foreign currency forward exchange contracts.
The Company may enter into foreign currency forward exchange and option
contracts to manage exposure related to certain foreign currency commitments,
certain foreign currency denominated balance sheet positions and anticipated
foreign currency denominated expenditures. The Company does not enter into
derivative financial instruments for trading purposes. Foreign currency forward
exchange contracts designated and effective as hedges of firm commitments and
option contracts designated and effective as hedges of firm commitments or
anticipated transactions are treated as hedges for accounting purposes. Gains
and losses related to qualified accounting hedges of firm commitments or
anticipated transactions are deferred and are recognized in income or as
adjustments to the
<PAGE>
25
carrying amounts when the hedged transaction occurs. All other foreign currency
forward exchange contracts are marked-to-market and unrealized gains and losses
are included in current period net income as a component of other income
(expense).
Premiums on foreign currency option contracts used to hedge firm
commitments and anticipated transactions are amortized on a straight-line basis
over the life of the contract. Forward points on foreign currency forward
exchange contracts which qualify as hedges of firm commitments are recognized in
income as adjustments to the carrying amount when the hedged transaction occurs.
The Company may, from time to time, adjust its foreign currency hedging
position by taking out additional contracts or by terminating or offsetting
existing foreign currency forward exchange and option contracts. These
adjustments may result from changes in the Company's underlying foreign currency
exposures or from fundamental shifts in the economics of particular exchange
rates, as occurred in the first and second quarters of fiscal 1998 with respect
to the Thai baht, Malaysian ringgit and Singapore dollar. For foreign currency
forward exchange and option contracts qualifying as accounting hedges, gains or
losses on terminated contracts and offsetting contracts are deferred and are
recognized in income as adjustments to the carrying amount of the hedged item in
the period the hedged transaction occurs. For foreign currency forward exchange
and option contracts not qualifying as accounting hedges, gains and losses on
terminated contracts, or on contracts that are offset, are recognized in income
in the period of contract termination or offset.
Revenue Recognition and Product Warranty---Revenue from sales of products is
generally recognized upon shipment to customers. The Company warrants its
products against defects in design, materials and workmanship generally for
three to five years depending upon the capacity category of the disc drive, with
the higher capacity products being warranted for the longer periods. A provision
for estimated future costs relating to warranty expense is recorded when
products are shipped.
The Company's software revenues are primarily derived from the sale of
product licenses, software maintenance, technical support, training and
consulting. During the first quarter of fiscal 1999, the Company began
recognizing license revenues in accordance with the American Institute of
Certified Public Accountant's Statement of Position 97-2, "Software Revenue
Recognition." Revenues from software license agreements are primarily recognized
at the time of product delivery, provided that fees are fixed or determinable,
evidence of an arrangement exists, collectibility is probable and the Company
has vendor-specific objective evidence of fair value. Revenues from resellers,
including VARs, OEMs and distributors, are primarily recognized at the time of
product delivery to the reseller. The Company's policy is to defer such revenues
if resale contingencies exist. Some of the factors that are considered to
determine the existence of such contingencies include payment terms,
collectibility and past history with the customer. Product returns are reserved
for in accordance with SFAS 48. Such returns are estimated based on historical
return rates. The Company considers other factors such as fixed and determinable
fees, resale contingencies, arms length contract terms and the ability to
reasonably estimate returns to ensure compliance with SFAS 48. Additionally,
reserves are provided for product return authorizations received by the Company
prior to fiscal cutoff dates. Service revenues from customer maintenance fees
for ongoing customer support and product updates are recognized ratably over the
maintenance term, which is typically 12 months. Service revenues from training
and consulting are recognized when such services are performed.
Inventory---Inventories are valued at the lower of standard cost (which
approximates actual cost using the first-in, first-out method) or market.
Property, Equipment, and Leasehold Improvements---Land, equipment, buildings and
leasehold improvements are stated at cost. Equipment and buildings are
depreciated using the straight-line method over the estimated useful lives of
the assets. Leasehold improvements are amortized using the straight-line method
over the shorter of the estimated life of the asset or the remaining term of the
lease.
Advertising Expense---The cost of advertising is expensed as incurred.
Advertising costs were $68 million, $41 million and $34 million in 1998, 1997
and 1996, respectively.
Stock-Based Compensation---The Company accounts for employee stock-based
compensation under Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APBO 25") and related interpretations. Pro forma
net income and net income per share are disclosures required by Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123") and are included in the Stock-Based Benefit Plans -
Pro Forma Information note to the consolidated financial statements.
<PAGE>
26
Impact of Recently Issued Accounting Standards---In June 1997, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. SFAS 130 is effective for fiscal years beginning after December 15,
1997 and will be adopted by the Company for its fiscal 1999. Adoption of this
pronouncement is not expected to have a material impact on the Company's
financial statements.
Also in June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosures About Segments of an Enterprise and Related
Information" ("SFAS 131"). SFAS 131 replaces Statement of Financial Accounting
Standards No. 14 and changes the way public companies report segment
information. SFAS 131 is effective for fiscal years beginning after December
15, 1997 and will be adopted by the Company for its fiscal 1999 which commenced
July 4, 1998. Adoption of this pronouncement is not expected to have a material
impact on the Company's financial statements.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). This statement establishes accounting and reporting standards for
derivative instruments and for hedging activities. It requires that derivatives
be recognized in the balance sheet at fair value and specifies the accounting
for changes in fair value. SFAS 133 is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999 and will be adopted by the Company
for its fiscal year 2000. The Company is in the process of assessing the impact
of this pronouncement on its financial statements.
Net Income Per Share---In February 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 128, "Earnings per
Share" ("SFAS 128"). SFAS 128 replaced the previously reported primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options and convertible securities. Diluted earnings per
share is very similar to the previously reported fully diluted earnings per
share. All earnings per share amounts for all periods have been presented, and
where necessary, restated to conform to the SFAS 128 requirements. The adoption
of SFAS 128 did not have a material impact on the Company's earnings 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 stock options outstanding during the period
and assumed the conversion of the Company's convertible subordinated debentures
for the period of time such debentures were outstanding. 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.
Cash, Cash Equivalents and Short-Term Investments---The Company considers all
highly liquid investments with a remaining maturity of 90 days or less at the
time of purchase to be cash equivalents. Cash equivalents are carried at cost,
which approximates fair value. The Company's short-term investments primarily
comprise readily marketable debt securities with remaining maturities of more
than 90 days at the time of purchase. The Company has classified its entire
investment portfolio as available-for-sale. Available-for-sale securities are
classified as cash equivalents or short-term investments and are stated at fair
value with unrealized gains and losses included in stockholders' equity. The
amortized cost of debt securities is adjusted for amortization of premiums and
accretion of discounts to maturity. Such amortization and accretion are included
in interest income. Realized gains and losses are included in other income
(expense). The cost of securities sold is based on the specific identification
method.
Concentration of Credit Risk---The Company's customer base for disc drive
products is concentrated with a small number of systems manufacturers and
distributors. Financial instruments which potentially subject the Company to
concentrations of credit risk are primarily accounts receivable, cash
equivalents and short-term investments. The Company performs ongoing credit
evaluations of its customers' financial condition and, generally, requires no
collateral from its customers. The allowance for noncollection of accounts
receivable is based upon the expected collectibility of all accounts receivable.
The Company places its cash equivalents and short-term investments in investment
grade, short-term debt instruments and limits the amount of credit exposure to
any one commercial issuer.
Financial Instruments
The following is a summary of the fair value of available-for-sale
securities at July 3, 1998 and June 27, 1997:
<PAGE>
27
<TABLE>
<CAPTION>
In millions July 3, 1998 June 27, 1997
----------------------------
<S> <C> <C>
Money market mutual funds $ 71 $ 182
U.S. government and agency obligations 398 364
Repurchase agreements 81 150
Auction rate preferred stock 167 227
Municipal bonds 102 78
Corporate securities 612 731
Other 301 417
------ ------
$1,732 $2,149
====== ======
Included in short-term investments $1,161 $1,236
Included in cash and cash equivalents 571 913
------ ------
$1,732 $2,149
====== ======
</TABLE>
The fair value of all available-for-sale securities approximates
amortized cost. Gross realized and unrealized gains and losses on the sale of
available-for-sale securities were not material for each of the three years in
the period ended July 3, 1998.
The fair value of the Company's investment in debt securities, by
contractual maturity, is as follows:
<TABLE>
<CAPTION>
.
<S> <C> <C>
In millions July 3, 1998 June 27, 1997
-----------------------------
Due in less than 1 year $ 771 $1,529
Due in 1 to 3 years 723 211
------ -------------
$1,494 $1,740
====== =============
</TABLE>
Fair Value Disclosures--- The carrying value of cash and cash equivalents
approximates fair value. The fair values of short-term investments, notes,
debentures (see Long-Term Debt and Lines of Credit footnote) and foreign
currency forward exchange and option contracts are estimated based on quoted
market prices.
The carrying values and fair values of the Company's financial instruments
are as follows:
<TABLE>
<CAPTION>
In millions July 3, 1998 June 27, 1997
--------------------------------------------------------
Carrying Estimated Carrying Estimated
amount fair value amount fair value
---------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 666 $ 666 $1,047 $1,047
Short-term investments 1,161 1,161 1,236 1,236
7.125% senior notes, due 2004 (200) (199) (200) (200)
7.37% senior notes, due 2007 (200) (198) (200) (201)
7.45% senior debentures, due 2037 (200) (198) (200) (202)
7.875% senior debentures, due 2017 (100) (98) (100) (100)
Italian Lira debentures, 14.65% to 15.25% (1) (1) (1) (1)
Foreign currency forward exchange and option contracts (18) (18) (2) (10)
Foreign currency forward sale contracts 0 0 N/A N/A
</TABLE>
Derivative Financial Instruments---The Company may enter into foreign currency
forward exchange and option contracts to manage exposure related to certain
foreign currency commitments, certain foreign currency denominated balance sheet
positions and anticipated foreign currency denominated expenditures. The Company
does not enter into derivative financial instruments for trading purposes. Based
on uncertainty in the Southeast Asian foreign currency markets, beginning in the
second quarter of 1998 the Company has temporarily suspended its hedging
program. At July 3, 1998, the Company had effectively closed out all of its
foreign currency forward exchange contracts by
<PAGE>
28
purchasing offsetting contracts and the remaining foreign currency market risk
from derivative financial instruments is not material.
Accounts Receivable
Accounts receivable are summarized below:
<TABLE>
<CAPTION>
In millions 1998 1997
----------------
<S> <C> <C>
Accounts receivable $ 853 $1,101
Less allowance for noncollection (54) (60)
----- ------
$ 799 $1,041
===== ======
Inventories
Inventories are summarized below:
In millions 1998 1997
---------------
Components $ 172 $ 359
Work-in-process 87 134
Finished goods 249 315
----- ------
$ 508 $ 808
===== ======
</TABLE>
Property, Equipment and Leasehold Improvements
Property, equipment and leasehold improvements consisted of the following:
<TABLE>
<CAPTION>
In millions Estimated Useful Life 1998 1997
----------------------------------------------
<S> <C> <C> <C>
Land $ 33 $ 15
Equipment 1-1/2 - 4 years 2,187 1,919
Building and leasehold improvements Life of lease - 30 years 854 763
Construction in progress 168 362
------- -------
3,242 3,059
Less accumulated depreciation and amortization (1,573) (1,272)
------- -------
$ 1,669 $ 1,787
======= =======
</TABLE>
Equipment and leasehold improvements include assets under capitalized
leases. Amortization of leasehold improvements is included in depreciation
expense. Depreciation expense was $549 million, $451 million and $330 million in
1998, 1997 and 1996, respectively.
Goodwill and Other Intangibles
Goodwill represents the excess of the purchase price of acquired companies
over the estimated fair value of the tangible and specifically identified
intangible net assets acquired. In accordance with SFAS 121, the carrying value
of these intangibles and related goodwill is reviewed if the facts and
circumstances suggest that they may be permanently impaired. If this review
indicates these assets' carrying value will not be recoverable, as determined
based on the undiscounted net cash flows of the entity acquired over the
remaining amortization period, the Company's carrying value is reduced to its
estimated fair value, first by reducing goodwill, and second by reducing long-
term assets and other intangibles (generally based on an estimate of discounted
future net cash flows). Goodwill and other intangibles
<PAGE>
29
are being amortized on a straight-line basis over periods ranging from two to
fifteen years. Accumulated amortization was $201 million and $161 million as of
July 3, 1998 and June 27, 1997, respectively.
Other intangible assets consist of trademarks, assembled workforces,
distribution networks, developed technology, customer bases, and covenants not
to compete related to acquisitions accounted for by the purchase method.
Amortization of purchased intangibles, other than acquired developed technology,
is provided on the straight-line basis over the respective useful lives of the
assets ranging from 36 to 60 months for trademarks, 24 to 48 months for
assembled workforces and distribution networks, 12 to 36 months for customer
bases and 18 to 24 months for covenants not to compete. In-process research and
development without alternative future use is expensed when acquired.
Developed Technology. The Company applies Statement of Financial Accounting
Standards No. 86 ("SFAS 86", "Accounting for the Costs of Computer Software to
Be Sold, Leased, or Otherwise Marketed," to software technologies developed
internally, acquired in business acquisitions, and purchased.
Internal development costs are included in research and development and are
expensed as incurred. SFAS 86 requires the capitalization of certain internal
development costs once technological feasibility is established, which based on
the Company's development process generally occurs upon the completion of a
working model. As the time period between the completion of a working model and
the general availability of software has been short, capitalization of internal
development costs has not been material to date. Capitalized costs are
amortized based on the greater of the straight-line basis over the estimated
product life (generally 30 to 48 months) or the ratio of current revenues to the
total of current and anticipated future revenues.
Purchased developed technology is amortized based on the greater of the
straight-line basis over the estimated useful life (30 to 48 months) or the
ratio of current revenues to the total of current and anticipated future
revenues. The recoverability of the carrying value of purchased developed
technology and associated goodwill is reviewed periodically. The carrying value
of developed technology is compared to the estimated future gross revenues from
that product reduced by the estimated future costs of completing and disposing
of that product, including the costs of performing maintenance and customer
support (net undiscounted cash flows) and to the extent that the carrying value
exceeds the undiscounted cash flows the difference is written off.
Long-Term Debt and Lines of Credit
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
In millions 1998 1997
------------
<S> <C> <C>
7.125% senior notes, due 2004 $ 200 $ 200
7.37% senior notes, due 2007 200 200
7.45% senior debentures, due 2037 200 200
7.875% senior debentures, due 2017 100 100
Italian lira debentures, 14.65% to 15.25% notes and
loans due through 1999 1 1
Capitalized lease obligations with interest at 14% to 19.25%
collateralized by certain manufacturing equipment and buildings 4 2
----- -----
705 703
Less current portion 1 1
----- -----
$ 704 $ 702
===== =====
</TABLE>
At July 3, 1998, future minimum principal payments on long-term debt and
capitalized lease obligations were as follows:
<TABLE>
<CAPTION>
In millions
<S> <C>
1999 $ 1
2000 1
2001 -
2002 1
</TABLE>
<PAGE>
30
<TABLE>
<S> <C>
2003 1
After 2003 701
----
$705
====
</TABLE>
During 1996 and 1997, the Company called for redemption all its 6.5%,
6.75%, 5% and 6.75% Convertible Subordinated Debentures due 2002, 2001, 2003 and
2012, respectively. Approximately $1.054 billion principal amount of the
debentures was converted to approximately 50.8 million shares of the Company's
common stock and approximately $2 million principal amount of the debentures
were redeemed. None of the 5% debentures were redeemed.
The Company's 7.125% senior notes due 2004, 7.37% senior notes due 2007 and
7.875% senior debentures due 2017 are redeemable at the option of the Company at
any time, at a redemption price equal to the greater of (I) 100% of their
principal amount plus accrued interest or (ii) the sum of the present values of
the remaining scheduled payments of principal and interest discounted to the
date of redemption at a discount rate (the "discount rate") as set forth in the
indenture governing the notes and debentures plus 10 basis points. The
Company's 7.45% senior debentures due 2037 are redeemable at the option of the
Company at any time, at a redemption price equal to the greater of (i) 100% of
their principal amount plus accrued interest, (ii) the sum of the present values
of the remaining scheduled payments of principal and interest discounted to the
date of redemption at the discount rate plus 10 basis points, calculated as if
the principal amount were payable in full on March 1, 2009, or (iii) the sum of
the present values of the remaining scheduled payments of principal and interest
discounted to the date of redemption at the discount rate plus 10 basis points.
In addition, the Company's 7.45% senior debentures due 2037 will be redeemable
on March 1, 2009, at the option of the holders thereof, at 100% of their
principal amount, together with interest payable to the date of redemption. The
Company's 7.125% senior notes due 2004, 7.37% senior notes due 2007 and 7.875%
senior debentures due 2017 will not be redeemable at the option of the holders
thereof prior to maturity. These securities were issued in February 1997 in an
offering registered under the Securities Act of 1933, as amended.
As of July 3, 1998, the Company had committed lines of credit of $61
million which can be used for standby letters of credit or bankers' guarantees.
These lines of credit were fully utilized at July 3, 1998.
Net Income Per Share
The following table sets forth the computation of basic and diluted net
income (loss) per share.
<TABLE>
<CAPTION>
For the years ended July 3, June 27, June 28,
In millions, except per share data 1998 1997 1996
------------------------------
<S> <C> <C> <C>
Basic Net Income (Loss) Per Share Computation
- --------------------------------------------------------
Numerator:
Net income (loss) $ (530) $ 658 $ 213
Denominator:
Weighted average number of common shares
outstanding during the period 243.6 233.6 199.7
------ ------ ------
Basic net income (loss) per share $(2.17) $ 2.82 $ 1.07
====== ====== ======
Diluted Net Income (Loss) Per Share Computation
- --------------------------------------------------------
Numerator:
Net income (loss) $ (530) $ 658 $ 213
Add convertible subordinated debentures interest,
net of income tax effect - 17 16
Total $ (530) $ 675 $ 229
Denominator:
</TABLE>
<PAGE>
31
<TABLE>
<S> <C> <C> <C>
Weighted average number of common shares
outstanding during the period 243.6 233.6 199.7
Incremental common shares attributable to exercise
of outstanding options (assuming proceeds
would be used to purchase treasury stock) - 7.4 7.2
Incremental common shares attributable to conversion
of convertible subordinated debentures - 16.9 29.2
Total 243.6 257.9 236.1
------ ------ ------
Diluted net income (loss) per share $(2.17) $ 2.62 $ 0.97
====== ====== ======
</TABLE>
Incremental common shares attributable to exercise of outstanding options
(assuming proceeds would be used to purchase treasury stock) of 4,080,000 for
the year ended July 3, 1998, were not included in the diluted net income per
share computation because the effect would be antidilutive due to the net loss
incurred during that period.
Employee Profit Sharing and Executive Bonus Plans
The Company allocates a certain percentage of adjusted quarterly pretax
profits to its Employee Profit Sharing Plan which is currently distributed to
employees, excluding officers, employed for the full quarter. The Company also
allocates a certain percentage of adjusted quarterly pretax profits to its
Executive Bonus Plan. Distributions to corporate officers under this plan are
subject to the discretion of the Board of Directors. Charges to operations for
distributions to employees and/or corporate officers under these Plans during
1998, 1997 and 1996 were $3 million, $115 million and $73 million, respectively.
Tax-Deferred Savings Plan
The Company has a tax-deferred savings plan, the Seagate Technology, Inc.
Savings and Investment Plan ("the 40l(k) plan"), for the benefit of qualified
employees. The 40l(k) plan is designed to provide employees with an
accumulation of funds at retirement. Qualified employees may elect to make
contributions to the 401(k) plan on a monthly basis. The Company may make
annual contributions to the 401(k) plan at the discretion of the Board of
Directors. No material contributions were made by the Company for each of the
three years in the period ended July 3, 1998.
Stock-Based Benefit Plans
Stock Option Plans---Options granted under the Company's stock option plans are
granted at fair market value, expire ten years from the date of the grant and
generally vest in four equal annual installments, commencing one year from the
date of the grant.
Following is a summary of stock option activity for the three years ended
July 3, 1998:
<TABLE>
<CAPTION>
Options Outstanding
-----------------------------
Shares in millions Number Weighted Average
of Shares Exercise Price
---------- ----------------
<S> <C> <C>
Balance June 30, 1995 21.4 $11.45
Granted 11.1 22.30
Exercised (6.2) 8.71
Canceled (3.3) 14.27
Elimination of Conner activity for
the duplicated six months ended
December 31, 1995 .7 14.13
-----
Balance June 28, 1996 23.7 16.91
Granted 6.0 36.31
Exercised (5.2) 12.15
Canceled (2.5) 20.42
-----
Balance June 27, 1997 22.0 22.92
</TABLE>
<PAGE>
32
<TABLE>
<S> <C> <C>
Granted 18.3 27.10
Exercised (2.4) 13.34
Canceled (11.9) 32.62
-----
Balance July 3, 1998 26.0 $22.30
=====
</TABLE>
In fiscal 1998, the Company offered to all optionees below the level of
Senior Vice President, who held options with an exercise price higher than the
prevailing fair market value of the Company's common stock the right to exchange
their options for new options exercisable at such fair market value. In
connection with this transaction, 8.4 million options were exchanged. The
number of options shown as granted and canceled in the above table reflects this
exchange of options. Such options had a weighted average exercise price before
repricing of $34.20 and the new options were granted at a weighted average price
of $24.45.
Options available for grant were 13.6 million at July 3, 1998; 5.1 million
at June 27, 1997; and 9.0 million at June 28, 1996. On October 30, 1997, the
stockholders approved an amendment to the 1991 Incentive Stock Option Plan to
increase the number of shares of common stock reserved for issuance thereunder
by 15 million. At July 3, 1998, options to purchase 10.0 million shares of
common stock were exercisable. The following table summarizes information about
options outstanding at July 3, 1998.
<TABLE>
<CAPTION>
Outstanding Options Exercisable Options
------------------------------------------ -------------------------
Weighted Average
Shares in millions Number Contractual Life Weighted Average Number Weighted Average
Range of exercise prices of Shares (in years) Exercise Price of Shares Exercise Price
------------------------------------------- --------------------------
<S> <C> <C> <C> <C> <C> <C>
$.00 - $11.06 3.2 4.93 $ 7.98 3.1 $ 8.05
11.12 - 21.56 4.3 6.60 15.50 2.5 14.27
21.62 - 28.25 15.5 8.60 24.52 3.4 24.32
28.50 - 51.75 3.0 8.09 35.86 1.0 33.83
------------------------------------------- --------------------------
$.00 - $51.75 26.0 7.76 $22.30 10.0 $17.70
</TABLE>
Executive Stock Plan--The Company has an Executive Stock Plan under which senior
executives of the Company are granted the right to purchase shares of the
Company's common stock at $.01 per share. The difference between the fair market
value of the shares on the measurement date and the exercise price is recorded
as deferred compensation and is charged to operations over the vesting period of
five or ten years. The Company has the right to repurchase the restricted stock
from an executive upon his or her voluntarily or involuntary termination of
employment with the Company for any reason at the same price paid by the
executive. If an executive voluntarily resigns at or above age 65, the Company
may release from the repurchase option, or if his or her employment terminates
as a result of death, disability, termination by the Company other than for
cause or constructive termination within the two-year period following a change
of control, the Company will release from the repurchase option a pro rata
number of shares based on the number of months that have passed since the grant
date divided by the number of months in the vesting period. In November 1995,
the Company's Board of Directors granted 1,604,000 shares under the plan,
subject to stockholder approval of certain amendments to the plan. These
amendments included the addition of 2,000,000 shares to be issued under the
plan. In February 1996, such stockholder approval was obtained. Subsequently in
May 1996, an additional 416,500 shares were granted under the plan. In 1997,
249,500 shares were granted and 85,000 shares were repurchased under the terms
of the plan. In 1998, 453,500 shares were granted and 253,867 shares were
repurchased under the terms of the plan. At July 3, 1998, 115,367 shares were
available for future grants. In addition, the Company has a Restricted Stock
Plan which also has a deferred compensation component. Under this plan the
deferred compensation is amortized over a period of seven years. There are two
employees remaining in the plan and no shares are available for future grant.
The aggregate amount charged to operations for amortization of deferred
compensation under both plans was $8 million, $8 million and $4 million in 1998,
1997 and 1996, respectively.
Stock Purchase Plan---The Company also maintains an Employee Stock Purchase
Plan. A total of 13,600,000 shares of common stock have been authorized for
issuance under the Purchase Plan. The Purchase Plan permits eligible employees
who have completed thirty days of employment prior to the inception of the
offering period to purchase common stock through payroll deductions generally at
the lower of 85% of the fair market value of the common stock at the beginning
or at the end of each six-month offering period. Under the plan, 1,348,000;
1,054,000 and 1,129,000 shares of common stock were issued in 1998, 1997 and
1996, respectively.
<PAGE>
33
Common stock reserved for future issuance under the Company's Employee
Stock Purchase Plan aggregated 1,426,000 shares at July 3, 1998. In July 1998,
the Board of Directors approved an amendment to the Employee Stock Purchase Plan
to increase the number of shares of common stock reserved for issuance
thereunder by 6 million, subject to stockholder approval at the 1998 Annual
Meeting of Stockholders.
Pro Forma Information ---The Company has elected to follow APBO 25 and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under SFAS
123 requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APBO 25, the Company generally recognized
no compensation expense with respect to such options.
Pro forma information regarding net income and earnings per share is
required by SFAS 123 for stock options granted after June 30, 1995 as if the
Company had accounted for its stock options under the fair value method of SFAS
123. The fair value of the Company's stock options was estimated using a Black-
Scholes option valuation model. The Black-Scholes option valuation model was
developed for use in estimating the fair value of traded options which have no
vesting restrictions and are fully transferable. In addition, the Black-Scholes
model requires the input of highly subjective assumptions, including the
expected stock price volatility. Because the Company's stock options granted to
employees have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its stock
options granted to employees.
The fair value of the Company's stock options granted to employees was
estimated assuming no expected dividends and the following weighted average
assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
------------------
<S> <C> <C> <C>
Stock Option Plan Shares
Expected life (in years) 3.2 3.5 3.5
Risk-free interest rate 5.5% 6.2% 5.6%
Volatility .45 .45 .45
Employee Stock Purchase Plan Shares
Expected life (in years) .6 .5 .5
Risk-free interest rate 5.5% 5.4% 5.4%
Volatility .63 .46 .46
</TABLE>
The weighted average fair value of stock options granted under the Company's
Stock Option Plans was $10.05, $14.57 and $9.45 per share in 1998, 1997 and
1996, respectively. The weighted average fair value of shares granted under the
Company's Employee Stock Purchase Plan was $12.03, $8.89 and $6.00 per share in
1998, 1997 and 1996, respectively. The weighted average purchase price of
shares granted under the Company's Employee Stock Purchase Plan was $26.99,
$27.95 and $23.46 per share in 1998, 1997 and 1996, respectively.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized over the options' vesting period (for stock options) and
the six month purchase period for stock purchases under the Stock Purchase Plan.
The Company's pro forma information follows:
<TABLE>
<CAPTION>
In millions 1998 1997 1996
----------------------
<S> <C> <C> <C>
Except per share data
Pro forma
net income (loss) $ (600) $ 610 $ 195
Pro forma basic net
income (loss) per share (2.46) 2.64 0.98
Pro forma diluted net
income (loss) per share (2.46) 2.45 0.90
</TABLE>
The effects on pro forma disclosures of applying SFAS 123 are not likely to
be representative of the effects on pro forma disclosures of future years.
Because SFAS 123 is applicable only to options granted subsequent to June 30,
1995, the pro forma effect will not be fully reflected until 1999.
<PAGE>
34
Income Taxes
The provision for (benefit from) income taxes consisted of the following:
<TABLE>
<CAPTION>
In millions 1998 1997 1996
------------------------
<S> <C> <C> <C>
Current Tax Expense (Benefit)
Federal $ (157) $ 122 $ 168
State - 6 28
Foreign 16 9 7
------ ----- -----
(141) 137 203
------ ----- -----
Deferred Tax Expense (Benefit)
Federal (19) 65 (76)
State (20) 14 (9)
Foreign 6 17 -
------ ----- -----
(33) 96 (85)
------ ----- -----
Provision for (Benefit from)
Income Taxes $ (174) $ 233 $ 118
====== ===== =====
</TABLE>
The income tax benefit related to the exercise of stock options reduces
taxes currently payable and is credited to additional paid-in capital. Such
amounts approximated $12 million, $52 million, and $47 million for 1998, 1997
and 1996, respectively.
Income (loss) before income taxes consisted of the following:
<TABLE>
<CAPTION>
In millions 1998 1997 1996
-----------------------
<S> <C> <C> <C>
Federal $(778) $ 41 $ (77)
Foreign 74 850 408
----- ----- -----
(704) 891 331
===== ===== =====
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The significant
components of the Company's deferred tax assets and liabilities were as follows:
<TABLE>
<CAPTION>
In millions July 3, June 27,
1998 1997
-------- ---------
<S> <C> <C>
Deferred Tax Assets
Accrued warranty $ 151 $ 166
Inventory valuation accounts 38 33
Receivable reserves 29 29
Accrued compensation and benefits 27 36
Depreciation 37 23
Restructuring reserves 25 12
Other reserves and accruals 40 47
Acquisition related items 36 29
Net operating loss and tax credit carry-forwards 87 31
Other assets 9 9
----- -----
Total Deferred Tax Assets 479 415
Valuation allowance (82) (57)
----- -----
Net Deferred Tax Assets 397 358
----- -----
</TABLE>
<PAGE>
35
<TABLE>
<CAPTION>
Deferred Tax Liabilities
<S> <C> <C>
Unremitted income of foreign subsidiaries (549) (561)
Acquisition related items (19) (20)
Other liabilities (21) (2)
----- -----
Total Deferred Tax Liabilities (589) (583)
----- -----
Net Deferred Tax Liabilities $(192) $(225)
===== =====
As Reported on the Balance Sheet
Deferred Income Tax Assets $ 243 $ 254
Deferred Income Tax Liabilities (435) (479)
----- -----
Net Deferred Tax Liability $(192) $(225)
===== =====
</TABLE>
The valuation allowance has been provided for deferred tax assets related
to certain foreign net operating loss carry-forwards, foreign tax credit carry-
forwards and future tax benefits associated with the acquisition of certain
software companies. The valuation allowance increased by $25 million, $20
million and $15 million in 1998, 1997 and 1996, respectively.
The Company, as of July 3, 1998, has domestic, foreign and state net
operating loss carry-forwards of approximately $36 million, $47 million and $500
million, respectively, expiring in 1999 through 2013 if not used to offset
future taxable income. The Company, as of July 3, 1998, also has tax credit
carry-forwards of approximately $36 million expiring in 2000 through 2013 if not
used to offset future tax liabilities.
The differences between the provision for (benefit from) income taxes
at the U.S. statutory rate and the effective rate are summarized as follows:
<TABLE>
<CAPTION>
In millions 1998 1997 1996
-----------------------
<S> <C> <C> <C>
Provision (benefit) at U.S. statutory rate $(246) $312 $116
State income tax provision (benefit),
net of federal income tax benefit (15) 19 10
Benefit from net earnings of foreign
subsidiaries considered to be
permanently invested in
non-U.S. operations - (97) (59)
Write-off of in-process research
and development 75 - 30
Restructuring - - 18
Valuation reserve 25 19 15
Other individually immaterial items (13) (20) (12)
----- ---- ----
Provision for (benefit from)
income taxes $(174) $233 $118
===== ==== ====
</TABLE>
A substantial portion of the Company's Far East manufacturing operations at
plant locations in Singapore, Thailand, China and Malaysia operate free of tax
under various tax holidays. The tax holiday in Singapore expires in June 2005.
The tax holidays in Chockchai, Wellgrow and Korat, Thailand expire in June 2001,
February 2004 and September 2004, respectively. The tax holidays in Shenzen and
Wuxi, China expire in December 1998 and December 2000, respectively. The tax
holidays in Penang and Perai, Malaysia expire in June 1999 and December 1999,
respectively. Certain tax holidays may be extended if specific conditions are
met. The tax holidays had no impact on the net loss in 1998. The net impact of
these tax holidays was to increase net income by approximately $71 million
($0.28 per share, diluted) in 1997 and approximately $50 million ($0.21 per
share, diluted) in 1996. Cumulative undistributed earnings of the Company's Far
East subsidiaries for which no income taxes have been provided aggregated
approximately $1.439 billion at July 3, 1998. These earnings are considered to
be permanently invested in non-U.S. operations. Additional federal and state
taxes of approximately $518 million would have to be provided if these earnings
were repatriated to the U.S.
<PAGE>
36
The Company received a statutory notice of deficiency dated June 27, 1997 from
the Internal Revenue Service relative to taxable years 1991 through 1993
assessing potential deficiencies approximating $39 million plus interest and
approximately $6 million of penalties. The proposed adjustments to taxable
income relate primarily to re-allocations of income and expenses between the
Company and its Far East subsidiaries, the timing for deduction of accrued
domestic expenses and reserves and the allowable amount of domestic tax credits.
No assets have been levied as a result of the statutory notice of deficiency.
The Company petitioned the United States Tax Court on September 24, 1997 for a
re-determination of the deficiencies. The Company believes that the outcome of
this matter will not have a material adverse effect on its financial position or
results of operations.
The Company received a statutory notice of deficiency dated June 12, 1998 from
the Internal Revenue Service relative to Conner's taxable years 1991 and 1992
assessing potential deficiencies approximating $11 million plus interest. The
proposed adjustments to taxable income relate primarily to re-allocations of
income and expenses between the Company and its Far East subsidiaries and the
timing for deduction of accrued domestic expenses and reserves. No assets have
been levied as a result of the statutory notice of deficiency. The Company
believes it has meritorious defenses to the Internal Revenue Service adjustments
but has not yet determined the forum in which it will contest the proposed
deficiencies. The Company believes that the likely outcome of this matter will
not have a material adverse effect on its financial position or results of
operations.
Certain of the Company's foreign and state tax returns for various fiscal
years are under examination by taxing authorities. The Company believes that
adequate amounts of tax have been provided for any final assessments which may
result from these examinations.
Merger with Conner
On February 2, 1996, the Company and Conner Peripherals, Inc. ("Conner")
merged after approval by the stockholders of both companies. To effect the
combination, Seagate issued 48,956,044 shares of its common stock in exchange
for all the outstanding common stock of Conner and issued options to purchase
4,939,160 shares of Seagate common stock in exchange for all the outstanding
options to purchase Conner common stock. The merger has been accounted for as a
pooling of interests and, accordingly, all periods prior to the merger presented
in the accompanying consolidated financial statements have been restated to
include the accounts and operations of Conner. Conner was involved in the
design, manufacture and marketing of information storage products including disc
drives, tape drives and storage management software. Combined and separate
results of the Company and Conner for the periods prior to the acquisition were
as follows:
<TABLE>
<CAPTION>
For the year ended June 28,
In millions 1996
---------
<S> <C>
Revenue:
Prior to December 30, 1995:
Seagate $3,016
Conner 1,464
Combined results after December 29, 1995 4,108
------
$8,588
======
Net Income:
Prior to December 30, 1995:
Seagate $ 232
Conner 37
Combined results after December 29, 1995 (56)
------
$ 213
======
</TABLE>
The combined net loss after December 29, 1995 (see table above) of $56 million
includes a $168 million restructuring charge, net of related tax effect, as a
result of the merger with Conner and an $89 million write-off of in-process
research and development, net of related tax effect, incurred in connection with
the acquisitions of software companies.
The two companies maintained a majority of similar accounting practices.
However, as a result of certain differing accounting practices relating to the
capitalization of fixed assets and inventory, certain adjustments to net assets
were made to conform accounting practices of the two companies. None of these
adjustments was material to any period presented.
<PAGE>
37
Acquisitions
The Company has a history of acquisitions and during the three most
recent fiscal years significant acquisitions included Quinta Corporation and
Eastman Storage Software Management Group in fiscal 1998, and Arcada Holdings,
Inc., Holistic Systems, Calypso Software Systems, Inc., and OnDemand Software,
Inc. in fiscal 1996. No significant acquisitions occurred in fiscal 1997. The
following details information specific to these acquisitions including purchase
price allocation, significant assumptions used in valuing the purchase price and
the appraisal method utilized.
Valuation Methodology
In accordance with the provisions of APB Opinion 16, all identifiable
assets, including identifiable intangible assets, were assigned a portion of the
cost of the acquired enterprise (purchase price) on the basis of their
respective fair values. This included the portion of the purchase price
properly attributed to incomplete research and development projects that should
be expensed according to the requirements of Interpretation 4 of SFAS No. 2.
Valuation of acquired intangible assets. Intangible assets were identified
through (i) analysis of the acquisition agreement, (ii) consideration of the
Company's intentions for future use of the acquired assets, and (iii) analysis
of data available concerning Quinta's, Arcada's, and Eastman's (collectively
referred to as the "Targets") products, technologies, markets, historical
financial performance, estimates of future performance and the assumptions
underlying those estimates. The economic and competitive environment in which
the Company and the Targets operate was also considered in the valuation
analysis.
To determine the value of in-process research and development, the
Companyconsidered, among other factors, the state of development of each
project, the time and cost needed to complete each project, expected income,
associated risks which included the inherent difficulties and uncertainties in
completing each project and thereby achieving technological feasibility and
risks related to the viability of and potential changes to future target
markets. This analysis resulted in amounts assigned to in-process research and
development for projects that had not yet reached technological feasibility and
which did not have alternative future uses. The Income Approach, which includes
analysis of markets, cash flows, and risks associated with achieving such cash
flows, was the primary technique utilized in valuing each in-process research
and development project. The underlying in-process projects acquired were the
most significant and uncertain assumptions utilized in the valuation analysis of
in-process research and development projects.
To determine the value of developed technologies, the expected future cash
of existing product technologies were evaluated, taking into account risks
related to the characteristics and applications of each product, existing and
future markets and assessments of the life cycle stage of each product. Based
on this analysis, the existing technologies that had reached technological
feasibility were capitalized.
To determine the value of the distribution networks and customer bases,
Seagate Technology, considered, among other factors, the size of the current and
potential future customer bases, the quality of existing relationships with
customers, the historical costs to develop customer relationships, the expected
income and associated risks. Associated risks included the inherent
difficulties and uncertainties in transitioning the business relationships from
the acquired entity to Seagate and risks related to the viability of and
potential changes to future target markets.
To determine the value of trademarks, the Company considered, among other
factors, the assumption that in lieu of ownership of a trademark, Seagate would
be willing to pay a royalty in order to exploit the related benefits of such
trademark.
To determine the value of assembled workforces, the Company considered,
among other factors, the costs to replace existing employees including search
costs, interview costs and training costs.
Goodwill is determined based on the residual difference between the amount
paid and the values assigned to identified tangible and intangible assets. If
the values assigned to identified tangible and intangible assets exceed the
amounts paid, including the effect of deferred taxes, the values assigned to
long-term assets were reduced proportionately.
The underlying in-process projects acquired within each acquisition was the
most significant and uncertain assumption utilized in the valuation analysis.
Such uncertainties could give rise to unforeseen budget over runs and/or
<PAGE>
38
revenue shortfalls in the event that the Company is unable to successfully
complete a certain research and development project.Seagate management
recognizes that the Company is primarily responsible for estimating the fair
value of the purchased research and development in all acquisitions accounted
for under the purchase method.
The following details specific information about significant acquisitions
including related assumptions used in the purchase price allocation.
Acquisition of Quinta Corporation:
- ----------------------------------
In April and June 1997, the Company invested an aggregate of $20 million to
acquire approximately ten percent (10%) of the outstanding stock of Quinta
Corporation ("Quinta"), a developer of ultra-high capacity disc drive
technologies, including a new optically-assisted Winchester (OAW) technology. In
August 1997, the Company completed the acquisition of Quinta. Pursuant to the
purchase agreement with Quinta, the shareholders of Quinta, other than Seagate,
received cash payments aggregating $230 million upon the closing of the
acquisition and were eligible to receive additional cash payments aggregating
$95 million upon the achievement of certain product development and early
production milestones. Of the $95 million, $19 million was charged to operations
in fiscal 1998. Of the $19 million charged to operations, $5 million was paid
in fiscal 1998. In July 1998, the Company and Quinta amended the purchase
agreement to eliminate the product development and early production milestones
and provide that the former shareholders of Quinta will be eligible to receive
the remaining $76 million and the $14 million that had been accrued but unpaid
in fiscal 1998. In the first quarter of fiscal 1999, the Company expects to take
a charge to operations for the remaining $76 million.
Quinta's research and development project revolves around an Optically Assisted
Winchester ("OAW") technology. OAW refers to Quinta's newly designed recording
technology that, upon completion, would be implemented into Winchester hard disk
drives. OAW combines traditional magnetic recording technology with Winchester
hard disc drives and optical recording capabilities; optical recording
technology enables greater data storage capacity. By integrating advanced
optical features along with a highly fine and sophisticated tracking and
delivery system within the head design, OAW would multiply the real density of
disc drives.
Through August 8, 1997, the acquisition date, Quinta had demonstrated
significant achievements in developing its technology. However, further
technological milestones were required before technological feasibility could be
achieved. Quinta's development process consists of the following development
milestones: (i) route light (optical fiber), (ii) flying head use, (iii)
recording media, (iv) mirror creation and demonstration (two stage servo), (v)
complete assembly, (vi) form factor containment, (vii) design verification test,
(viii) customer qualification, and (ix) delivery.
Assumptions used in estimating the fair value of intangible assets:
Revenue
- -------
Future revenue estimates were generated for the following product that the OAW
technology would be utilized: (i) fixed drives, (ii) removable drive, (iii)
fixed/removable drives, and (iv) cartridges. There were no revenues expected
through fiscal 1998 since the underlying technology was anticipated not to be
technologically feasible until fiscal 1999. Revenues were estimated to be
approximately $26.6 million in fiscal 1999 and to increase to approximately $212
million for fiscal year 2000 when the in-process project was expected to be
complete and shipping. Revenue growth was expected to decline to a sustainable
20% growth by fiscal 2005. The estimated revenue growth is consistent with the
introduction of new technology. Revenue estimates were based on (i) aggregate
revenue growth rates for the business as a whole, (ii) individual product
revenues, (iii) growth rates for the disc drive market, (iv) the aggregate size
of the disc drive market, (v) anticipated product development and introduction
schedules, (vi) product sales cycles, and (vii) the estimated life of a
product's underlying technology. Quinta's development cycle, in total, is
expected to take approximately 18 to 24 months.
<PAGE>
39
Operating expenses
- ------------------
Operating expenses used in the valuation analysis of Quinta included (i) cost of
goods sold, (ii) general and administrative expense, (iii) selling and marketing
expense, and (iv) research and development expense. In developing future
expense estimates, an evaluation of Seagate's overall business model, specific
product results, including both historical and expected direct expense levels
(as appropriate), and an assessment of general industry metrics was conducted.
Due to Quinta's limited operating history, an analysis of Quinta's historical
performance was not meaningful.
Cost of goods sold. Cost of goods sold, expressed as a percentage of revenue,
for the in-process technologies ranged from approximately 65% to 80%.
General and administrative ("G&A") expense. G&A expense, expressed as a
percentage of revenue, for the in-process technologies ranged from 2.6% in
fiscal 2000 to a sustainable 3.5% in fiscal 2001 and beyond. For fiscal 1999,
however, when the OAW technology would become commercially available, G&A
expense was estimated to be 6.4% due to the relatively low revenue expectation
in the initial commercialization period.
Selling and marketing ("S&M") expense. S&M expense, expressed as a percentage
of revenue, for the in-process technologies ranged from 3.3% in fiscal 2000 to a
sustainable 3.5% in fiscal 2001 and beyond. For fiscal 1999, however, when the
OAW technology would become commercially available, S&M expense was estimated to
be 8.7% due to the relatively low revenue expectation in the initial
commercialization period.
Research and development ("R&D") expense. R&D expense consists of the costs
associated with activities undertaken to correct errors or keep products updated
with current information (also referred to as "maintenance" R&D). Maintenance
R&D includes all activities undertaken after a product is available for general
release to customers to correct errors or keep the product updated with current
information. These activities include routine changes and additions. The
maintenance R&D expense was estimated to be 0.5% of revenue for the in-process
technologies throughout the estimation period.
Effective tax rate
- ------------------
The effective tax rate utilized in the analysis of the in-process technologies
was 38%, which reflects the Company's combined federal and state statutory
income tax rates, exclusive of non-recurring charges at the time of the
acquisition and estimated for future years.
Discount rate
- -------------
The discount rates selected for Quinta's in-process technology was 25%. In the
selection of the appropriate discount rates, consideration was given to (i) the
Weighted Average Cost of Capital (WACC) of approximately 15% at the date of
acquisition and (ii) the Weighted Average Return on Assets of approximately 25%.
The discount rate utilized for the in-process technology was determined to be
higher than Seagate's WACC due to the fact that the technology had not yet
reached technological feasibility as of the date of valuation. In utilizing a
discount rate greater than the Company's WACC, management has reflected the risk
premium associated with achieving the forecasted cash flows associated with
these projects.
As a result of this acquisition, the Company incurred a one-time write-off
of in-process research and development of approximately $214 million. Intangible
assets arising from the acquisition of Quinta are being amortized on a straight-
line basis over two years. This acquisition was accounted for as a purchase and,
accordingly, the results of operations of Quinta have been included in the
Company's consolidated financial statements from the date of acquisition.
The following is a summary of the purchase price allocation (in millions):
<TABLE>
<S> <C>
Tangible assets less liabilities assumed $ 34
In-process research and development 214
Assembled workforce 2
----
$250
====
</TABLE>
Acquisition of Eastman Software Storage Management Group, Inc.:
<PAGE>
40
In June 1998, the Company acquired Eastman Software Storage Management
Group, Inc.("Eastman"), a subsidiary of Eastman Kodak Company, the developer of
storage migration software technology for distributed networks, for $10 million.
Eastman Software SMG's two primary products are OPEN/stor for Windows NT and
AvailHSM for NetWare. By integrating Eastman's product line, Seagate will be
able to convert their Storage Migrator product into a stand-alone HSM
application for Windows NT environments. As of the date of acquisition, the
Company abandoned the AvailHSM product and technology due to dated features and
functionality; the valuation analysis did not include a fair value for the
AvailHSM product.
As for OPEN/stor at the date of acquisition, the Company planned to phase out
the product over the following 12 to 15 months. The Company's purpose for the
acquisition was for the next generation technologies that were underway at
Eastman, referenced by project names Sakkara and Phoenix. These projects were
complete re-writes of Eastman's prior generation technology that would allow the
product to be sold stand-alone upon completion.
In accordance with SFAS 86, paragraph 38 ("Accounting for the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed"), "the cost of software
purchased to be integrated with another product or process will be capitalized
only if technological feasibility was established for the software component and
if all research and development activities for the other components of the
product or process were completed at the time of the purchase." Although
Seagate purchased existing products from Eastman, the existing products did not
operate on a stand-alone basis. Therefore, as mentioned above, all of the
original underlying code and base technology for the next generation products
were in the process of being completely re-written as date of valuation.
Assumptions used in estimating the fair value of intangible assets:
Revenue
- -------
Future revenue estimates were generated for the following technologies: (i)
OPEN/stor, (ii) Sakkara, and (iii) Phoenix. Aggregate revenue for existing
Eastman products was estimated to be approximately $167,000 for the one month
ending June 30, 1998. Revenues were estimated to increase to approximately $3.9
million and $7.1 million for fiscal years 1999 and 2000 when most of the in-
process projects were expected to be complete and shipping. Thereafter, revenue
was estimated to increase at rates ranging from 20% to 30% for fiscal years 2001
through 2006. Revenue estimates were based on (i) aggregate revenue growth
rates for the business as a whole, (ii) individual product revenues, (iii)
growth rates for the storage management software market, (iv) the aggregate size
of the storage management software market, (v) anticipated product development
and introduction schedules, (vi) product sales cycles, and (vii) the estimated
life of a product's underlying technology.
Operating expenses
- ------------------
Operating expenses used in the valuation analysis of Eastman included (i) cost
of goods sold, (ii) general and administrative expense, (iii) selling and
marketing expense, and (iv) research and development expense. In developing
future expense estimates, an evaluation of both Seagate's and Eastman's overall
business model, specific product results, including both historical and expected
direct expense levels, and an assessment of general industry metrics was
conducted.
Cost of goods sold. Cost of goods sold, expressed as a percentage of revenue,
for the developed and in-process technologies was estimated to be approximately
5% throughout the estimation period.
General and administrative ("G&A") expense. G&A expense, expressed as a
percentage of revenue, for the developed and in-process technologies was
estimated to be approximately 10% throughout the estimation period.
Selling and marketing ("S&M") expense. S&M expense, expressed as a percentage
of revenue, for the developed and in-process technologies was estimated to be
27% throughout the estimation period.
Research and development ("R&D") expense. R&D expense consists of the costs
associated with activities undertaken to correct errors or keep products updated
with current information (also referred to as "maintenance" R&D). Maintenance
R&D includes all activities undertaken after a product is available for general
release to customers to correct errors or keep the product updated with current
information. These activities include routine changes and
<PAGE>
41
additions. The maintenance R&D expense was estimated to be 5% of revenue for the
developed and in-process technologies throughout the estimation period.
In addition, as of the date of acquisition, Seagate Software management
anticipated the costs to complete the in-process technologies at approximately
$1.8 million.
Effective tax rate
- ------------------
The effective tax rate utilized in the analysis of developed and in-process
technologies was 38%, which reflects the Company's combined federal and state
statutory income tax rates, exclusive of non-recurring charges at the time of
the acquisition and estimated for future years.
Discount rate
- -------------
The discount rates selected for Eastman's developed and in-process technologies
were 15% and 20%, respectively. In the selection of the appropriate discount
rates, consideration was given to (i) the Weighted Average Cost of Capital
(WACC) of approximately 15% at the date of acquisition and (ii) the Weighted
Average Return on Assets of approximately 18%. The discount rate utilized for
the in-process technology was determined to be higher than the Company's WACC
due to the fact that the technology had not yet reached technological
feasibility as of the date of valuation. In utilizing a discount rate greater
than the Company's WACC, management has reflected the risk premium associated
with achieving the forecasted cash flows associated with these projects.
The purchase price allocation was based upon the anticipated release date,
as of the valuation date, of significant projects acquired, such as Sakkara and
Phoenix. Such release dates were estimated from the second quarter of the
Company's fiscal year 1999 through the fourth quarter of fiscal 1999. Material
net cash inflows from such related projects were expected to commence
immediately after their respective release dates. As a result of the
acquisition, the Company incurred a one-time write-off of in-process research
and development of $7 million.
The following is a summary of the purchase price allocation (in millions):
<TABLE>
<S> <C>
Current assets and other tangible assets $ .5
Liabilities assumed (.5)
Assembled workforce .4
Developed technology .5
In-process research and development 6.8
Microsoft agreement 1.5
Goodwill .8
----
$ 10
====
</TABLE>
Acquisition of Holistic Systems, Ltd.:
During the year ended June 26, 1996, the Company acquired Holistic
Systems Ltd. ("Holistic"), an information management software company. The
purchase price of approximately $85.5 million was paid in cash. This acquisition
was accounted for as a purchase and, accordingly, the results of operations of
the acquired business have been included in the consolidated financial
statements from the date of the acquisition. The purchase price allocation was
based on the anticipated release date, as of the valuation date, of the in-
process research and development project acquired (Holos version 6.0). The
release date for Holos version 6.0 was estimated to be in the fourth quarter of
fiscal 1997. The discount rates selected for Holistic's developed and in-
process technologies were 15% and 17.5%, respectively. In the selection of the
appropriate discount rates, consideration was given to (i) the Weighted Average
Cost of Capital (WACC) of approximately 15% at the date of acquisition and (ii)
the Weighted Average Return on Assets of approximately 17%. The discount rate
utilized for the in-process technology was determined to be higher than the
Company's WACC due to the fact that the technology had not yet reached
technological feasibility as of the date of valuation. In utilizing a discount
rate greater than the Company's WACC, management has reflected the risk premium
associated with achieving the forecasted cash flows associated with these
projects.
Goodwill and other intangibles arising from the acquisition are being
amortized over periods from one to seven years. As a result of the payments out
of escrow in fiscal year 1997 to former stockholders of Holistic, the Company
incurred one-time charges of compensation expense and in-process research and
development of $13 million and $3 million, respectively. The compensation
expense is included in unusual items on the consolidated statement of
operations.
<PAGE>
42
The following is a summary of the purchase price allocation (in millions):
<TABLE>
<S> <C>
Current assets and other tangible assets $ 10
Liabilities assumed (5)
Trademarks 5.9
Assembled workforce 1.9
Developed technology 16.4
Customer base 3.7
In-process research and development 35.9
Restricted cash held in escrow 18
Deferred tax liability (1.3)
-----
$85.5
=====
</TABLE>
Acquisition of Calypso Software Systems, Inc.:
During the year ended June 26, 1996, the Company acquired Calypso
Software Systems, Inc., a network management software company. The purchase
price of approximately $13.9 million was paid in cash. This acquisition was
accounted for as a purchase and, accordingly, the results of operations of the
acquired business have been included in the consolidated financial statements
from the date of acquisition. Goodwill and other intangibles arising from the
acquisition are being amortized over periods from one to seven years.
The following is a summary of the purchase price allocation (in millions):
<TABLE>
<S> <C>
Current assets and other tangible assets $ 1.2
Liabilities assumed (.2)
Assembled workforce .4
Developed technology 3.6
Customer base .5
In-process research and development 5.4
Goodwill 3.0
-----
$13.9
=====
</TABLE>
Acquisition of OnDemand Software, Inc.:
During the year ended June 26, 1996, the Company acquired OnDemand
Software, Inc., a network management software company. The purchase price of
approximately $13.4 million was paid in cash. This acquisition was accounted for
as a purchase and, accordingly, the results of operations of the acquired
business have been included in the consolidated financial statements from the
date of acquisition. Goodwill and other intangibles arising from the acquisition
are being amortized over periods from one to seven years.
The following is a summary of the purchase price allocation (in millions ):
<TABLE>
<S> <C>
Current assets and other tangible assets $ .8
Liabilities assumed (.2)
Assembled workforce. .2
Developed technology 2.0
Covenant not to compete .1
In-process research and development 8.9
Goodwill 1.6
-----
$13.4
=====
</TABLE>
Acquisition of Minority Interest of Arcada Holdings, Inc.:
In connection with the merger with Conner, on February 16, 1996, the
Company acquired the minority interest in Arcada Holdings, Inc. ("Arcada"),
formerly a majority-owned subsidiary of Conner. Seagate acquired the minority
interest in Arcada by exchanging 2,553,340 shares of Seagate common stock with a
fair value of approximately $52 million and 1,817,000 options to purchase shares
of Arcada common stock with a fair value of approximately $33 million (aggregate
fair value of $85 million. The options were issued to employees of Arcada and
Conner, Arcada's parent, in exchange for options of Arcada. The options have a
term of 10 years and vest 1/16 per quarter over 4 years. The value of the
options were based on the intrinsic value of the options, which approximates the
<PAGE>
43
fair value. Arcada developed, marketed and supported data protection and
storage management software products that operate across multiple desktop and
client/server environments.
As of the acquisition date, Arcada had spent a significant amount of research
and development related to the re-development efforts to add features and
utilities to the Desktop, NetWare and Windows NT products such as disc grooming,
hierarchical storage management, upgraded graphical user interfaces, file and
server replication, and server mirroring in order to continue to meet
increasingly complex user needs.
In accordance with SFAS 86, paragraph 38 ("Accounting for the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed"), "the cost of software
purchased to be integrated with another product or process will be capitalized
only if technological feasibility was established for the software component and
if all research and development activities for the other components of the
product or process were completed at the time of the purchase." Although
Seagate purchased existing products from Arcada, since the majority of the
original underlying code and base technology for the NetWare and Windows NT
product families was completed in the 1990 time frame, the technologies, as of
the date of valuation, were desperately in need of, and therefore, as mentioned
above, was undergoing significant re-development.
Assumptions used in estimating the fair value of intangible assets:
Revenue
- -------
Future revenue estimates were generated for the following product families: (i)
Desktop, (ii) NetWare, and (iii) Windows NT. Aggregate revenue for Arcada
products was estimated to be approximately $94 million for the ten and one-half
months ending December 31, 1996. Revenues were estimated to increase to
approximately $161 million and $233 million for calendar years 1997 and 1998
when most of the in-process projects were expected to be complete and shipping.
Thereafter, revenue was estimated to increase at rates ranging from 35% to 40%
for calendar years 1999 through 2002. Revenue estimates were based on (i)
aggregate revenue growth rates for the business as a whole, (ii) individual
product revenues, (iii) growth rates for the storage management software market,
(iv) the aggregate size of the storage management software market, (v)
anticipated product development and introduction schedules, (vi) product sales
cycles, and (vii) the estimated life of a product's underlying technology. The
estimated product development cycle for the new products ranged from 12 to 18
months.
Operating expenses
- ------------------
Operating expenses used in the valuation analysis of Arcada included (i) cost of
goods sold, (ii) general and administrative expense, (iii) selling and marketing
expense, and (iv) research and development expense. In developing future
expense estimates, an evaluation of both Seagate and Arcada's overall business
model, specific product results, including both historical and expected direct
expense levels, and an assessment of general industry metrics was conducted.
Cost of goods sold. Cost of goods sold, expressed as a percentage of revenue,
for the developed and in-process technologies ranged from approximately 5% to
30% (30% for Desktop, 10% for NetWare, and 5% for Windows NT).
General and administrative ("G&A") expense. G&A expense, expressed as a
percentage of revenue, for the developed and in-process technologies ranged from
12% in calendar 1996 to 8% in calendar 1998 and beyond.
Selling and marketing ("S&M") expense. S&M expense, expressed as a percentage
of revenue, for the developed and in-process technologies was estimated to be
30% throughout the estimation period.
Research and development ("R&D") expense. R&D expense consists of the costs
associated with activities undertaken to correct errors or keep products updated
with current information (also referred to as "maintenance" R&D). Maintenance
R&D includes all activities undertaken after a product is available for general
release to customers to correct errors or keep the product updated with current
information. These activities include routine changes and additions. The
maintenance R&D expense was estimated to be 5% of revenue for the developed
technologies and 3% of revenue for the in-process technologies throughout the
estimation period.
In addition, as of the date of acquisition, the Company anticipated the costs to
complete the Desktop, NetWare, and Windows NT technologies at approximately $6.8
million, $4.5 million, and $7.5 million, respectively. Since the
<PAGE>
44
acquisition date, all projects originally acquired from Arcada were commercially
released prior to the end of the fourth quarter of fiscal 1997.
Effective tax rate
- ------------------
The effective tax rate utilized in the analysis of developed and in-process
technologies was 38%, which reflects the Company's combined federal and state
statutory income tax rates, exclusive of non-recurring charges at the time of
the acquisition and estimated for future years.
Discount rate
- -------------
The discount rates selected for Arcada's developed and in-process technologies
were 15% and 17.5%, respectively. In the selection of the appropriate discount
rates, consideration was given to (i) the Weighted Average Cost of Capital
(WACC) of approximately 13% to 15% at the date of acquisition and (ii) the
Weighted Average Return on Assets of approximately 18%. The discount rate
utilized for the in-process technology was determined to be higher than the
Company's WACC due to the fact that the technology had not yet reached
technological feasibility as of the date of valuation. In utilizing a discount
rate greater than the Company's WACC, management has reflected the risk premium
associated with achieving the forecasted cash flows associated with these
projects.
As a result of the acquisition, the Company incurred a one-time write-off of in-
process research and development of $44 million. Goodwill and other intangibles
arising from the acquisition are being amortized on a straight-line basis over
periods ranging from two to seven years.
The following is a summary of the purchase price allocation (in millions ):
<TABLE>
<S> <C>
Assembled workforce $ 1.4
Distribution network .1
Corporate accounts .4
Strategic alliances 1.4
OEM agreements 3.2
Value added resellers 2.0
Trademarks 2.8
Developed technology 4.6
In-process research and development 44.0
Deferred tax liability (6.2)
Goodwill 31.4
-----
$85.1
=====
</TABLE>
Acquisition of Sytron Corporation.
In July 1995, Arcada Software, Inc. a majority-owned subsidiary of Arcada,
acquired the assets and liabilities of Sytron Corporation ("Sytron"), a company
that develops, produces and markets software products for data storage
management. The purchase price of approximately $5.0 million was paid in cash.
Arcada accounted for the acquisition using the purchase method, and the results
of operations of Sytron are only included in the Company's operations since the
acquisition was completed.
The following is a summary of the purchase price allocation (in millions):
<TABLE>
<S> <C>
Current assets and other tangible assets $ .8
Liabilities assumed (.5)
Developed technology 1.5
In-process research and development 2.8
Goodwill .4
----
$5.0
====
</TABLE>
In 1998, the Company increased its investment in Dragon Systems, a
maker of voice recognition software, by $18 million. Goodwill arising from the
equity investment in Dragon Systems is being amortized on a straight-line basis
over seven years. In 1996, the Company increased its investment in SanDisk
Corporation, a flash memory manufacturer, by $10 million. Goodwill arising from
the equity investment in SanDisk Corporation is being amortized on a straight-
line basis over seven years.
<PAGE>
45
Restructuring
In the second and third quarters of fiscal 1998, the Company recorded
restructuring charges aggregating $347 million. The Company had experienced
reductions in revenue from the third quarter of fiscal year 1997 to the fourth
quarter of fiscal year 1997 of 21%, from the fourth quarter of fiscal year 1997
to the first quarter of fiscal year 1998 of 4% and from the first quarter of
fiscal year 1998 to the second quarter of fiscal year 1998 of an additional 12%.
During the second quarter of fiscal 1998, forecasted production needs were much
lower than the current capacity of the Company and the Company recognized that
the recent oversupply in the marketplace was not a short-term anomaly. In this
period, the Company also decided to discontinue production of several products,
rendering test and manufacturing equipment unique to those products obsolete.
Prior to this period, there was no indication of permanent impairment of these
assets associated with the recent excess capacity of the Company or the products
to be discontinued. These charges reflect steps the Company is taking to align
worldwide operations with current market conditions by reducing existing
capacity in all areas of the Company and improving the productivity of its
operations and the efficiency of its development efforts by consolidating
manufacturing and R&D operations. Actions include exiting production of mobile
products; early discontinuation of several other products; closing and selling
the Clonmel, Ireland drive manufacturing facility; closing and subleasing the
San Jose and Moorpark, California design center facilities; aborting production
expansion projects in Cork, Ireland; and divesting the Company of the new
Philippines manufacturing facility, which was nearing completion. Included in
the restructuring charge are the write-down and write-off of tangible assets
comprised of manufacturing, assembly and test equipment and tooling formerly
utilized in California, Singapore, Thailand, Ireland and facilities located in
California, the Philippines and Thailand totaling $200 million and intangible
assets totaling $2.5 million for of goodwill associated with permanently
impaired media manufacturing equipment.
The majority of the tangible assets have been disposed of or sold including
the disposal of the Clonmel, Ireland facility in May 1998 and the sublease of
one of the five buildings at the San Jose, California design center. The
Company is marketing three additional buildings in the San Jose, California
design center for sublease. The fifth building has a remaining lease term so
short as to make a sublease impractical. Equipment formerly utilized at these
facilities, in addition to equipment associated with restructuring actions in
Singapore and Thailand, has been relocated to other sites or scrapped. Of the
$137 million in write-offs and write-downs of equipment, $109 million was
scrapped and $28 million is awaiting final disposition. In addition, $10
million of equipment was transferred at net book value for use in operations at
other sites. Subsequent to the recording of the restructuring reserve,
depreciation related to certain assets that continued in use, was included in
operations. At the time these assets were identified as available for sale no
further depreciation was recorded. The write-off of intangibles and other
assets includes capital equipment deposits and goodwill associated with
permanently impaired equipment. Costs associated with aborting production
expansion projects in Cork, Ireland include primarily architect costs, lease
termination costs associated with equipment leased by contractors, and lease
termination costs for temporary housing used by contractor personnel.
Certain facilities including design centers in California, as well as
manufacturing facilities in Thailand continued in use after restructuring
amounts were recorded. The Moorpark, California product design center remained
in use for six months after the write-down of leasehold improvements and
equipment totaling $9 million. This facility has been subleased for a portion of
the remaining minimum lease term. Two Thailand manufacturing facilities
continue to be utilized until a satisfactory agreement can be made with an
external vendor to supply parts currently manufactured at these locations. At
the time the decision to exit these facilities was made, the Company believed
that it had identified a supplier for parts. It was subsequently determined
that the supplier could not meet the Company's quality standards.
In connection with this restructuring, the Company currently expects a
workforce reduction of approximately 15,000 employees. Of the 15,000 employees,
8,144 are involuntary terminations of regular, full-time employees, 1,528 are
contract laborers, primarily engaged through temporary employment agencies, and
the remainder represent attrition. Approximately 14,100 of the 15,000
employees, including 7,959 of the 8,144 involuntary terminations of regular,
full-time employees, had been terminated as of July 3, 1998. The Company
anticipates that the implementation of the restructuring plan will be
substantially complete by the end of December 1998.
The fiscal year 1998 aggregated restructuring reserve included asset
write-off or write-down of tangible assets totaling $200 million and intangible
assets totaling $2 million. In the table below, the aggregated restructuring
charges for tangible assets are comprised of $137 million included in
"Equipment," $9 million included in "Intangibles and Other Assets" and $54
million included in "Excess Facilities." The remaining $24 million included in
"Excess Facilities" is for lease termination and holding costs and the remaining
$2 million of "Intangibles and Other Assets" is for the write-off of
intangibles. The following table summarizes the Company's restructuring
activities related to the 1998 restructuring charge for the year ended July 3,
1998:
<PAGE>
46
<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>
Q2 restructuring charge $ 6 $ 52 $ 112 $ 4 $ 12 $ 19 $ 205
Q3 restructuring charge 51 26 25 7 31 2 142
--------------------------------------------------------------------------------------
1998 restructuring charges 57 78 137 11 43 21 347
--------------------------------------------------------------------------------------
Cash charges (48) (3) - - (38) (11) (100)
Non-cash charges - (55) (137) (11) - - (203)
--------------------------------------------------------------------------------------
Reserve balances,
July 3, 1998 $ 9 $ 20 $ - $ - $ 5 $ 10 $ 44
======================================================================================
</TABLE>
During fiscal year 1996, the Company recorded restructuring charges
totaling $242 million as a result of the merger with Conner, such charges were
incurred for the reduction of approximately 1,370 personnel whose duties were
made redundant; write-off or write-down of equipment, intangibles and other
assets to fair value; closure of duplicate and excess facilities primarily in
California, Singapore, Malaysia, Scotland and Italy; discontinuing products as a
result of overlap of product offerings in the merged company; professional fees
of financial advisors, attorneys and accountants; and contract cancellation
exposure. There were no indicators of asset impairment in a prior period
because impairment arose specifically from the restructuring actions taken as a
result of the merger. All facilities whose holding costs prior to disposal that
were charged to the restructuring reserve have been vacated and no income has
been generated as a result of activities in these facilities. All equipment has
been scrapped.
The employment of 1,313 employees has been terminated and implementation of
the restructuring plan was substantially complete as of June 27, 1997.
Manufacturing equipment totaling $4 million used to manufacture products that
were to be discontinued as a result of the restructuring plan was included in
the restructuring charge but remained in use for three to six months until the
assets were scrapped due to their proprietary nature. Certain design center
facility leasehold improvements totaling $6 million for buildings to be vacated
were also included in the restructuring charge. These facilities were in use
after the restructuring charge was recorded for approximately three months at
which time the buildings were vacated and the leasehold improvements were
abandoned. During this period of time, no income was generated from these
activities and no depreciation expense was recorded. Certain lease termination
and holding costs for vacant facilities continue to be incurred and charged
against the restructuring reserve until the leases expire or the facilities are
subleased.
In 1997, the Company reversed $10 million of its restructuring reserves as
a result of the completion of certain aspects of the restructuring plan at less
than the originally estimated cost. This reversal included employee termination
benefits of $5 million as a result of terminating fewer employees than
originally anticipated, excess facilities costs of $4 million as a result of
continuing to utilize certain facilities, and the settlement of certain
outstanding lease obligations at less than the originally estimated cost of $1
million. Reclassifications between cost categories were made as a result of
terminating fewer employees than originally planned and write-off of additional
equipment that became excess or obsolete as a result of the merger with Conner.
Asset write-off and write-down of certain duplicated and excess assets
totaled $99 million for tangible assets and $14 million for intangible assets.
In the table below, the restructuring charges for tangible assets are comprised
of $41 million included in "Equipment," $42 million included in "Other Assets"
and $16 million included in "Excess Facilities." The remaining $29 million
included in "Excess Facilities" is for lease termination and holding costs. The
following table summarizes the Company's restructuring activity related to the
1996 restructuring charge for the three years ended July 3, 1998:
<TABLE>
<CAPTION>
Severance
and Excess Other Professional Contract
In millions Benefits Facilities Equipment Intangibles Assets Fees Cancellations Other Total
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996 restructuring
charges $ 61 $ 45 $ 41 $ 14 $ 42 $ 25 $12 $ 2 $242
Cash charges (28) - - - - (21) (5) - (54)
Non-cash charges - (10) (41) (14) (31) - - - (96)
----------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
47
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Reserve balances,
June 26, 1996 33 35 - - 11 4 7 2 92
Cash charges (18) (10) - - - (2) (3) (3) (36)
Non-cash charges - (5) (13) - (5) - - - (23)
Adjustments (5) (4) - - - - (1) - (10)
Reclassifications (10) (5) 13 - (2) (2) - 6 -
----------------------------------------------------------------------------------------------------------------
Reserve balances,
July 27, 1997 - 11 - - 4 - 3 5 23
Cash charges - (11) - - (1) - - (1) (13)
----------------------------------------------------------------------------------------------------------------
Reserve balances,
July 3, 1998 $ - $ - $ - $ - $ 3 $ - $ 3 $ 4 $ 10
================================================================================================================
</TABLE>
Business Segment and Geographic Information
The Company operates in a single industry segment by designing,
manufacturing and marketing products for storage, retrieval and management of
data on computer and data communications systems. These products include disc
drives and disc drive components, tape drives and software.
The following tables summarize the Company's operations in different
geographic areas:
<TABLE>
<CAPTION>
Year Ended July 3, 1998
Adjustments
United Far and
In millions States East Eliminations Consolidated
---------------------------------------------
<S> <C> <C> <C> <C>
Sales to unaffiliated customers $3,643 $3,176 $ - $6,819
Transfers between geographic areas 1,425 6,302 (7,727) -
Total revenue $5,068 $9,478 $(7,727) $6,819
Income (loss) from operations $ (721) $ 35 $ - $ (686)
Other income (expense), net (57) 39 - (18)
Income (loss) before income taxes $ (778) $ 74 $ - $ (704)
Identifiable assets $2,337 $3,308 $ - $5,645
<CAPTION>
Year Ended June 27, 1997
Adjustments
United Far and
In millions States East Eliminations Consolidated
---------------------------------------------
<S> <C> <C> <C> <C>
Sales to unaffiliated customers $5,216 $ 3,724 $ - $8,940
</TABLE>
<PAGE>
48
<TABLE>
<S> <C> <C> <C> <C>
Transfers between geographic areas 1,398 6,463 (7,861) -
Total revenue $6,614 $10,187 $(7,861) $8,940
Income from operations $ 44 $ 814 $ - $ 858
Other income (expense), net (3) 36 - 33
Income before income taxes $ 41 $ 850 $ - $ 891
Identifiable assets $3,050 $ 3,673 $ - $6,723
</TABLE>
<TABLE>
<CAPTION>
Year Ended June 28, 1996
Adjustments
United Far and
In millions States East Eliminations Consolidated
--------------------------------------------
<S> <C> <C> <C> <C>
Sales to unaffiliated customers $5,888 $2,700 $ - $8,588
Transfers between geographic areas 1,272 6,248 (7,520) -
Total revenue $7,160 $8,948 $(7,520) $8,588
Income (loss) from operations $ (77) $ 364 $ - $ 287
Other income (expense), net - 44 - 44
Income (loss) before income taxes $ (77) $ 408 $ - $ 331
Identifiable assets $2,311 $2,929 $ - $5,240
</TABLE>
Sales and transfers between geographic areas are accounted for at
prices which, in general, provide a profit after coverage of all manufacturing
costs. Income from operations is revenue less operating expenses. The
identifiable assets by geographic area are those assets used in the Company's
operations in each area.
The Company's European operations include sales offices and
distribution warehouses. The sales offices and distribution warehouses do not
qualify as revenue-producing operations in accordance with Statement of
Financial Accounting Standards No. 14, "Financial Reporting for Segments of a
Business Enterprise" ("SFAS 14") and thus do not qualify to be disclosed as a
separate geographic area. The distribution warehouses merely facilitate sales
for the Singapore and Thailand manufacturing operations and are thus included in
the Far East geographic area in the tables above. Other European operations
that do qualify as revenue-producing operations do not meet the materiality
criteria of SFAS 14 and thus are not disclosed as a separate geographic area.
In 1998 and 1997, Compaq Computer Corporation accounted for more than
10% of consolidated revenue for a total of $873 million and $995 million,
respectively. No customer accounted for 10% or more of consolidated revenue in
1996.
Net foreign currency transaction losses included in the determination of
net income (loss) were $252 million, $2 million and $8 million for 1998, 1997,
and 1996, respectively. The Company transacts business in various foreign
countries. Its primary foreign currency cash flows are in emerging market
countries in Asia and in certain European countries. During 1998 and 1997, the
Company employed a foreign currency hedging program utilizing foreign currency
forward exchange contracts and purchased currency options to hedge local
currency cash flows for payroll, inventory, other operating expenditures and
fixed asset purchases in Singapore, Thailand and Malaysia. During fiscal
<PAGE>
49
1998 the Singapore dollar, Thai baht, and Malaysian ringgit declined in value
relative to the U.S. dollar. The transaction loss of $252 million for fiscal
1998 primarily included losses incurred on closing out these foreign currency
forward exchange contracts.
Litigation
Patent Litigation ---In November 1992, Rodime, PLC ("Rodime") filed a complaint
in Federal Court for the Central District of California, alleging infringement
of U.S. Patent No. B1 4,638,383 and various state law unfair competition claims.
It was the opinion of the Company's patent counsel that the Company's products
do not infringe any valid claims of the Rodime patent in suit and thus the
Company refused Rodime's offer of a license for its patents. Other companies,
however, such as IBM, Hewlett-Packard and a number of Japanese companies have
reportedly made payments to and taken licenses from Rodime. On October 24, 1997
the Court entered a Final Judgment against Rodime and in favor of Seagate.
Rodime has appealed the final judgment. The appeal before the Court of Appeals
for the Federal Circuit will be heard in September 1998. The Company intends to
vigorously defend itself in the appeal brought by Rodime.
On October 5, 1994, a patent infringement action was filed against the
Company by an individual, James M. White, in the U.S. District Court for the
Northern District of California for alleged infringement of U.S. Patent Nos.
4,673,996 and 4,870,519. Both patents relate to air bearing sliders. Prior to
the filing of the lawsuit, the Company filed a Petition for Reexamination of
U.S. Patent No. 4,673,996 with the United States Patent and Trademark Office
("PTO") and this Petition was granted shortly after the lawsuit was filed.
Subsequently, the Company filed a Petition for Reexamination of U.S. Patent No.
4,870,519. This second petition was also granted by the PTO. The District Court
stayed the action pending the outcome of the Reexaminations. Both patents have
completed reexamination and the stay of the action has been lifted. Mr. White's
lawyers filed a motion seeking a preliminary injunction to stop the sale of
certain of the Company's products. The Court denied the motion on July 1, 1997.
On April 27, 1998, the Court entered an order establishing a construction of the
claims in Mr. White's patents which is broader than the construction which the
Company advocated, and on June 25, 1998, the Court denied reconsideration of the
April 27 order. The Court has set a February 1999 trial date. It is the opinion
of the Company's patent counsel that the Company's products do not infringe any
valid or enforceable claims of the patents involved in the suit. The Company
intends to vigorously defend itself against any and all charges of infringement
of these patents. See Subsequent Events (Unaudited) Note.
On December 16, 1996, a patent infringement action was filed against the
Company by an individual, Virgle Hedgcoth, in the U.S. District Court for the
Northern District of California, San Jose Division, for alleged infringement of
U.S. Patent Nos. 4,735,840; 5,082,747; and 5,316,864. These patents relate to
sputtered magnetic thin-film recording discs for computers and their
manufacture. The Company answered the complaint denying infringement, alleging
that the patents are invalid and unenforceable, and counterclaiming for
declaratory judgment that a fourth Hedgcoth patent, No. 4,894,133, is invalid,
unenforceable and not infringed. Additionally, on July 1, 1997, Mr. Hedgcoth
filed a patent infringement action against the Company in the same Court for
alleged infringement of a fifth patent, U.S. Patent No. 5,262,970, issued May 6,
1997. It is the opinion of the Company's patent counsel that the Company's
products do not infringe any valid or enforceable claims of the patents in the
two actions, and that the claims of the patents in the two actions are invalid
or unenforceable. The Company intends to vigorously defend itself against any
and all charges of infringement of Mr. Hedgcoth's patents.
Papst Licensing, GmbH, has given the Company notice that it believes
certain former Conner Peripherals, Inc. ("Conner") disc drives infringe several
of its patents covering the use of spindle motors in disc drives. It is the
opinion of the Company's patent counsel that the former Conner disc drives do
not infringe any claims of the patents and that the asserted claims of the
patents are invalid. The Company also believes that subsequent to the merger
with Conner, the Company's earlier paid-up license under Papst's patents
extinguishes any ongoing liability. The Company also believes it enjoys the
benefit of a license under Papst's patents since Papst Licensing had granted a
license to motor vendors of Conner.
In the normal course of business, the Company receives and makes inquiry
with regard to other possible intellectual property matters including alleged
patent infringement. Where deemed advisable, the Company may seek or extend
licenses or negotiate settlements.
Other Matters---The Company is involved in a number of other judicial and
administrative proceedings incidental to its business. Although occasional
adverse decisions (or settlements) may occur, the Company believes that the
final disposition of such matters will not have a material adverse effect on the
Company's financial position or results of operations.
Commitments
<PAGE>
50
Leases---The Company leases certain property, facilities and equipment under
noncancelable lease agreements. Land and facility leases expire at various dates
through 2082 and contain various provisions for rental adjustments including, in
certain cases, a provision based on increases in the Consumer Price Index. All
of the leases require the Company to pay property taxes, insurance and normal
maintenance costs.
Future minimum lease payments for operating leases with initial or
remaining terms of one year or more were as follows at July 3, 1998:
<TABLE>
<CAPTION>
In millions
Operating
Leases
<S> <C>
1999 $ 58
2000 44
2001 27
2002 30
2003 19
After 2003 133
----
$311
====
</TABLE>
Total rent expense for all land, facility and equipment operating leases
was approximately $58 million, $51 million and $45 million for 1998, 1997 and
1996, respectively.
Capital Expenditures---The Company's commitments for construction of
manufacturing facilities and equipment approximated $173 million at July 3,
1998.
Supplemental Cash Flow Information
<TABLE>
<CAPTION>
In millions 1998 1997 1996
-----------------------
<S> <C> <C> <C>
Cash Transactions:
Cash paid for interest $ 52 $ 26 $ 64
Cash paid for income taxes,
net of refunds (1) 59 208
Non-Cash Transactions:
Conversion of debentures $ - $ 788 $ 266
</TABLE>
Subsequent Events (Unaudited)
On March 8, 1999, the Company announced that it expects to take a one-time
charge in the third quarter of fiscal 1999 related to the restructuring of
certain worldwide operations. This will include the closure of the Company's
microelectronics manufacturing facility in Livingston, Scotland, consolidation
of global customer service facilities, and additional actions necessary to
further increase the productivity and efficiency of worldwide operations. The
Company expects the charge to be in the range of $50 - 60 million.
On February 12, 1999 the Company entered into a settlement agreement with Mr.
James M. White with respect to a patent infringement action against the Company.
On February 22, 1999, the court dismissed the action with prejudice. The
settlement of this matter did not have a material adverse effect on the
Company's financial conditions or results of operations. See Litigation note.
The Company, its majority owned subsidiary, Seagate Software, Inc., ("SSI") and
SSI's Network and Storage Management Group Inc. ("NSMG") subsidiary announced on
October 5, 1998 that they had entered into an agreement and Plan of
Reorganization ("the Plan") as of such date with VERITAS Holding Corporation
("New VERITAS") and VERITAS Software Corporation ("VERITAS"). VERITAS provides
end to end storage management software solutions.
<PAGE>
51
The Plan provides for the contribution by the Company, SSI and certain of their
respective subsidiaries to New VERITAS of (a) the outstanding stock of NSMG and
certain other subsidiaries of SSI, and (b) those assets used primarily in the
Network Storage Management Business of SSI ("the NSMG Business"), in
consideration for the issuance of shares of common stock of New VERITAS to SSI
and the offer by New VERITAS to grant options to purchase common stock of New
VERITAS to certain of SSI's 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 Plan is structured to qualify as a tax
free exchange. The merger will be accounted for as a non monetary transaction
using the fair value of the assets exchanged.
Upon consummation of the merger, New VERITAS shall issue shares of common stock
to SSI equal to approximately 40% of the fully diluted common stock equivalent
equity interest in New VERITAS (assuming conversion of all convertible
securities, including the VERITAS convertible debentures and exercise of all
assumed options and warrants) less that number of shares of New VERITAS common
stock issuable upon exercise of New VERITAS options issued to the SSI employees
who surrender their outstanding options to purchase shares of SSI's common
stock. Upon consummation of the merger, the former security holders of VERITAS
will be issued New VERITAS securities representing approximately 60% of the
fully diluted common stock equivalent equity interest in New VERITAS.
The merger is subject to a number of conditions, including but not limited to
the effectiveness of a Registration Statement on Form S-4 filed by New VERITAS
with the Securities and Exchange Commission, approval of the stockholders of New
VERITAS and SSI, the expiration or termination of the waiting period (and any
extension thereof) under the Hart-Scott-Rodino Antitrust Improvements Act of
1996, as amended, and other customary closing conditions.
SSI anticipates recording a substantial gain and certain expenses in connection
with the merger. The gain will be recorded in fiscal 1999. The expenses will
include a 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 merger. The magnitude of the gain and expenses will depend on
several factors, including the average stock price of VERITAS around the date of
the merger, the number of shares of stock exchanged and the value of VERITAS'
business. SSI will account for its investment in VERITAS using the equity
method. The merger is expected to be consummated in the fourth quarter of fiscal
1999.
Historically, NSMG has had higher gross margins as a percent of sales than the
Company. Therefore, if the exchange with VERITAS is consummated, it could result
in lower gross margins for the Company. The Company's gross margins for the six
months ended January 1, 1999 and the year ended July 3, 1998 were 22.3% and
14.5% respectively. Without NSMG, such gross margins would have been 20.0% and
12.6%, respectively. However, under the equity method of accounting, the
Company will record its equity interest in the net income or loss of VERITAS
each quarter. This equity income or loss will be classified as non-operating
income (loss) on the Company's income statement.
<PAGE>
52
Report of Independent Auditors
The Board of Directors and Stockholders
Seagate Technology, Inc.
We have audited the accompanying consolidated balance sheets of Seagate
Technology, Inc. as of July 3, 1998 and June 27, 1997, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended July 3, 1998. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Seagate Technology, Inc. at July 3, 1998 and June 27, 1997, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended July 3, 1998, in conformity with generally accepted accounting
principles.
Ernst & Young LLP
San Jose, California
July 14, 1998, except for the twelth paragraph of the
Acquisitions note, as to which the date is July 31, 1998
and the first and second paragraphs of the Patent
Litigation note, as to which the date is August 17, 1998.
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 1O-K/A)
of Seagate Technology, Inc. of our report dated July 14, 1998, except for the
twelfth paragraph of the Acquisitions note, as to which the date is July 31,
1998, and the first and second paragraphs of the Patent Litigation note, as to
which the date is August 17, 1998, included in the 1998 Annual Report to
Stockholders of Seagate Technology, Inc.
Our audits also included the financial statement schedule of Seagate Technology,
Inc. listed in Item 14(a). This schedule is the responsibility of the Company's
management. Our responsibility is to express in opinion based an our audits. In
our opinion, the financial statement schedule referred to above, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
We also consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 33-43911, 33-50973, 33-39916, 33-56215, 33-34793, 33-64339,
333-00697, 333-01059, 333-40005, 333-70105), pertaining to the 1991 Incentive
Stock Option Plan, the Employee Stock Purchase Plan, the Executive Stock Option
Plan of Seagate Technology, Inc., the 1992 Conner Peripherals, Inc. Restricted
Stock Plan and the Arcada Holdings, Inc. Stock Option Plan, and in the related
prospectus, of our report dated July 14, 1998, except for the twelfth paragraph
of the Acquisitions note, as to which the date is July 31, 1998, and the first
and second paragraphs of the Patent Litigation note, as to which the date is
August 17, 1998, with respect to the consolidated financial statements
incorporated herein by reference, and our report included in the preceding
paragraph with respect to the financial statement schedule included in this
Annual Report (Form 10-K/A) of Seagate Technology, Inc.
/s/ Ernst & Young LLP
---------------------
San Jose, California
April 16,1999
